Accounting Chapter three

What is the contribution margin?

the amount remaining from sales revenue after variable expenses have been deducted. Thus, the amount available to cover fixed expenses and then to provide profits for the period.

CVP analysis focuses on how profits are affected by which 5 factors?

selling prices sales volume unit variable costs total fixed costs mix of products sold

Formula Method

short cut version of the equation method unit sales to attain target profit= target profit + fixed expenses/ unit CM

break-even analyisis

special cases of target profit analysis in which the target profit is zero unit sales to break even= 0+ fixed expenses/ unit CM

degree of operating leverage

= contribution margin/ net operating income

The contribution format income statement can be expressed in equation form as:

Profit = (sales - variable expenses) - fixed expenses sales = selling price per unit X quantity sold variable expenses = variable expenses per unit X quantity sold

What is the unit contribution margin formula?

Unit CM = selling price per unit - variable expenses per unit = P-V

Operating leverage

a measure of how sensitive net operating income is to a given percentage change in dollar sales. It acts as a multiplier. If operating leverage is high, a small percentage increase in sales can produce a much larger percentage increase in net operating income.

Equation Method

profit = unit CM X Q - fixed expense

What is the contribution margin ratio?

contribution margin/ sales

Target profit analysis in terms of sales dollars

dollar sales to attain target profit= target profit + fixed expenses/ CM ratio

Target profit analysis

key uses of CVP analysis. estimates what SALES VOLUME is needed to achieve a specific target profit. To figure this out we use the equation method or the formula method

Margin of Safety

the excess of budgeted or actual sales dollars over the break-even volume of sales dollars. It is the amount by which sales can drop before losses incurred. The higher the margin of safety, the lower the risk of not breaking even and incurring a loss.