45 Putting It Together: Cost Volume Profit Analysis
Wow! This chapter included a ton of awesome information to help you figure out net profit, contribution margin, fixed costs and how product mix can affect your net profit.
You also learned the importance of changes in income, and how, due to operating leverage, can have a huge affect on net profit.
The breakdown between types of cost structures is helpful when trying to make decisions between variable and fixed costs. It becomes especially important when planning a potential automation system that involves a large capital investment.
So to review, here are the basic formulas we have discussed in this module:
Profit=(Sales−variable expenses)−Fixed Expenses
Contribution Margin=Sales−Variable expenses
Contribution margin ratio=Contribution margin/sales
Unit sales to break-even=fixed expenses/unit contribution margin
Dollar sales to break-even=Unit sales×selling price
Margin of safety in dollars=total budgeted or actual sales−break-even sales
Margin of safety percentage=margin of safety in dollars/total budgeted or actual sales
Degree of operating leverage=contribution margin/net operating income
% Change in net operating income=degree of operating leverage×% change in sales
Note how many interconnect, to give you different information. Make sure to make note of these formulas to help you figure out selling prices and profitability!