acc212 ch 5
Contribution Margin Ratio
- shows how the contribution margin will be affected by a change in total sales CM Ratio = CM / Sales CM Ratio = CM per unit / selling price per unit
Break-Even Point
- the level of sales of sales at which profit is zero - one the break-even point has been reached, NOI will increase by the amount of the unit contribution margin for each additional unit sold
Break-Even in Units / $ Sales
Fixed Costs / unit CM
Contribution Margin
the amount remaining from sales revenue less variable costs; the amount contributes toward covering fixed expenses and then toward profits for the period
CVP Analysis
tool that helps managers understand the relationships among cost, volume, and profit
2 Ways to Compute # of Units to Attain a Target Profit
1. Equation Method 2. Formula Method
Contribution Margin per Unit
CM per unit = Selling price per unit - VC per unit CM per unit = P - V
Margin of Safety %
Margin of Safety in $ / Sales
Margin of Safety in Units
Margin of Safety in $ / Selling Price
Profit (NOI)
Profit = (Sales - VC) - FC
Relationship Between Profit & CM Ratio Equation
Proft = (CM Ratio x Sales) - FC
Margin of Safety Formula
Sales - Break Even Sales
Operating Leverage
a measure of how sensitive net operating income is to percentage changes in sales
incremental analysis
consider only those items of revenue, cost, and volume that will change if the new program is implemented
Target Profit Analysis
estimate what sales volume is needed to achieve a specific target profit
Degree of Operating Leverage
- a measure, at any given level of sales, of how a percentage change in sales volume will affect profits DOL = CM / NOI
Equation Method
- goal is to solve for unknown 'Q' which represents the quantity of units that must be sold to attain the target profit Profit = (P x Q - V x Q) - FC Profit = (P - V) x Q - FC Profit = Unit CM x Q - FC
Margin of Safety
- helps management assess how far above or below the break-even point the company is currently operating - the higher the margin of safety, the lower the risk of not breaking even and incurring a loss
Formula Method
- short cut version of the equation method - Unit Sales to Attain Target Profit = Target Profit + FC / CM per unit - $ sales to Attain Target Profit = Target Profit + FC / CM per unit
Break-Even Analysis
a special case of target profit analysis in which the target profit is zero
CVP Graph
highlights relationships among revenue, cost, profit, and volume over wide ranges of activity
Variable Expense Ratio
total variable expenses / total sales (in single approach analysis) variable cost per unit / unit selling price
Break-Even Point on CVP Graph
where the total revenue and total expenses lines intersect