Short-term Decision Making: Break Even, Margin of Saftey and Contribution Margin Ratio Flashcards
What is the break even point
When sales income = costs or when contribution = total fixed costs
Formula for break even point
fixed costs / unit contribution margin
What is the margin of safety
The difference between actual (budgeted) units and and the break even point
Margin of safety formula
actual/budgeted units - break even point
What do you do when, for example, they say calculate margin of safety in terms of…
divide by what the in terms of is
What is the contribution margin ratio
The difference between a companys sales and variable costs as a percentage of sales
Contribution margin ratio formula
contribution margin / revenue x 100 = %
How to find out revenue at break even point
Fixed costs / CM Ratio
How to find out what will be the increase in total contribution margin if sales increase by x amount
multiply increase by contribution margin ratio
How to work out how many units you need to sell to reach target profit
fixed costs + target profit / contribution margin
How to work out, using the contribution margin ratio, which level of sales pound is required to cover all costs?
fixed costs/contribution margin ratio
round to 1 whole pound
