Bus121 Ch7 Vocab
Bus121 Ch7 Vocab
Bus121 Ch7 Vocab
Breakeven Point
• The sales level at which operating income is zero: Total Revenues = Total Expenses
• 3 Ways to calculate: The Income Statement Approach, the shortcut approach using unit
contribution margin, and the shortcut approach using the contribution margin ratio.
• Operating Income = 0
Contribution Margin
• The excess of the unit sales price over the variable cost per unit; also called unit
contribution margin.
• (Excess of the Unit Sales Price) divided by (Variable Cost per Unit) = Contribution
Margin Per Unit
• Tells us how much more money we’ll have to spend on fixed expenses and potentially
put towards operating income if we were to increase the quantity of units sold.
• (Contribution Margin per Unit) divided by (Sales Price per Unit) = Contribution Margin
Ratio (with regards to units)
• This tells us how much a specific unit (often expressed as a percentage) contributes to the
contribution margin.
• (Contribution Margin per Unit) divided by (Sales Revenue) = Contribution Margin Ratio
(with regards to revenue)
• This tells us how much money (typically expressed as a percentage) is left over after
variable costs are covered (the Contribution Margin amount, expressed as a percentage,
with regards to revenue). We would use this leftover money to pay for fixed expenses and
anything left after is used as operating income.
Cost Structure
•
Cost-Volume-Profit (CVP) Analysis
Cost-Volume-Profit Graph
• The Revenue Line starts at the origin (this is because if there is nothing sold, there is no
profit)
• The intersection of the Revenue Line and the Cost-Volume line represents the Breakeven
Point.
• The area to the left of the Breakeven Point is known as the Operating Loss Area
• The area to the right of the Breakeven Point is known as the Operating Income Area
Margin of Safety
• Excess of expected sales over breakeven sales; the drop in sales a company can absorb
without incurring an operating loss.
• (Expected or Actual Sales) - (Breakeven Sales) = Margin of Safety
Operating Leverage
• The relative amount of fixed and variable costs that make up a firm’s total costs.
• High operating leverage means that more of the revenue can be put towards fixed costs
and operating income. Additionally, it means that the company has few to no variable
costs per unit of volume.
Relevant Range
• The amount of Volume that is typically expected for the month based on prior data
analysis.
Sales Level
• An estimated value of a desired / projected revenue.
Sensitivity Analysis
• A “what-if” technique that asks what results will be if actual prices or costs change or if
an underlying assumption changes.
Target Sales
• [(Operating Income) + (Fixed Expenses)] divided by (Contribution Margin Units/Ratio)
= Target Sales