Chapter 5 Flashcards
Contribution Margin
Sales - Variable Cost = Contribution Margin
Profit
Contribution Margin - Fixed Costs
(Sales - Variable Expenses) - Fixed Expenses
(P x Q) - (V x Q) - Fixed Expenses
(P - V) x Q - Fixed expenses
(CM Ratio x Sales) - Fixed expenses
Contribution Income Statement
(Sales - Variabel Expenses) - Fixed Expenses = Net Operating Income
Contribution Margin - Fixed Income = Net Operating Income
Sales
Quantity (Q) x Selling price per unit (P)
Q x P
Variable Expenses
Quantity (Q) x Variable expenses per unit (V)
Q x V
Unit CM
Selling price per unit - Variable expenses per unit
P - V
Contribution Margin Ratio
Contribution Margin / Sales
(Sales - Variable expenses) / Sales
1 - Variable Expense Ratio
Variable Expense Ratio
Variable Expense / Sales
Unit Sales to break even
Fixed expenses / Unit CM
Dollar Sales to break even
Fixed expenses / CM Ratio
Target Profit Analysis: Equation Method
Unit CM x Q - Fixed Expenses = Profit
Target Profit Analysis: Formula Method
(Target profit + Fixed expenses) / CM per unit = Unit sales to attain the target profit
Target Profit Analysis: Formula Method Sales Dollars
(Target profit + Fixed expenses) / CM Ratio = Dollar sales to attain the target profit
Margin of safety in dollars
Total sales - Break-even sales
(Higher margin = lower risk)
High vs Low Fixed Cost Structure
In a high fixed cost structure, income will be higher in good years compared to companies with lower proportion of fixed costs. Though, their income will also be lower in bad years.
Low cost structures enjoy greater income stability across good and bad years.
