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Key Terms

  • Cost-Volume-Profit (CVP) Analysis: Method of analyzing how operating decisions affect profit based on costs, volume, and prices
  • Variable Costs: Costs that change in total in direct proportion to volume
  • Fixed Costs: Costs that remain constant in total regardless of volume
  • Mixed Costs: Costs with both fixed and variable components
  • Contribution Margin: Sales revenue minus variable costs
  • Contribution Margin per Unit: Selling price per unit minus variable cost per unit
  • Contribution Margin Ratio: Contribution margin divided by sales revenue
  • Break-Even Point: Level of sales where revenue equals total costs (zero profit)
  • Target Profit: Desired level of profit
  • Margin of Safety: Amount by which actual sales exceed break-even sales
  • CVP Income Statement: Income statement organized by cost behavior
  • Operating Leverage: Measure of how sensitive profit is to volume changes
  • Sales Mix: Relative proportion of different products sold
  • Weighted Average Contribution Margin: Average contribution margin weighted by sales mix
  • Variable Costing: Costing method including only variable manufacturing costs
  • Absorption Costing: Costing method including all manufacturing costs
  • Relevant Range: Range of activity where cost behavior assumptions are valid
  • Degree of Operating Leverage: Contribution margin divided by net income