Chapter 7: Cost-Volume-Profit Analysis

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Cost-volume-profit analysis
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A study of the relationships between sales volume, expenses, revenue, and profit.
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Break-even point
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The volume of activity at which an organization’s revenues and expenses are equal. May be measure either in units or in sales dollars.
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Total contribution margin
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Total sales revenue less total variable expenses.
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Unit contribution margin
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Sales price minus the unit variable cost.
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Contribution-margin ratio
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The unit contribution margin divided by the sales price per unit. Also may be expressed in percentage form; then it is called the contribution-margin percentage.
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Cost-volume-profit
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A graphical expression of the relationships between sales volume, expenses, revenues, and profits.
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Profit-volume graph
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A graphical expression of the relationship between profit and sales volume.
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Target profit (or income)
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The profit level set as management’s objective.
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Safety margin
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Difference between budgeted sales revenue and break-even sales revenue.
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Total contribution margin
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Total sales revenue less total variable expenses.
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Sales mix
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Relative proportion of sales of each of an organization’s multiple products.
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Weighted-average unit contribution margin
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Average of a firm’s several products’ unit contribution margins, weighted by the relative sales proportion of each product.
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Sensitivity analysis
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A technique for determining what would happen in a decision analysis if a key prediction or assumption proves to be wrong.
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Contribution income statement
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An income statement on which fixed and variable expenses are separated.
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Cost structure
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The relative proportions of an organization’s fixed and variable costs.
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Operating Leverage
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The extent to which an organization uses fixed costs in its costs structure. The greater the proportion of fixed costs, the greater the operating leverage.
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Operating leverage factor
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A measure of operating leverage at a particular sales volume. Computed by dividing an organization’s total contribution margin by its net income.

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