Break-even point That level of operations at which revenues for a period are equal to the costs assigned to that period so there is no net income or loss.
Contribution margin The amount by which revenue exceeds the variable costs of producing that revenue. The contribution margin per unit is the selling price minus the variable cost per unit.
Contribution margin ratio Contribution margin per unit divided by selling price per unit, or total contribution margin divided by total revenues.
Cost-volume-profit (CVP) analysis An analysis of the effect that any changes in a company’s selling prices, costs, and/or volume will have on income (profits) in the short run. Also called break-even analysis.
Cost-volume-profit (CVP) chart A graph that shows the relationships among sales, volume, costs, and net income or loss.
Fixed costs Costs that remain constant (in total) over some relevant range of output.
High-low method A method used in dividing mixed costs into their fixed and variable portions. The high plot and low plot of actual costs are used to draw a line representing a total mixed cost.
Margin of safety Amount by which sales can decrease before a loss is incurred.
Margin of safety rate Margin of safety expressed as a percentage, which equals (Current sales – Break-even sales)/Current sales.
Mixed cost Contains a fixed portion of cost incurred even when the plant is completely idle and a variable portion that increases directly with production volume.
Product mix The proportion of the company’s total sales attributable to each type of product sold.
Profit equation The equation is Net income = Revenue – Total variable costs – Fixed costs.
Relevant range The range of production or sales volume over which the assumptions about cost behavior are valid.
Scatter diagram A diagram that shows plots of actual costs incurred for various levels of activity; it is used in dividing mixed costs into their fixed and variable portions.
Short run The time during which a company’s management cannot change the effects of certain past decisions; often determined to be one year or less. In the short run, many costs are assumed to be fixed and unchangeable.
Step cost A cost that remains constant at a certain fixed amount over a range of output (or sales) but then keeps increasing to a higher amount at certain points.
Variable costs Costs that vary (in total) directly with changes in the volume of production or sales.
*Some terms listed in earlier chapters are repeated here for your convenience.