Chapter 9: Cost-Volume-Profit

What is contribution margin?

CM = Sales Revenue - Variable Costs

What is the contribution margin ratio?

CM Ratio = CM / Sales Revenue

How is contribution margin different from gross margin?

CM is revenue minus variable costs, whereas GM is revenue minus manufacturing costs.

Is it good to have a high or low margin of safety?

High? If MOS Ratio is 40% and sales dip below 40%, then company will lose money.

Is it good to have high or low operating leverage?

It depends. A higher OL means a company will profit more from sales, but will also take more damage from lost sales.

What is margin of safety?

Margin of safety (MOS) is the amount of planned sales above breakeven, in units or dollars. MOS = Planned Sales - Breakeven Point

What is operating leverage?

Operating leverage is a measure of the sensitivity of operating profit to changes in volume. Operating Leverage = CM / Operating Profit

What does it measure?

Sensitivity

What is the breakeven point?

The breakeven point (BEP) is where total revenue = total cost.