Session:3 Cost-Volume-Profit Analysis

Key Terms

Principles of Accounting, Volume 2: Managerial Accounting | Leadership Development – Micro-Learning Session

Rice University 2020 | Michael Laverty, Colorado State University Global Chris Littel, North Carolina State University| https://openstax.org/details/books/principles-managerial-accounting

break-even point

dollar amount (total sales dollars) or production level (total units produced) at which the company has recovered all variable and fixed costs; it can also be expressed as that point where Total Cost (TC) = Total Revenue (TR)

composite unit

selection of discrete products associated together in relation or proportion to their sales mix

contribution margin

amount by which a product’s selling price exceeds its total variable cost per unit

contribution margin ratio

percentage of a unit’s selling price that exceeds total unit variable costs

margin of safety

difference between current sales and break-even sales

multi-product environment

business environment in which a company sells different products, manufactures different products, or offers different types of services

multiplier effect

when the change in an input by a certain percentage has a greater effect (a higher percentage effect) on the output

operating leverage

measurement of how sensitive net operating income is to a percentage change in sales dollars

relevant range

quantitative range of units that can be produced based on the company’s current productive assets; for example, if a company has sufficient fixed assets to produce up to 10,000 units of product, the relevant range would be between 0 and 10,000 units

sales mix

relative proportions of the products that a company sells

sensitivity analysis

what will happen if sales price, units sold, variable cost per unit, or fixed costs change

target pricing

process in which a company uses market analysis and production information to determine the maximum price customers are willing to pay for a good or service in addition to the markup percentage

total contribution margin

amount by which total sales exceed total variable costs