Putting It Together: Cost Volume Profit Analysis

Wow! Module 8 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:

[latex]\text{Profit}=\left(\text{Sales}-\text{variable expenses}\right)-\text{Fixed Expenses}[/latex]

[latex]\text{Contribution Margin}=\text{Sales}-\text{Variable expenses}[/latex]

[latex]\text{Contribution margin ratio}=\dfrac{\text{Contribution margin}}{\text{sales}}[/latex]

[latex]\text{Unit sales to break-even}=\dfrac{\text{fixed expenses}}{\text{unit contribution margin}}[/latex]

[latex]\text{Dollar sales to break-even}=\text{Unit sales}\times\text{selling price}[/latex]

[latex]\text{Margin of safety in dollars}=\text{total budgeted or actual sales}-\text{break-even sales}[/latex]

[latex]\text{Margin of safety percentage}=\dfrac{\text{margin of safety in dollars}}{\text{total budgeted or actual sales}}[/latex]

[latex]\text{Degree of operating leverage}=\dfrac{\text{contribution margin}}{\text{net operating income}}[/latex]

[latex]\text{% Change in net operating income}=\text{degree of operating leverage}\times\text{% change in sales}[/latex]

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!