Chapter 5: Cost-Volume-Profit Flashcards

Cost-Volume-Profit (CVP) Relationships

• The CM Ratio Formula is calculated as Contribution Margin divided by Sales, providing insight into profit generation relative to sales.

• To determine the Unit Sales to Break Even, use the formula Fixed Expenses divided by Unit Contribution Margin (CM).

• Dollar Sales to Break Even can be calculated using Fixed Expenses divided by the Contribution Margin Ratio, indicating how much revenue is needed to cover costs.

• For achieving a target profit, the formula is (Target Profit + Fixed Expenses) divided by Contribution Margin Per Unit (CMPU).

• The formula for Dollar Sales to Attain Target Profit is (Target Profit + Fixed Expenses) divided by CM Ratio, helping specify sales goals.

• Margin of Safety in Dollars represents the cushion of budgeted or actual sales over break-even sales. A higher margin indicates lower risk of losses.

• The formula for calculating Margin of Safety in Dollars is Total Sales minus Break Even Sales, essential for risk management analysis.

• An advantage of a high cost structure is increased income during profitable years compared to companies with lower fixed costs.

• Conversely, a disadvantage of a high cost structure results in decreased income during poor years, making it riskier than lower fixed cost structures.

• Operating leverage measures how sensitive net operating income is to changes in sales, reflecting the impact of fixed costs on profit.

• The Degree of Operating Leverage Formula is Contribution Margin divided by Net Operating Income, indicating the level of operating risk.

• Sales mix refers to the proportionate relationship of different products sold by a company, affecting overall profitability.

• CVP Relationships in Equation Form is represented as Profit = (Sales - Variable Expenses) - Fixed Expenses, summarizing profit drivers in a straightforward equation.