BUS 371 CH 5 KEY TERMS

Question	Answer
Break-even point	The level of sales at which profit is zero.
Contribution margin ratio (CM ratio)	A ratio computed by dividing contribution margin by sales.
Cost-volume-profit (CVP) graph	A graphical representation of the relationships between an organization’s revenues, costs, and profits on the one hand and its sales volume on the other hand.
Degree of operating leverage	A measure, at a given level of sales, of how a percentage change in sales volume will affect profits. The degree of operating leverage is computed by dividing contribution margin by net operating income.
Incremental analysis	An analytical approach that focuses only on those costs and revenues that change as a result of a decision.
Margin of safety	The excess of budgeted or actual dollar sales over the break-even dollar sales.
Operating leverage	A measure of how sensitive net operating income is to a given percentage change in unit sales.
Sales mix	The relative proportions in which a company’s products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales.
Target profit analysis	Estimating the level of sales needed to achieve a desired target profit.
Variable expense ratio	A ratio computed by dividing variable expenses by sales.

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