Vocab Words

Cost-volume-profit analysis

the process of analyzing how changes in key assumptions (related to cost, volume, or profit) may impact financial projections

Break-even point in sales dollars

the total sales measured in dollars required to achieve zero profit

Break-even point in units

the number of units that must be sold to achieve zero profit

Target profit in units

the number of units that must be sold to achieve a certain profit

Profit equation

profit equals total revenues minus total variable costs minus total fixed costs

Margin of safety

the excess of expected sales over the break even point, measured in units and in sales dollars

Contribution margin ratio

the contribution margin as a percentage of sales; it measures the amount each sales dollar contributes to (1) covering fixed costs (2) increasing profit; also called contribution margin percent

Target profit in sales dollars

the total sales measures in dollars required to achieve a certain profit

Contribution margin per unit

the amount each unit sold contributes to (1) covering fixed costs (2) increasing profit

Sales Mix

the proportion of one product’s sales to total sales

Weighted average contribution margin ratio

the total contribution margin divided by total sales

Sensitivity analysis

an analysis that shows how the CVP model will change with changes in any of its variables

Weighted average contribution margin per unit

calculated my multiplying each product’s unit contribution margin by the product’s proportion of total sales

The following are assumptions required to perform break-even and target profit calculations:

• Contribution margin ratio remains constant for each product, segment, or department.

• Sales mix remains constant with changes in sales volume.

• Costs can be separated into fixed and variable components