Chapter 5: Cost-Volume-Profit Relationships

Dollar sales to break even

Fixed Expenses / CM Ratio Fixed Expenses / (contribution margin / sales)

CVP Relationships in Equation Form

Profit = (Sales - Variable Expenses) - Fixed Expenses

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

Unit Sales to Break Even Formula

Fixed Expenses / Unit CM

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.

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