Questions and Answers
What is the Contribution Margin Ratio Formula?
What is the Unit Sales to Break Even Formula?
Fixed Expenses / Unit CM
What is Dollar Sales to Break Even?
Fixed Expenses / CM Ratio
What is the Unit Sales to Attain Target Profit Formula?
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What is the Dollar Sales to Attain Target Profit Formula?
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What is margin of safety in dollars?
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What is the Margin of Safety in Dollars Formula?
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What is an advantage of a high cost structure?
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What is a disadvantage of a high cost structure?
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What is operating leverage?
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What is the Degree of Operating Leverage Formula?
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What is sales mix?
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What is the CVP Relationships in Equation Form?
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Study Notes
Cost-Volume-Profit (CVP) Relationships
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The CM Ratio Formula is calculated as Contribution Margin divided by Sales, providing insight into profit generation relative to sales.
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To determine the Unit Sales to Break Even, use the formula Fixed Expenses divided by Unit Contribution Margin (CM).
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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.
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For achieving a target profit, the formula is (Target Profit + Fixed Expenses) divided by Contribution Margin Per Unit (CMPU).
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The formula for Dollar Sales to Attain Target Profit is (Target Profit + Fixed Expenses) divided by CM Ratio, helping specify sales goals.
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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.
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The formula for calculating Margin of Safety in Dollars is Total Sales minus Break Even Sales, essential for risk management analysis.
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An advantage of a high cost structure is increased income during profitable years compared to companies with lower fixed costs.
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Conversely, a disadvantage of a high cost structure results in decreased income during poor years, making it riskier than lower fixed cost structures.
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Operating leverage measures how sensitive net operating income is to changes in sales, reflecting the impact of fixed costs on profit.
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The Degree of Operating Leverage Formula is Contribution Margin divided by Net Operating Income, indicating the level of operating risk.
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Sales mix refers to the proportionate relationship of different products sold by a company, affecting overall profitability.
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CVP Relationships in Equation Form is represented as Profit = (Sales - Variable Expenses) - Fixed Expenses, summarizing profit drivers in a straightforward equation.
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Test your knowledge of cost-volume-profit relationships with these flashcards. Focus on key formulas such as the CM Ratio, break-even sales, and target profit calculations. Perfect for students looking to solidify their understanding of financial concepts.