Chapter 16--Cost-Volume-Profit Analysis Key 1. Cost-volume-profit analysis focuses on the break-even point and the impact of changes in fixed costs and price. 2. The break-even point is the point where total costs equal sales revenues. 3. The term net income is used to mean operating income before income taxes. 4. To earn a target profit, total costs plus the amount of target profit must equal total sales revenue. 5. Units to earn target profit equal total fixed costs plus target profit divided by the contribution margin ratio. 6. Sales revenue to earn target profits equals total fixed costs plus target profit divided by the contribution margin. 7. Income taxes are generally calculated as a percentage of income. 8. When using either the equation or the contribution margin approach, the after-tax profit must be converted to a before-tax profit target. 9. In multiple-product analysis, the break-even units for each product will change as the sales mix changes. 10. Increased sales of high contribution margin products increase the break-even point.
11. Increases in sales of low contribution margin products decrease the break-even point. 12. In a CVP graph, the intersection of the total costs line and the total sales revenue lineis the break-even point in units. 13. The profit-volume graph depicts the relationship among cost, volume, and profit. 14. The cost-volume-profit graph portrays the relationship between profits and sales volume. 15. CVP analysis is a short-run decision-making tool since some costs are fixed. 16. Multiple-product break-even analysis requires a constant sales mix, which is difficult to predict with certainty. 17. Uncertainty regarding costs, prices, and sales mix affect the break-even point. 18. The operating leverage shows how far the company’s actual sales or units are from the break-even point. 19. Sensitivity analysis is a what-if technique that examines the impact of changes in assumptions. 20. Under ABC, cost drivers are separated into unit-based and non-unit-based drivers.
21. The __________ is where total revenues equal total costs. 22. The __________ ratio expresses variable costs in terms of sales dollars. 23. In cost-volume-profit analysis income taxes __________ the break even point.
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