chapter 6 managerial accounting (test 2) – Flashcards

the relative percentage in which a company sells its multiple products. sales mix is important to managers bc different products often have substantially different contribution margins. (ex: hewlett packer's unit sales are 80% printers and %PCs)

net income will be greater if higher contribution margin units are sold

for a company with many products, we calculate the break even point in terms of sales dollars (rather than units sold), using sales information for divisions or product lines (rather than individual products). this requires that we compute sales mix as a percentage of total dollars sales (rather than units sold) and we compute the contribution margin ratio (rather than contribution margin per unit)

approach to evaluating constraints. its a specific approach used to identify and manage constraints in order to achieve the companys goals. according to this theory, a company must continually identify its constraints and find ways to reduce or eliminate them, where appropriate.

refers to the relative proportion of fixed versus variable costs that a company incurs. cost structure can have a significant effect on profitability.

refers to the extent to which a companys net income reacts to a given change in sales. companies that have higher fixed costs relative to variable costs have higher operating leverage. when a companys sales revenue is increasing, high operating leverage is a good thing bc it means that profits will increase rapidly. but when sales are declining, too much operating leverage can have devastating consequences.

provides a measure of a companys earnings volatility and can be used to compare companies. degree of operating leverage is computed by dividing contribution margin by net income.

choose the one that has the HIGHER contribution margin per unit

a high degree of operating leverage exposes a company to greater earnings volatility risk

net income

product costs under absorption costs

higher than net income under variable costing when units produced are greater than units sold

Both types of income statements report the same amount of net income. But the format used to reach net income differs. A traditional income statement's format consists of: Sales revenue - cost of goods sold = gross profit; Gross profit - selling and administrative expenses = net income. A CVP income statement's format consists of: Sales revenue - variable expenses = contribution margin; Contribution margin - fixed expenses = net income.

The CVP income statement isolates variable costs from fixed costs while the traditional income statement does not. The CVP format indicates contribution margin in total and frequently on a per unit basis as well. This format facilitates calculation of break-even point and target net income. It also highlights how changes in sales volume or cost structure affect net income.

If the selling price is reduced but variable and fixed costs remain unchanged, the break-even point will increase. (bc you have to sell more to meet the break even point)

At the break-even point fixed costs and contribution margin are equal.