Scribd Logo
Upload

Welcome to Scribd!

  • 60 views

    Contribution Margin CM Ratio Total Sales: CVP Analysis

    Uploaded by

    Zimbo Kigo
    The document discusses key concepts in contribution margin analysis and break-even analysis. It defines the contribution margin ratio as contribution margin divided by total sales. It presents the equation method and contribution margin method for calculating the break-even point. It also defines the margin of safety as the excess of actual or budgeted sales over break-even sales. Finally, it discusses operating leverage and how it measures the effect of sales changes on net operating income.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd

    Contribution Margin CM Ratio Total Sales: CVP Analysis

    Uploaded by

    Zimbo Kigo
    60 views2 pages
    The document discusses key concepts in contribution margin analysis and break-even analysis. It defines the contribution margin ratio as contribution margin divided by total sales. It presents the equation method and contribution margin method for calculating the break-even point. It also defines the margin of safety as the excess of actual or budgeted sales over break-even sales. Finally, it discusses operating leverage and how it measures the effect of sales changes on net operating income.

    Original Description:

    costing

    Original Title

    CVP Analysis.doc

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    DOC, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses key concepts in contribution margin analysis and break-even analysis. It defines the contribution margin ratio as contribution margin divided by total sales. It presents the equation method and contribution margin method for calculating the break-even point. It also defines the margin of safety as the excess of actual or budgeted sales over break-even sales. Finally, it discusses operating leverage and how it measures the effect of sales changes on net operating income.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    60 views2 pages

    Contribution Margin CM Ratio Total Sales: CVP Analysis

    Uploaded by

    Zimbo Kigo
    The document discusses key concepts in contribution margin analysis and break-even analysis. It defines the contribution margin ratio as contribution margin divided by total sales. It presents the equation method and contribution margin method for calculating the break-even point. It also defines the margin of safety as the excess of actual or budgeted sales over break-even sales. Finally, it discusses operating leverage and how it measures the effect of sales changes on net operating income.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    You are on page 1of 2

    CVP ANALYSIS

    CONTRIBUTION MARGIN RATIO The contribution margin (CM) ratio is the ratio of contribution margin to total sales:

    CM ratio=

    Contribution margin Total sales

    If the company has only one product, the CM ratio can also be computed using per unit data:

    CM ratio=

    Unit contribution margin Unit selling price

    The CM ratio shows how the contribution margin will be affected by a given change in total sales. BREAKEVEN ANALYSIS - EQUATION METHOD Q =Break-even quantity Sales =Variable expenses + Fixed expenses + Profits Q x selling price/unit = (Q x variable expense/unit) + Fixed expenses + Profits BREAKEVEN ANALYSIS - CONTRIBUTION MARGIN METHOD Break-even quantity = Fixed Expenses CM/u To calculate the breakeven point in sales dollars, substitute ratios as a percent of sales for dollars. Or, calculate the breakeven point in units and multiply by the selling price/unit. MARGIN OF SAFETY The margin of safety is the excess of budgeted (or actual) sales over the break-even sales. The margin of safety can be expressed either in dollar or percentage form. The formulas are:

    Margin of safety =Total sales-Breakeven sales in dollars

    Margin of safety =Margin of safety in dollars percentage Total sales


    OPERATING LEVERAGE Operating leverage measures how a given percentage change in sales affects net operating income. It is a measure of volatility in net income caused by high fixed expenses relative to variable expenses.

    Contribution margin Degree of = operating leverage Net operating income


    Use the income statements for Company X and Y to compute: a. Breakeven point in units and sales dollars. b. Margin of safety. c. Degree of operating leverage. d. The change in net income caused by a 10% increase in sales. Sales (5,000 units) ............... Less variable expenses.......... Contribution margin............... Less fixed expenses............... Net operating income............ Company X $500,000 100% 350,000 70 150,000 30% 90,000 $ 60,000 Company Y $500,000 100% 100,000 20 400,000 80% 340,000 $ 60,000

    You might also like