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Contribution Margin:
If all
variable expenses are deducted from sales revenue
the resulting figure is contribution margin or
contribution margin is equal to sales revenue minus variable
expenses (manufacturing and non-manufacturing).
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Contribution Margin Ratio (CM Ratio):
The
contribution margin as a percentage of total
sales is referred to as contribution margin
ratio (CM Ratio).
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Contribution Margin Income Statement:
Contribution margin income statement is an
income statement that is prepared to show the
contribution margin figure in the income
statement. A contribution margin income
statement is prepared for the use of internal
management.
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Break-even Point Analysis:
Break-even point
is the level of sales at which profit is zero. At break even
point total sales are equal to total cost (variable
+ fixed).
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Target
Profit Analysis:
Management desires to achieve a specific amount of
profit at the end of a business period. The net
operating income or profit that management desires
to achieve at the end of a business period is called target profit.
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Margin of Safety
(MOS):
The
excess of actual or budgeted sales over the
break even volume of sales is called margin of
safety. At break even point costs are equal to
sales revenue and profit is zero. Margin of
safety, therefore, tells us the amount of sales
that can be dropped before losses begin to be
incurred. Click
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Operating
Leverage:
Operating leverage
is a measure of how sensitive net operating
income is to percentage change in sales.
Operating leverage is high near the break even
point and decreases with the increase in sales
and profit.
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Break even Analysis with Multiple Products -
Sales Mix:
The
term sale mix refers to the relative
proportion in which a company's products are
sold. The concept is to achieve the combination,
that will yield the greatest amount of profits.
Most companies have many products, and often
these products are not equally profitable.
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CVP Consideration in Choosing a Cost Structure:
The
relative proportion of fixed and variable costs
in an organization is referred to as cost
structure. An organization often has some
latitude in trading off between these two types
of costs. For example labor costs can be reduced
by investments in automated equipments.
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Importance of Cost Volume Profit (CVP) Analysis:
The
most profitable combination of variable cost,
fixed cost, selling price and sales volume can
be found with the help of cost volume profit
analysis.
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