Learning Objectives

After studying Chapter 6, you should be able to:

1

Explain how changes in activity affect contribution margin and net income.

2

Compute the contribution margin ratio (CM ratio) and use it to compute changes in contribution margin and net income.

3

Show the effects on contribution margin of changes in variable costs, fixed costs, selling price, and volume.

4

Compute the break-even point by both the equation method and the contribution margin method.

5

Prepare a cost-volume-profit (CVP) graph and explain the significance of each of its components.

6

Use the CVP formulas to determine the activity level needed to achieve a desired target profit.

7

Compute the margin of safety and explain its significance.

8

Compute the degree of operating leverage at a particular level of sales and explain how the degree of operating leverage can be used to predict changes in net income.

9

Compute the break-even point for a multiple product company and explain the effects of shifts in the sales mix on contribution margin and the break-even point.

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