Chapter 6
Costs that change in total in direct proportion to changes in volume, but remain constant per unit
Variable Costs
Sales Revenue - Total Variable Expenses. Represents the amount of profit generated to cover fixed costs and operating income.
Contribution Margin
Future-oriented information that differs among alternatives
Relevant Information
The combined CM across all products weighted by their proportion in the sales mix
Weighted Average CM
Calculate CM per unit and CM Ratio
$12 and 60%
Costs that remain unchanged in total regardless of volume changes, but decrease per unit as volume increases
Fixed Costs
A specific operating income level above breakeven that management aims to achieve.
Target Profit
Past costs that cannot be changed by any present or future decisions; they are always irrelevant
Sunk Costs
The traditional GAAP required method where all manufacturing costs are absorbed into product costs. Fixed MOH is not expended until inventory is sold
Absorption Costing
Calculate breakeven sales in units
10,000 Units
Long term fixed costs that management cannot easily change in the short term
Committed Fixed Costs
The sales level where total revenue equals total expenses.
Breakeven Point
A pricing approach adding a target profit markup to the full cost of a product
Cost Plus Pricing
An internal management costing method where only variable MOH costs are treated as product cost. Fixed MOH is expensed immediately as a period cost
Calculate target profit of 210,000 in units
27,500 Units
Costs containing both variable and fixed costs
Mixed Costs
The excess of expected or actual sales over breakeven; measures the cushion against incurring a loss.
The potential benefit given up when choosing one alternative over another
Opportunity Cost
A statistical tool that uses all historical data points to create the most accurate cost estimating equation
Regression Analysis
Calculate margin of safety in dollars
$300,000
The specific volume range where total fixed costs and variable cost per unit remain constant
Relevant Range
A ratio that measures how sensitive operating income is to precentage changes in volume.
Operating Leverage Factor
Fixed costs that will be eliminated if a specific product line, store, or department is discontinued
Avoidable Fixed Costs
What is the major downside of using the high-low method?
Starlight Resorts sells all-inclusive daily activity passes for $120 per person. The variable costs associated with each pass (equipment maintenance, snacks, and guides) are $40 per pass. Fixed costs related to operating the resort facilities total $160,000.
Calculate the operating income if the resort sold 3,000 activity passes.
172,500