AFM 191 - Chp 7.2 - Break-even and margin of safety

Question 1

define the break-even point

Answer 1

level of sales volume at which a company makes $0 of operating income

Question 2

what is true at the break-even point

Answer 2

1.total sales dollars = total expenses
2. contribution margin dollars = fixed expenses
3. operating income = $0

Question 3

why is the break-even point useful to internal stakeholders?

Answer 3

understand how many units need to be sold for the company to generate an operating income

Question 4

what are the 2 formulas for the contribution margin income statement

Answer 4

sales - variable expenses - fixed expenses = operating income

(CM per unit * sales volume) - fixed expenses = operating income

Question 5

what’s the break-even formula in number of units sold?

Answer 5

sales volume = (fixed expenses)/CM per unit

Question 6

what’s the contribution margin income statement and break-even formula in total sales dollars?

Answer 6

(sales dollars*CM ratio) - fixed expenses = operating income

sales dollars = (fixed expenses)/CM ratio

Question 7

define the margin of safety

Answer 7

the difference between the actual sales dollars and the break-even sales dollars

Question 8

the larger the safety cushion (margin of safety) is, the ______ the risk the company will operate at a ______

Answer 8

lower, loss

Question 9

how to calculate margin of safety

Answer 9

margin of safety = total actual sales dollar - break-even sales dollars

Question 10

how to calculate the percentage of margin of safety

Answer 10

margin of safety % = (margin of safety)/total actual sales dollars

Question 11

what’s the formula to calculate the break-even point in units

Answer 11

break-even point in units = (fixed expenses)/CM per unit

Question 12

what’s the formula to calculate the break-even point in sales dollars

Answer 12

break-even point in sales dollars = (fixed expenses)/CM ratio

Question 13

what’s the formula to calculate the margin of safety % in terms of total actual sales dollars

Answer 13

margin of safety % = (Margin of safety)/ total actual sales dollars

Question 14

define a company’s sales mix

Answer 14

the percentage of total sales dollars generated by each product

Question 15

what are conclusions of the margin of safety percentage of less than 5%, 6%-15%, and 16% and higher

Answer 15

if less than 5%, there’s a high risk that the company will operate at a loss

if the margin of safety percentage is between 6%-15%, there’s a medium risk that the company will operate at a loss

if the margin of safety percentage is higher than 16%, there’s a low risk that the company will operate at a loss

Question 16

how to solve for total sales volume using target operating income

Answer 16

(CM per unit * sales volume) - fixed expenses = operating income

(CM per unit * sales volume) - fixed expenses = target operating income

(CM per unit * sales volume) = fixed expenses + target operating income

sales volume = (fixed expenses + target operating income)/ CM per unit