Management Accounting Ch06

The CVP income statement classifies costs as variable or fixed and computes a contribution margin.

The margin of safety indicates how much sales must increase before a company will be operating at a profit.

Sales mix is the relative percentage in which each product is sold when a company sells more than one product.

When multiple products exist, the break-even point in dollars is computed by dividing fixed costs by the weighted-average contribution margin.

When a company has limited resources, management must decide which product to make and sell in order to maximize contribution margin ratio.

Contribution margin per unit of limited resource is obtained by dividing the contribution margin per unit of each product by the number of units of the limited resource required for each product.

Operating leverage refers to the extent to which a company’s net income reacts to a given change in production.

Companies that have higher fixed costs relative to variable costs have higher operating leverage.