Chapter 5

(formula) How to find the difference in net income when you change fixed costs or number of units

(unit cm x quantity) - fixed costs = noi

The higher the proportion of fixed costs in a company, the ______ the operating leverage (higher or lower)

higher

4. If sales increase to 1,001 units, what would be the increase in net operating income? How would you answer this problem

the answer is the unit contribution margin

where is the break even point on the cvp graph?

where the total revenue and total expenses lines cross

What is the formula to find target profit on a per unit basis?

(target profit + fixed cost)/unit cm

formula for margin of safety in percentage

margin of safety in dollars/actual or budgeted sales

What is the formula for variable expense ratio?

variable expenses / sales

What is the equation method formula for unit sales to break even?

Profit (0) = unit cm x Q - fc

contribution margin

The amount remaining from sales revenues after all variable expenses have been deducted.

what is operating leverage?

a measure of how sensitive net income is to a given percentage change in dollar sales

formula for margin of safety in dollars

actual or budgeted sales - break-even sales

What is the formula for contribution margin on a per unit basis

cm per unit / unit selling price

What is the formula to find the changes in cm for a company?

cm ratio x sales

What is the formula for contribution margin ratio

contribution margin / sales

What is the relationship between contribution margin ratio and variable expense ratio

contribution margin can be found by doing 1 - variable expense ratio

What is the formula for degree of operating leverage?

contribution margin/net operating income

What is the formula method formula for unit sales to break even?

fc/unit cm

What is usually plotted as a horizontal line on the CVP graph?

fixed expenses

What is represented on the X axis of a cost-volume-profit (CVP) graph?

sales volume

What does the cost volume profit graph illustrate?

the relationships among revenue, cost and profit over different levels of actvity

Break-even point is the level of sales at which ______.

total revenue equals total costs

Where is the loss area found on the cvp analysis graph?

under the break even point

Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold.

unit contribution margin

How do you find unit contribution margin?

unit sales - unit vc

Formula to find Unit contribution margin

unit selling price - unit variable cost

What is the formula for variable expense ratio on a per unit basis?

unit variable expense / unit selling price

Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales? How do you find this answer?

use your degree of operating leverage and multiply it by the percentage increase in sales

Formulas for contribution margin

1. Sales - Variable Costs 2. unit cm x Q

Formulas for profit:

1. cm - fc 2. (cm ratio x sales)- fc

What is the equation method formula to break even to get dollar sales?

(Profit (0) = cm ratio x Q - fc) x selling price

What is the formula method formula to break even to get dollar sales?

(fc/unit cm) x selling price

break even

A point at which revenue equals expenses.

What is the formula to find target profit on a dollar sales basis?

(target profit + fixed cost)/cm ratio