managerial accounting chapter 7
companies with high operating leverage have
relatively more fixed costs and relatively fewer variable costs higher contribution margin ratios changes in volume = higher risk higher potential for reward
breakeven point: contribution margin ratio
sales in dollars = (fixed exp + operating income) / contribution margin ratio
breakeven point
sales level at which operating income is zero
breakeven point: income statement approach
sales rev. - variable exp. - fixed exp. = operating income (sales price per unit X units sold) - ( variable cost per unit X units sold) - fixed expenses = operating income *always use zero as operating income
contribution margin
sales revenue minus variable expenses
Operating leverage factor
tells how responsive a company's operating income is to changes in volume. the greater the operating factor, the greater the impact of change in sales volume has on operating income.
breakeven point: unit contribution margin
contribution margin - fixed exp. = operating income sales in units = (fixed exp. + operating income) / contribution margin per unit *always uses zero as operating income
contribution margin ratio
contribution margin per unit / sales price per unit OR contribution margin / sales revenue
Breakeven point in units for multiple (two) products. That is, how many units of product 1 and how many units of product 2 must be sold in order to breakeven?
-find contribution margin per unit -multiply by sales mix -add together to get contribution margin -divide by how many units to get weighted-avg. contribution margin per unit sales in total units = (fixed expenses + operating income) / weighted avg. contribution margin per unit multiply the total number of units needed to breakeven by the proportion of each product in the sales mix
if a company changes its fixed costs for a product
if the fixed costs go up, then the volume needed to break even or achieve target profits goes up if the fixed costs go down, then the volume needed to break even or achieve target profits goes down
if a company changes its selling price for a product
if the sales price goes down, the unit contribution margin goes down, and the volume needed to break even or achieve target profits goes up if sales price goes up, the unit contribution margin goes up, and the volume needed to break even or achieve target profits goes down
if a company changes its variable costs for a product
if the variable costs go up, the unit contribution margin goes down, and the volume needed to break even or achieve target profits goes up if the variable cost goes down, the unit contribution margin goes up and the volume needed to break even or achieve target profits goes down
when finding the volume needed to earn a target profit, use the target profit as the _________ in the formulas
operating income
contribution margin income statement
organizes costs by behavior (fixed or variable) rather than function sales revenue less variable expenses contribution margin less fixed expenses operating income
margin of safety
the excess of the actual or expected sales over breakeven sales margin of safety in units = expected sales in units - breakeven sales in units margin of safety in dollars = expected sales in dollars - breakeven sales in dollars margin of safety as a percentage = margin of safety in units (dollars) / expected sales in units (dollars)
