Match the following statements to the appropriate terms. The amount of revenue remaining after deducting variable costs. Costs that contain both a variable and a fixed element. The percentage of sales dollars available to cover fixed costs and produce income. Identifies the activity which causes changes in the behavior of costs. The difference between actual or expected sales and sales at the break-even point. Costs that vary in total directly and proportionately with changes in the activity level. The level of activity at which total revenues equal total costs. The range over which the company expects to operate during the year. Costs that remain the same in total regardless of changes in the activity level. A method that uses the total costs incurred at the high and low levels of activity. Click if you would like to Show Work for this question: Open Show Work Question Attempts: 0
The Correct Answer and Explanation is:
Matching Question 205 – Correct Answers:
- The amount of revenue remaining after deducting variable costs.
→ Contribution Margin - Costs that contain both a variable and a fixed element.
→ Mixed Costs - The percentage of sales dollars available to cover fixed costs and produce income.
→ Contribution Margin Ratio - Identifies the activity which causes changes in the behavior of costs.
→ Activity Index - The difference between actual or expected sales and sales at the break-even point.
→ Margin of Safety - Costs that vary in total directly and proportionately with changes in the activity level.
→ Variable Costs - The level of activity at which total revenues equal total costs.
→ Break-Even Point - The range over which the company expects to operate during the year.
→ Relevant Range - Costs that remain the same in total regardless of changes in the activity level.
→ Fixed Costs - A method that uses the total costs incurred at the high and low levels of activity.
→ High-Low Method
Textbook-Style Explanation (300 Words):
In cost-volume-profit (CVP) analysis, several key terms and concepts help businesses understand how costs behave and how changes in activity levels affect profitability.
Contribution Margin represents the amount of revenue left after subtracting variable costs. It is the income available to cover fixed costs and contribute to net income. The Contribution Margin Ratio expresses this as a percentage of sales, helping managers evaluate how much of each sales dollar is profit after variable expenses.
Variable Costs change directly and proportionally with activity levels. For example, the cost of raw materials increases with more units produced. Fixed Costs, however, remain constant in total, regardless of the level of activity—like rent or insurance.
Mixed Costs include both fixed and variable components. A typical example is a utility bill that includes a fixed charge plus a usage-based cost.
Activity Index is crucial as it identifies what drives changes in cost behavior, such as units produced or machine hours used. The Relevant Range defines the boundaries within which cost behaviors (fixed and variable) are valid. Costs may behave differently outside this range.
The Break-Even Point is when total revenues equal total costs—no profit or loss occurs. Any sales beyond this point generate profit. The Margin of Safety shows how much sales can drop before the company reaches its break-even point, offering a cushion against risk.
Finally, the High-Low Method is a simple way to separate mixed costs into fixed and variable components using data from the highest and lowest activity levels.
Understanding these terms is essential for budgeting, pricing, and strategic planning in any organization.
