Chapter 5 – Sales – Flashcards
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CVP Assumptions
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1. selling price is constant 2. Costs are linear 3. Product mix remains constant
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Contribution Margin
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Amount of money left over to cover fixed expenses (sales less variable costs)
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Breakeven Point - Definition
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The point at which the company's profit is 0.
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Profit Formula
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(sales - variable expenses) - fixed expenses OR (Unit CM * Q) - Fixed Cost OR (CM ratio *sales) - Fixed costs
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Sales formula
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Quantity * Price per unit
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Variable Expense Formula
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Variable cost per unit *Quantity
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Unit Contribution Margin
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Sales per unit - Variable cost per unit
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Contribution Margin Ratio Formula
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Contribution margin/sales
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Contribution Margin Ratio Definition
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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%
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Variable Expense Ratio
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Variable costs/sales Variable expenses are x% of sales
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Breakeven Equation - Units
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Unit sales to breakeven = fixed expenses/unit CM
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Breakeven Equation - Dollars
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Dollar sales to breakeven = fixed expenses/CM ratio
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Target Profit Equation - Unit
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Unit sales required = (Target profit+fixed expenses)/Unit CM
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Target Profit Equation - Dollars
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Dollar sales = (Target profit+fixed expenses)/CM ratio
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Margin of Safety Definition
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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
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Margin of Safety Formula
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Dollars = Total sales - breakeven sales % = MoS dollars/total sales Units = Dollars/price per unit
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Operating Leverage Definition
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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.
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Operating Leverage Formula
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Contribution margin/net operating income % change in NOI = OL * %change in sales
