6
Cost-Volume-Profit
Relationships
McGraw-Hill/Irwin
Copyright Chapter 2006, The McGraw-Hill Companies, Inc.
Contribution Margin Ratio
The contribution margin ratio is:
Total CM
CM Ratio =
Total sales
Or, in terms of units, the contribution margin ratio is:
Unit CM
CM Ratio =
Unit selling price
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Copyright 2006, The McGraw-Hill Companies, Inc.
Equation Method
Profits = (Sales Variable expenses) Fixed expenses
OR
Sales = Variable expenses + Fixed expenses + Profits
The equation can be modified to calculate
the break-even point in sales dollars.
Sales = Variable expenses + Fixed expenses + Profits
X = VC% of sales X + $80,000 + $0
$0
McGraw-Hill/Irwin
Copyright 2006, The McGraw-Hill Companies, Inc.
Contribution Margin Method
The contribution margin method has two
key point
=
in equations.
Break-even units sold
Break-even point in
total sales dollars =
Fixed expenses
Unit contribution margin
Fixed expenses
CM ratio
Total CM
CM Ratio =
Total sales
McGraw-Hill/Irwin
Copyright 2006, The McGraw-Hill Companies, Inc.
The CVP Equation Method
Sales = Variable expenses + Fixed expenses + Target Profits
$sales PUQ = $VC PUQ + $80,000 + $100,000
Unit sales to attain
=
the target profit
McGraw-Hill/Irwin
Fixed expenses + Target profit
Unit contribution margin
Copyright 2006, The McGraw-Hill Companies, Inc.
Operating Leverage
A measure of how sensitive net operating
income is to percentage changes in sales.
Degree of
Contribution margin
=
operating leverage
Net operating income
McGraw-Hill/Irwin
Copyright 2006, The McGraw-Hill Companies, Inc.