Accounting 3rd Test Chapter 18

vary in total directly and proportionately with changes in the activity level. If activity level increases by 10%, total variable costs will increase by 10%. It remains the same per unit at every level of activity.

remain the same in total regardless of changes in the activity level. Fixed costs per unit vary inversely w/ activity; as volume increases, unit cost declines, and vice versa.

costs that contain both a variable element and a fixed element. Mixed costs change in total but not proportionately with changes in the activity level.

The range over which a company expects to operate during a year. The linear assumption produces useful data for CVP analysis as long as the activity level remains within the relevant range.

First, Determine variable cost per unit from this: Change in total Costs/High minus Low Activity Level= Variable cost per unit. Second, Determine the fixed costs from subtracting the total variable costs at either the high or low activity level from the total cost at that level.

A study of the effects of changes in costs and volume on a company's profits. The CVP income statement classifies costs as variable or fixed and computes a contribution margin. Contribution margin is the amount of revenue remaining after deducting variable costs.

Unit selling price $500 Unit Variable costs $300 Total montly fixed costs $200,000 Units sold 1,600 CVP Income Statement Sales (1600 units) $800,000 Variable Costs(1600) $480,000 CONTRIBUTION MARGIN $320,000 Fixed Costs $200,000 Net Income $120,000

Sales - Variable Costs

Unit selling price - Unit variable costs

Contribution Margin per Unit / Unit selling price

the point at which total revenues equal total costs.

Required SalesX - Variable CostsX - Fixed Costs = Net Income Solve for X, multiply by selling price to get break even sales dollars.

Fixed costs / Contribution margin per unit = Break even point in Units

Fixed costs / Contribution margin ratio = Break even pt in $

Sales necessary to achieve a specified level of income.

Required SalesX - Variable CostsX - Fixed Costs = Target Net Income

(Fixed costs + Target Net Income) / Cont Margin per unit = Sales per unit

(Fixed costs + Target Net Income) / Contribution Margin Ratio = Required Sales in $

Difference between actual or expected sales and sales at break even point.

Actual(Expected) Sales - Break Even Sales = Margin of Safety in Dollars

Margin of Safety Dollars / Actual(Expected) Sales = Margin of safety ratio