Chapter 5: Cost-Volume-Profit Relationships
Dollar sales to break even
Fixed Expenses / CM Ratio Fixed Expenses / (contribution margin / sales)
Unit Sales to Break Even Formula
Fixed Expenses / Unit CM
Unit sales to attain target profit (formula method)
(Target profit + fixed expenses) / CMPU
dollar sales to attain target profit formula
(target profit + fixed expenses) / CM ratio (target profit + fixed expenses) / (CM / sales)
Degree of Operating Leverage Formula
Contribution Margin / Net Operating Income
CM Ratio Formula
Contribution Margin / Sales
What is an advantage of a high cost structure?
Income will be higher in good years compared to companies with lower proportion of fixed costs.
What is a disadvantage of a high cost structure?
Income will be lower in bad years compared to companies with lower proportion of fixed costs.
CVP Relationships in Equation Form
Profit = (Sales - Variable Expenses) - Fixed Expenses
What is margin of safety in dollars?
The excess of budgeted or actual sales dollars over the break-even volume of sales dollars. The amount by which sales can drop before losses are incurred. The higher this is, the lower the risk of not breaking even and incurring a loss.
Sales mix
The relative proportions in which a company's products are sold.
margin of safety in dollars formula
Total Sales - Break Even Sales
What is operating leverage?
a measure of how sensitive net operating income is to percentage changes in sales