Chapter 5
(formula) How to find the difference in net income when you change fixed costs or number of units
(unit cm x quantity) - fixed costs = noi
The higher the proportion of fixed costs in a company, the ______ the operating leverage (higher or lower)
higher
4. If sales increase to 1,001 units, what would be the increase in net operating income? How would you answer this problem
the answer is the unit contribution margin
where is the break even point on the cvp graph?
where the total revenue and total expenses lines cross
What is the formula to find target profit on a per unit basis?
(target profit + fixed cost)/unit cm
formula for margin of safety in percentage
margin of safety in dollars/actual or budgeted sales
What is the formula for variable expense ratio?
variable expenses / sales
What is the equation method formula for unit sales to break even?
Profit (0) = unit cm x Q - fc
contribution margin
The amount remaining from sales revenues after all variable expenses have been deducted.
what is operating leverage?
a measure of how sensitive net income is to a given percentage change in dollar sales
formula for margin of safety in dollars
actual or budgeted sales - break-even sales
What is the formula for contribution margin on a per unit basis
cm per unit / unit selling price
What is the formula to find the changes in cm for a company?
cm ratio x sales
What is the formula for contribution margin ratio
contribution margin / sales
What is the relationship between contribution margin ratio and variable expense ratio
contribution margin can be found by doing 1 - variable expense ratio
What is the formula for degree of operating leverage?
contribution margin/net operating income
What is the formula method formula for unit sales to break even?
fc/unit cm
What is usually plotted as a horizontal line on the CVP graph?
fixed expenses
What is represented on the X axis of a cost-volume-profit (CVP) graph?
sales volume
What does the cost volume profit graph illustrate?
the relationships among revenue, cost and profit over different levels of actvity
Break-even point is the level of sales at which ______.
total revenue equals total costs
Where is the loss area found on the cvp analysis graph?
under the break even point
Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold.
unit contribution margin
How do you find unit contribution margin?
unit sales - unit vc
Formula to find Unit contribution margin
unit selling price - unit variable cost
What is the formula for variable expense ratio on a per unit basis?
unit variable expense / unit selling price
Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales? How do you find this answer?
use your degree of operating leverage and multiply it by the percentage increase in sales
Formulas for contribution margin
1. Sales - Variable Costs 2. unit cm x Q
Formulas for profit:
1. cm - fc 2. (cm ratio x sales)- fc
What is the equation method formula to break even to get dollar sales?
(Profit (0) = cm ratio x Q - fc) x selling price
What is the formula method formula to break even to get dollar sales?
(fc/unit cm) x selling price
break even
A point at which revenue equals expenses.
What is the formula to find target profit on a dollar sales basis?
(target profit + fixed cost)/cm ratio