Key Terms
Formula
% Change in Net Operating Income = Degree of Operating Leverage x % Change in Sales
Interpretation
Sales can decline by up to 32% before the company hits break-even.
Purpose
Shows how much the entire sales volume contributes toward fixed costs and profit. Used in the contribution margin income
Format
Sales Revenue
Formula (units)
Target Units = (Fixed Costs + Desired Profit) / CM per Unit
Formula (dollars)
Target Sales Dollars = (Fixed Costs + Desired Profit) / CM Ratio
Definition
A process in which a company uses market analysis and production information to determine the maximum price customers ar
Example logic
Lower variable cost raises CM per unit (good). Higher fixed cost raises the threshold to cover (bad).
Margin of Safety (dollars)
Margin of Safety = Actual (or Budgeted) Sales - Break-Even Sales
Margin of Safety (units)
Margin of Safety = Actual Units Sold - Break- Even Units
Margin of Safety (percentage)
Margin of Safety % = Margin of Safety in Dollars / Total Actual (or Budgeted) Sales
Break-even point
Dollar amount or production level where Total Cost = Total Revenue; no profit or loss.
Composite unit
Virtual grouping of products in proportion to sales mix; used to calculate a combined CM for multi-product break-even.
Contribution margin
Amount by which selling price exceeds total variable cost per unit.
Contribution margin ratio
Percentage of selling price that exceeds total unit variable costs; CM per unit / selling price.