efficiency ratios

Question 1

what are the efficiency ratios for

Answer 1

the measure how efficiently a dollar of sales is turned into profits

• gives insight into the company’s cost structure
• helps to determine if problems exist with either variable or fixed costs

Question 2

what are the efficiency ratios

Answer 2

1. degree of total leverage (income statement ratio), 2. break-even point, 3. gross profit margin, 4. operating margin

Question 3

How do you calculate degree of total leverage

Answer 3

CM/ earnings before taxes

Question 4

how do you calculate break-even point

Answer 4

fixed cost / CM (contribution margin)

Question 5

how do you calculate gross profit margin

Answer 5

revenue - COS / revenue

Question 6

how do you calculate operating margin

Answer 6

operating income / revenue

Question 7

what does degree of total leverage show

Answer 7

measures exposure of profits to changes in sales

- the greater the DTL the greater the leverage effect

Question 8

what does break0even point show

Answer 8

estimates the unit volume that must be produced and sold in order for the company to cover all costs, both fixed and variable

BE - usually increases as the use of fixed costs increases

Question 9

what does gross profit margin show

Answer 9

shows the proportion of sales that are available to cover fixed period costs and financing expenses after variable costs have been paid

declining gross profit margin - raises concerns about the company’s ability to control variable costs, such as direct materials and labour

Question 10

what does operating margin show

Answer 10

measure the cumulative effect of both variable and period costs on the ability of the company to turn sales into operating profits to cover interest, taxes, deprecation and amortization (EBITDA)