Chapter 5

Question 0

Equation for CM Ratio?

Answer 0

Total CM / Total Sales

Question 1

Equation for CM?

Answer 1

Sales - Variable Expenses

Question 2

How to estimate the affect of a planned increase in sales on profit?

Answer 2

Multiply the increase in units by the unit CM.

Example: going from 400 to 425 sales,
25 x unit CM = increase in income

Question 3

Equation for variable expense ratio?

Answer 3

Variable expenses / sales

Question 4

Break-even analysis formula method?

Answer 4

Unit sales to break even = fixed / unit CM

Dollar sales to break even = fixed / CM ratio

Question 5

Target profit analysis formula method?

Answer 5

Unit sales to attain a target profit =
Target profit + fixed / Unit CM

Dollar sales to attain target profit =
Target profit + fixed / CM Ratio

Question 6

What is the margin of safety?

Answer 6

Amount by which sales can drop before losses occur.

MOS in dollars =
total budgeted or actual sales - break even sales

MOS percentage =
MOS in dollars / total budgeted or actual sales

Question 7

What is operating leverage?

Answer 7

Measure of how sensitive net operating income is to a given percentage change in dollar sales.

If OL is high, a small percentage increase in sales can produce a much larger percentage increase in income.

Degree of OL = CM / Net Income

Question 8

Target profit equation method?

Answer 8

Profit = unit CM x Q - Fixed Expenses

Profit = CM ratio x Q - Fixed Expenses

Question 9

Break-Even equation method?

Answer 9

Profit = unit CM x Q - Fixed Expenses

Profit = CM ratio x Q - Fixed Expenses