CVP ANALYSIS

CONTRIBUTION MARGIN RATIO The contribution margin (CM) ratio is the ratio of contribution margin to total sales:

CM ratio=

Contribution margin Total sales

If the company has only one product, the CM ratio can also be computed using per unit data:

CM ratio=

Unit contribution margin Unit selling price

The CM ratio shows how the contribution margin will be affected by a gi en change in total sales! BREAKEVEN ANALYSIS - EQUATION METHOD " =#rea$%e en &uantity 'ales =(ariable e)penses * +i)ed e)penses * ,rofits " ) selling price-unit = (" ) ariable e)pense-unit) * +i)ed e)penses * ,rofits BREAKEVEN ANALYSIS - CONTRIBUTION MARGIN METHOD #rea$%e en &uantity = +i)ed .)penses CM-u To calculate the brea$e en point in sales dollars, substitute ratios as a percent of sales for dollars! /r, calculate the brea$e en point in units and multiply by the selling price-unit! MARGIN OF SAFETY The margin of safety is the e)cess of budgeted (or actual) sales o er the brea$%e en sales! The margin of safety can be e)pressed either in dollar or percentage form! The formulas are:

Margin of safety =Total sales%#rea$e en sales in dollars

Margin of safety =Margin of safety in dollars percentage Total sales

OPERATING LEVERAGE /perating le erage measures how a gi en percentage change in sales affects net operating income! It is a measure of olatility in net income caused by high fi)ed e)penses relati e to ariable e)penses!

Contribution margin 0egree of = operating le erage 1et operating income

Use the income statements for Company 2 and 3 to compute: a! #rea$e en point in units and sales dollars! b! Margin of safety! c! 0egree of operating le erage! d! The change in net income caused by a 456 increase in sales! 'ales (7,555 units) !!!!!!!!!!!!!!! 9ess ariable e)penses!!!!!!!!!! Contribution margin!!!!!!!!!!!!!!! 9ess fi)ed e)penses!!!!!!!!!!!!!!! 1et operating income!!!!!!!!!!!! Company X 8755,555 4556 :75,555 ;5 475,555 :56 ?5,555 8 @5,555 Company Y 8755,555 4556 455,555 <5 =55,555 >56 :=5,555 8 @5,555