1. Cost behaviors and estimates are valid only within what is referred to as a precision range. 2. The relevant range is the normal level of operating activity. 3. Operating income = Sales revenue – Variable cost per unit – Total fixed costs. 4. A basic tool for making business decisions is the contribution margin. 5. The contribution margin is the difference between sales and fixed costs. 6. Contribution margin is the amount of revenue that remains to cover fixed costs and provide a profit. 7. Contribution margin = Sales revenue – Total variable costs. 8. Unlike the contribution margin in dollars the contribution margin ratio cannot be used to determine the increase in profits from a given dollar increase in sales revenue. 9. The contribution margin income statement allows managers to easily assess the impact of sales volume on operating income. 10. The contribution format income statement presents cost by behavior. 11. When production and sales are equal a drawback of the contribution format income statement is that is does not produce the same operating income as the traditional functional income statement format. 12. A contribution format income statement just rearranges the individual costs components and produces the same operating income as the traditional functional income statement.
