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