Ch 16: Cost-Volume-Profit Analysis

break-even point

the point where total sales revenue equals total costs (i.e., the point of zero profits).

net income

operating income less taxes, interest expense, and research and development expense.

contribution margin

the difference between revenue and all variable expenses.

variable cost ratio

variable costs divided by sales revenue. It is the proportion of each sales dollar needed to cover variable costs.

contribution margin ratio

contribution margin divided by sales revenue. It is the proportion of each sales dollar available to cover fixed costs and provide for profit.

sales-revenue approach

an approach to CVP analysis that uses sales revenue to measure sales activity. Variable costs and contribution margin are expressed as percentages of sales revenue.

direct fixed expenses

fixed costs that can be traced to each segment and would be avoided if the segment did not exist.

common fixed expenses

fixed costs that are not traceable to the segments and that would remain even if one of the segments were eliminated

Sales mix

the relative combination of products (or services) being sold by an organization.

profit-volume graph

a graphical portrayal of the relationship between profits and sales activity.

cost-volume-profit graph

a graph that depicts the relationships among costs, volume, and profits. It consists of a total revenue line and a total cost line.

margin of safety

the units sold or expected to be sold or sales revenue earned or expected to be earned above the break-even volume.

operating leverage

the use of fixed costs to extract higher percentage changes in profits as sales activity changes. Leverage is achieved by increasing fixed costs while lowering variable costs.

degree of operating leverage

a measure of the sensitivity of profit changes to changes in sales volume. It measures the percentage change in profits resulting from a percentage change in sales.

sensitivity analysis

a “what-if” technique that examines altering certain key variables to assess the effect on the original outcome.