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Asaxx

The document discusses various financial concepts including sales volume, costs, profit planning, and operating leverage, emphasizing the importance of understanding fixed and variable costs in achieving target profits. It introduces formulas for calculating break-even points and contribution margins, as well as sensitivity analysis to predict outcomes based on changes in variables. Additionally, it highlights the significance of sales mix and operating leverage in determining profitability and evaluating financial performance.

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Ashryle Salazar
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165 views1 page

Asaxx

The document discusses various financial concepts including sales volume, costs, profit planning, and operating leverage, emphasizing the importance of understanding fixed and variable costs in achieving target profits. It introduces formulas for calculating break-even points and contribution margins, as well as sensitivity analysis to predict outcomes based on changes in variables. Additionally, it highlights the significance of sales mix and operating leverage in determining profitability and evaluating financial performance.

Uploaded by

Ashryle Salazar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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- represents sales amount in either unit or sales to cover 𝑴𝑶𝑺𝒖 = 𝒕𝒐𝒕𝒂𝒍 𝒖𝒏𝒊𝒕𝒔 − 𝑩𝑬𝑷𝒖

total costs, consisting of both fixed and variable costs.


- level of sales volume level revenues = costs. 𝑴𝑶𝑺𝑺 = 𝒕𝒐𝒕𝒂𝒍 𝒔𝒂𝒍𝒆𝒔 − 𝑩𝑬𝑷𝒔
- CM = Fixed cost, therefore IBT is zero.
𝑶𝑰
- represents minimum output to exceed for business to 𝑴𝑶𝑺% =
𝑪𝑴
earn profit.
POINT OF INDIFFERENCE
𝑭𝑪
𝑩𝑬𝑷𝒖 =
𝑪𝑴𝒖 - two alternatives, either to be chosen, will produce
same profit.
𝑭𝑪
𝑩𝑬𝑷𝒔 = - Profit A = Profit B
𝑪𝑴𝒓
𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑭𝑪
𝑭𝑪 = 𝑪𝑴𝒖 𝒙 𝑩𝑬𝑷𝒖 𝑷𝑶𝑰𝒔 =
𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑪𝑴𝒓
𝑯𝑼 − 𝑳𝑼
𝑪𝑴𝒓 = 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑭𝑪
𝑯𝑺 − 𝑳𝑺 𝑷𝑶𝑰𝒖 =
𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑪𝑴𝒖
𝑯𝑼 − 𝑳𝑼
𝑪𝑴𝒖 = MULTIPLE PRODUCTS
𝑯𝑸 − 𝑳𝑸
Rule 1: Averaging

PROFIT PLANNING • Using info from sales -> cm, amount is in weighted
average.
- set of actions to achieve target profit level. • To compute WA, use concept of sales mix.
SENSITIVITY ANALYSIS • Sales mix is expressed in units or sales.
• SM in units is not generally the same in SM in sales.
- simulation analysis • Silent rule: SM is in units.
- predicting outcomes after changes in variables.
- how changes in variables will affect profit. Rule 2: Compatibility
- may alter underlying assumptions of CVP, constants
• Sales mix is use in the ff:
may not be.
1. Computing WA
OPERATING LEVERAGE 2. Allocating amounts to products

- extent of fixed costs in cost structure 𝑾𝑨𝑪𝑴𝒓 = (𝑪𝑴𝒓𝑨 𝒙 𝑺𝑴𝒓) + (𝑪𝑴𝒓𝑩 𝒙 𝑺𝑴𝒓)
- helps to measure % total costs in fixed and variable
costs. 𝑾𝑨𝑪𝑴𝒖 = (𝑪𝑴𝒖𝑨 𝒙 𝑺𝑴𝒖) + (𝑪𝑴𝒖𝑩 𝒙 𝑺𝑴𝒖)
- determine effectivity of using fixed costs in generating 𝑾𝑨𝑪𝑴𝒖
profits. 𝑾𝑨𝑪𝑴𝒓 =
𝑾𝑨𝒔𝒑
- evaluate OI changes after % changes in sales.
- Sensitivity of OI to SALES.

Operating leverage Proportion of FC & VC APPENDIX 3A: COMPOSITE BEP


High High
Low Low - for multi-product entities
- to calculate combined CM to get BEP
𝑪𝑴 𝑭𝑪
𝑫𝑶𝑳 = 𝑪𝒐𝒎𝒑𝒐𝒔𝒊𝒕𝒆 𝑩𝑬𝑷𝒖 =
𝑶𝑰 𝑪𝒐𝒎𝒑𝒐𝒔𝒊𝒕𝒆 𝑪𝑴𝒖
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝑶𝑰
𝑫𝑶𝑳 =
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒔𝒂𝒍𝒆𝒔
CHAPTER 4: STANDARD COSTING AND VARIANCE
Areas of comparison High DOL Low DOL
Cost structure Large FC Large VC
ANALYSIS
Incremental Sale Large profit Small profit since
Effect large amount on VC
Income Sensitivity in More sensitive Less sensitivity
Sales Volume
Income Generation Major profit after FC. Profit at low sales, no
substantial profit after
additional sales.
MARGIN OF SAFETY

- peso sales or units which actual or budgeted sales may


be decreased w/out loss.
- reduction in sales before BEP is reached.

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