10014_032210_18 - losses in bad years b. Low FC, high VC...

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VI. Margin of Safety Excess of sales over BEP sales – can be expressed in sales or % Formula: Actual (Budgeted) Sales or Margin of safety sales - BEP Sales _______ Total Actual Sales Sales % VII. FC or VC: Which is better? Advantages to both V F Sales 100,000 100,000 - VC 60,000 30,000 CM 40,000 40% 70,000 70% - FC 30,000 60,000 NI 10,000 10,000 In a bad economy: VC is better In a good economy: FC is better Depends on many factors o But VC is less vulnerable to downturns. Won’t incur heavy losses as quickly. Income is less volatile. Lower FC, lower BEP, higher margin of safety Conclusion: a. High FC, low VC – wide swings in income, greater profits in good years, greater
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Unformatted text preview: losses in bad years b. Low FC, high VC greater stability in income, protected in bad years, but less income in good years VIII. Operating Leverage How sensitive is NOI to change in sales? o High small change in sales creates a much larger increase in NOI. Most dramatic around BEP Formula: CM/NOI Example: V = 4 (40,000/10,000) F = 7 (70,000/10,000) V = NOI will grow 4x faster than sales F = NOI will grow 7x faster than sales ie. If sales increase by 10%, NOI will increase by 40 or 40%...
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