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ACC Ch.5


What is meant by a product's CM ratio? How is this ratio useful in planning business operations? The contribution margin (CM) ratio is the ratio of the total contribution margin to total sales revenue. It is used in target profit and break-even analysis and can be used to quickly estimate the effect on profits of a change in sales revenue.
In all respects, Company A and Company B are identical except that Company A's costs are mostly variable whereas Company B's costs are mostly fixed. When sales increase, which company will tend to realize the greatest increase in profits? All other things equal, Co. B, w/ its higher fixed costs and lower variable costs, will have a higher contribution margin ratio than Co A. Therefore, it will tend to realize a larger increase in contribution margin and in profits when sales increase.
What is meant by the term operating leverage? measures the impact on NOI of a given percentage change in sales. The degree of operating leverage at a given level of sales is computed by dividing the contribution margin at that level of sales by the NOI at that level of sales.
What is meant by the term break even? The break-even point is the level of sales at which profits are zero.
What is meant by the margin of safety? The margin of safety is the excess of budgeted (or actual) sales over the break-even volume of sales. It is the amount by which sales can drop before losses begin to be incurred.
What is meant by the term sales mix? What assumption is usually made concerning sales mix in CVP analysis. The sales mix is the relative proportions in which a company’s products are sold. The usual assumption in cost-volume-profit analysis is that the sales mix will not change.
Explain how a shift in the sales mix could result in both a higher break even point and a lower net income. Shifted from high CM products to low CM products. Cause avg. CM ratio in the company to decline resulting in less total CM for a given amt of sales. NOI=decline. The BE point=higher bc more sales would be required to cover the same amount of fixed costs.
Created by: acorso3