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Chapter 5
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Terms in this set (18)
CVP Assumptions
1. selling price is constant
2. Costs are linear
3. Product mix remains constant
Contribution Margin
Amount of money left over to cover fixed expenses (sales less variable costs)
Breakeven Point - Definition
The point at which the company's profit is 0.
Profit Formula
(sales - variable expenses) - fixed expenses OR
(Unit CM * Q) - Fixed Cost OR
(CM ratio *sales) - Fixed costs
Sales formula
Quantity * Price per unit
Variable Expense Formula
Variable cost per unit *Quantity
Unit Contribution Margin
Sales per unit - Variable cost per unit
Contribution Margin Ratio Formula
Contribution margin/sales
Contribution Margin Ratio Definition
Shows how the contribution margin will be affected by a change in sales. For each $1 increase in sales, the contribution margin will increase by X%
Variable Expense Ratio
Variable costs/sales
Variable expenses are x% of sales
Breakeven Equation - Units
Unit sales to breakeven = fixed expenses/unit CM
Breakeven Equation - Dollars
Dollar sales to breakeven = fixed expenses/CM ratio
Target Profit Equation - Unit
Unit sales required = (Target profit+fixed expenses)/Unit CM
Target Profit Equation - Dollars
Dollar sales = (Target profit+fixed expenses)/CM ratio
Margin of Safety Definition
Amount by which sales can drop before losses are incurred.
Higher margin of safety = lower risk of not breaking even and incurring loss but less upside
Reduction in sales of $x or x% would result in breakeven
Margin of Safety Formula
Dollars = Total sales - breakeven sales
% = MoS dollars/total sales
Units = Dollars/price per unit
Operating Leverage Definition
Measure of how sensitive net operating income is to a given %change in dollar sales.
High operating leverage = small %increase in sales equals a large increase in NOI.
Not constant.
Operating Leverage Formula
Contribution margin/net operating income
% change in NOI = OL * %change in sales
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