08-25-2009, 07:35 PM

Break-even Point

The level of activity at which an organization neither earns a profit nor incurs a loss. The break-even point can also be defined as the point where total revenue equals total costs and as the point where total contribution margin equals total fixed costs.

Contribution Margin Ratio

The contribution margin per unit expressed as a percentage of the selling price per unit. This term is synonymous with profit-volume ratio.

Degree of Operating Leverage

A measure, at a given level of sales, of how a percentage change in sales volume unit will effect profits. The degree of operating leverage is computed by dividing contribution margin by net income.

Margin of Safety

The excess of budgeted (or actual) sales over the break-even volume of sales.

Operating Leverage

A measure of the extent to which fixed costs are being used in an organization. The greater the fixed costs, the greater is the operating leverage available and the greater is the sensitivity of net income to change in sales.

Some Assumptions of CVP

In a given future time period

1. Variable cost and sales price per unit will remain unchanged.

2. Fixed cost per period will remain unchanged i.e. business will be operated in a relevant range.

3. No of units produced will be equal to no of units sold.

4. Purchasing power of money will remain unchanged.

5. The production and sales of one division of a company will not affect production and sales on an other division of same company.

The level of activity at which an organization neither earns a profit nor incurs a loss. The break-even point can also be defined as the point where total revenue equals total costs and as the point where total contribution margin equals total fixed costs.

Contribution Margin Ratio

The contribution margin per unit expressed as a percentage of the selling price per unit. This term is synonymous with profit-volume ratio.

Degree of Operating Leverage

A measure, at a given level of sales, of how a percentage change in sales volume unit will effect profits. The degree of operating leverage is computed by dividing contribution margin by net income.

Margin of Safety

The excess of budgeted (or actual) sales over the break-even volume of sales.

Operating Leverage

A measure of the extent to which fixed costs are being used in an organization. The greater the fixed costs, the greater is the operating leverage available and the greater is the sensitivity of net income to change in sales.

Some Assumptions of CVP

In a given future time period

1. Variable cost and sales price per unit will remain unchanged.

2. Fixed cost per period will remain unchanged i.e. business will be operated in a relevant range.

3. No of units produced will be equal to no of units sold.

4. Purchasing power of money will remain unchanged.

5. The production and sales of one division of a company will not affect production and sales on an other division of same company.