Describe the essential features of a Cost-Volume-Profit income statement.

The CVP income statement classifies costs as variable or fixed and computes a contribution margin.

Define Contribution Margin.

The amount of revenue remaining after deducting variable costs. It is often stated both as a total amount and on a per unit basis.

Formula for break-even point in units

Fixed costs / contribution margin per unit

Formula for break-even point in dollars

Fixed costs / contribution margin ratio

Formula for target net income in units

(Fixed costs - target net income) / contribution margin per unit

Formula for target net income in dollars

(fixed costs - target net income) / contribution margin ratio

Define Margin of Safety

Tells us how far sales can drop before the company will be operating at a loss.

Formula for Margin of Safety

Actual (or expected) sales - breakeven sales

Formula for Margin of Safety Ratio

Margin of safety / actual (or expected) sales

Explain the difference between absorption costing and variable costing

In job order costing, a job is assigned the costs of direct materials, direct labor & both variable and fixed MOH. This is Absorption Costing. Variable costing - only DM, DL & variable MOH are considered product costs. Fixed MOH is classified as period costs. Absorption costing usually used for external reporting, Variable used for internal accountability.

Define Operating Leverage

Refers to the extent to which a company's net income reacts to given change in sales. Companies with higher fixed costs relative to variable costs have higher operating leverage. Great when sales increasing, possibly devastating when declining.

Formula for the degree of operating leverage

Contribution margin / net income

Degree of Operating Leverage tells us...

A measure of a company's earnings volatility and can be used to compare companies. Higher leverage is equal to higher volatility risk.

Define Sales Mix

The relative percentage in which a company sells its multiple products.

How do you determine the break-even sales in units for a mix of two or more products.

By determining the weighted-average unit contribution margin of all the products.

Formula for weighted average unit contribution margin units

(Unit Contribution Margin x Sales Mix Percentage) + (Unit Contribution Margin x Sales Mix Percentage)

Formula for break-even in units for a sales mix or 2 or more products

Fixed costs - weighted average unit contribution margin

Formula for weighted average contribution margin ratio

(Contribution margin ratio x sales mix percentage) + (contribution margin ratio x sales mix percentage) =

Formula for break-even in dollars for a sales mix of 2 or more products

Fixed costs / weighted average contribution margin ratio

Formula for determining sales mix when a company has limited resources (Contribution margin per unit of limited resource)

Contribution margin per unit / limited resource per unit