CONTRIBUTION
MARGIN RATIO
The contribution margin (CM) ratio is the ratio of contribution
margin to total sales:
If the company has only one product, the CM ratio can also be computed
using per unit data:
The CM ratio shows how the contribution margin will be affected by a
given change in total sales.
BREAKEVEN ANALYSIS  EQUATION
METHOD
Q = Breakeven quantity
Sales = Variable expenses + Fixed expenses + Profits
Q x selling price/unit = (Q x
variable expense/unit) + Fixed expenses + Profits
BREAKEVEN ANALYSIS  CONTRIBUTION
MARGIN METHOD
Breakeven
quantity = Fixed Expenses
CM/u
To
calculate the breakeven point in sales dollars, substitute ratios as a percent
of sales for dollars. Or, calculate the breakeven point in units and multiply
by the selling price/unit.
MARGIN OF
SAFETY
The margin of safety
is the excess of budgeted (or actual) sales over the breakeven sales. The
margin of safety can be expressed either in dollar or percentage form. The
formulas are:
OPERATING
LEVERAGE
Operating leverage measures how a given
percentage change in sales affects net operating income. It is a measure of volatility in net income
caused by high fixed expenses relative to variable expenses.
Use the income statements for Company X and Y to compute:
a.
Breakeven point in units and sales dollars.
b.
Margin of safety.
c.
Degree of operating leverage.
d.
The change in net income caused by a 10% increase
in sales.

Company X

Company Y


Sales (5,000 units) ..................

$500,000

100%

$500,000

100%

Less variable
expenses..............

350,000

70

100,000

20

Contribution
margin..................

150,000

30%

400,000

80%

Less fixed
expenses...................

90,000


340,000


Net operating
income................

$ 60,000


$ 60,000

