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Contribution Margin Formula
Sales Revenue - Variable Costs
Contribution Margin
Represents the amount remaining from sales revenue after variable costs have been subtracted.
Contribution Margin Ratio
(Contribution Margin / Sales Revenue) × 100
Breakeven Point in Units Formula
Fixed Costs / Contribution Margin per Unit
Breakeven Point in Sales Dollars Formula
Fixed Costs / Contribution Margin Ratio
Target Profit in Units Calculation
(Fixed Costs + Target Profit) / Contribution Margin per Unit
Margin of Safety
Measures the amount by which actual sales exceed the breakeven point, calculated as Actual Sales - Breakeven Sales.
Margin of Safety Percentage
(Margin of Safety / Actual Sales) × 100
Operating Leverage
Measures how sensitive operating income is to a change in sales volume, calculated as Contribution Margin / Operating Income.
Variable Costs with Production Volume
Variable costs remain constant per unit but change in total with production volume.
Fixed Costs with Production Volume
Total fixed costs remain unchanged, but as production increases, fixed costs per unit decrease.
Breakeven Point Changes
It increases with an increase in fixed or variable costs and decreases when they decrease.
Contribution Margin per Unit with Sales Price Increase
It increases.
Margin of Safety with Decrease in Sales Volume
The margin of safety decreases.
High Degree of Operating Leverage
Indicates a greater proportion of fixed costs, leading to higher sensitivity in profit changes based on sales volume.
Reducing Breakeven Point Strategy
Decreasing variable costs per unit lowers the breakeven point.
Absorption Costing
It may cause operating income to fluctuate with production levels rather than sales.
Contribution Margin Calculation
Sales Revenue - Variable Costs
Breakeven Point with Increase in Fixed Costs
The breakeven point increases.
Breakeven Point
The sales level at which total revenues equal total costs, resulting in zero profit.
Price Taker
A firm that must accept the prevailing market price for its goods or services, as it lacks the power to influence prices.
Fixed Costs
Costs that do not change with the level of production or sales, such as rent and salaries.
Variable Costs
Costs that vary directly with the level of production, such as materials and labor.
Operating Income
The income generated from normal business operations, calculated as revenues minus operating expenses.
Sunk Costs
Costs that have already been incurred and cannot be recovered, thus irrelevant to future decisions.
Scenario Analysis
The process of experimenting with base case, best case, and worst case scenarios to see what would happen to company profits under those conditions.
Cost Behavior
The way in which a cost changes as the level of activity changes, including fixed, variable, and mixed costs.
Special Order
A one-time order that is not considered part of the company's normal ongoing business.
Variable Costing
A costing method that includes only variable manufacturing costs in the cost of a product, treating fixed overhead as a period expense.
Decision-Making Factors
Revenues that differ between alternatives should be considered when making decisions.
Outsourcing Decisions
When making outsourcing decisions, the variable cost of producing the product in-house is relevant.
Contribution Margin per Unit
The contribution margin calculated on a per unit basis, which helps in decision-making regarding product lines.
Contribution Margin per Pound of Nickel
The contribution margin calculated based on the amount of nickel used, relevant for maximizing total contribution margin.
Total Contribution Margin
The total amount contributed by all products to cover fixed costs and generate profit.
Breakeven Analysis
A method used to determine the breakeven point and analyze the relationship between costs, volume, and profits.
Market Price
The prevailing price at which goods or services are sold in the market.
Competitive Market
A market structure characterized by many buyers and sellers, where products are similar and prices are determined by supply and demand.
Fixed Cost Coverage
The ability of a company to cover its fixed costs through its contribution margin.
Short-Term Decision-Making
Decisions that focus primarily on immediate financial impacts, often considering variable costs and contribution margins.
Long-Term Strategic Goals
Goals that guide a company's direction over an extended period, often less relevant for immediate decisions.
Sales-to-Cost Ratio
A measure that compares sales revenue to the costs incurred, indicating profitability.
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