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 = Break-even 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
Break-even
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 break-even 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
|
|
