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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