chapter 7 Flashcards
how to calculate how many goods were sold in period revenue/sales
total sales $ / per unit sales $
how to calculate cm ratio
TOTAL CM / TOTAL Sales
what does cm per unit mean
- the dollar amount is the amount left over to cover fixed expenses
- ex. if CM per unit = $25, every item sold, there would be $25 left to cover fixed expenses
- also means that operating income increases by $25 as each item is sold
how to calculate operating ratio
operating income / TOTAL sales
what does operating ratio mean
percent means the amount of money from sales left over after variable and fixed expenses
if you expect sales to increase from the previous month, what can you expect to increase on the CM income statement
- total sales
- variable expenses
- CM
- operating income
if you expect sales to increase from the previous month, what can you expect to not change on the CM income statement
- sales per unit
- variable expenses per unit
- CM per unit
- total fixed expenses within relevant range
if you expect sales to increase from the previous month, what can you expect to decrease on the CM income statement
fixed expenses per unit (fixed expenses / # of units sold)
how much CM is needed to break even
CM should be the same amount of fixed expenses
(CM is after deducting variable expenses, so if it is the same # as fixed expenses, means it can cover all of the expenses)
if you expect sales to increase from the previous month, what changes can you expect for the ratios on the CM income statement
- CM ratio should stay the same
- operating income ratio increases (more CM to cover the same amount of fixed expenses = more operating income)
should you expect the amount of units needed to break-even change if there was an expected increase in sales
should stay the same b/c fixed expenses and CM per unit both dont change
who uses CVP analysis
used by internal stakeholders to make operating decisions to improve operating income
what is cvp analysis
cost-volume profit analysis
what is incremental analysis
- one approach to perform CVP analysis
- Tool that only considered items that change (ex. revenue & costs) when a decision is made
what is the CVP decision rule (used to make operating decisions):
Proceed with the decision if operating income will increase
Do not proceed with the decision if operating income decreases
how do you do the contribution margin approach for CVP analysis
- make a cm statement with the expected changes
- compare with the cm statement without the changes (the one from before)
- compare the operating income number - does it increase? decrease? (proceed if increases, don’t proceed if decreases)
how do you do the incremental analysis approach for CVP analysis
- only consider things that change
do:
expected cm - current cm = incremental cm - (incremental) fixed expense = change in operating income
if change in operating income = negative, don’t proceed, if positive, proceed
expected cm = expected units sold * expected CM per unit
current cm = current units sold * current cm per unit
what is break-even point
- another component of CVP
- The level of sales volume at which a company makes $0 of operating income
- Helps internal stakeholders understand how many units need to be sold for the company to generate an operating income
what is the formula for break-even in # of units sold (sales volume) (how many units need to be sold to break even)
sales volume = fixed expenses / cm per unit
what is true at break even point
- Total sales dollars = total expenses
- Contribution margin dollars = fixed expenses
- Operating income = $0
what is the formula for break-even in total sales dollars (how much sales needed to break even)
sales dollars = fixed expenses / cm ratio
what is margin of safety
- The difference between the actual sales dollars and the break-even sales dollars
- Helps understand the amount current sales are over break-even sales
- Like a “safety cushion” in case the company makes less than they anticipated, they won’t operate at a loss
- Larger the safety cushion, lower the risk that the company will operate at a loss
what is the formula to calculate margin of safety %
Margin of safety % = margin of safety / total actual sales dollars
what is the formula to calculate margin of safety
Margin of safety = total actual sales dollars - break-even sales dollars
what is sales mix
The percentage of total sales dollars generated by each product
when given a contribution margin income statement for a company that sells multiple goods what do you do first?
calculate cm ratio for each product & as a total company
how do you calculate the sales mix of a company
- add up all of the sales dollars of each product & find the total sales
- then divide the sales dollars of each product by the total sales dollars to find the % they make up of the total sales mix
how do you calculate the break-even point in total sales dollars for a company that has multiple products
to calculate for the entire company, it is the same as when there was only one product: fixed expenses / cm ratio
to calculate for each product:
- take the total break even sales dollars (break even sales dollars of the entire company)
- multiply each sales mix % (the % of sales mix for each product) by the total break-even sales dollars to get the break-even sales dollars for each product
how do you calculate the break-even point in units for a company that sells multiple products
Calculate for each product by dividing break even sales dollars by the price per unit
- take the break-even sales dollars for each product, and divide them by their price per unit to get the break even in units sold
how do you calculate margin of safety for a company with multiple products
same as when there’s only one product
margin of safety = total actual sales dollars - total break-even sales dollars
how do you calculate margin of safety % for a company with multiple products
same as when there’s only one product
margin of safety % = margin of safety / total actual sales dollars
what are the ranges for determining if margin of safety % is good or not
- If it’s =< 5%, high risk that the company will operate at a loss
- If it’s 6%-15%, medium risk that the company will operate at a loss
- If it’s >=16%, low risk that the company will operate at a loss
if internal stakeholders want to change the operating income, how do they calculate how much sales volume is needed to meet that new operating income
sales volume = (fixed expenses + target operating income) / cm per unit
