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Chapter 20: Q25RQ (page 1120)
What is operating leverage? What does it mean if a company has a degree of operating leverage of 3?
The change will be more operating income than sales.
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What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?
What is target profit?
What is sensitivity analysis? How do managers use this tool
Using terminology Match the following terms with the correct definitions:
1. Costs that do not change in total over wide ranges of volume.
2. Technique that estimates profit or loss results when conditions change.
3. The sales level at which operating income is zero.
4. Drop in sales a company can absorb without incurring an operating loss.
5. Combination of products that make up total sales.
6. Net sales revenue minus variable costs.
7. Describes how a cost changes as volume changes.
8. Costs that change in total in direct proportion to changes in volume.
9. The band of volume where total fixed costs and variable cost per unit remain constant.
a. Breakeven point
b. Contribution margin
c. Cost behavior
d. Margin of safety
e. Relevant range
f. Sales mix
g. Fixed costs
h. Variable costs
i. Sensitivity analysis
What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?
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