Short-term Decision Making: Break Even, Margin of Saftey and Contribution Margin Ratio

Question 1

What is the break even point

Answer 1

When sales income = costs or when contribution = total fixed costs

Question 2

Formula for break even point

Answer 2

fixed costs / unit contribution margin

Question 3

What is the margin of safety

Answer 3

The difference between actual (budgeted) units and and the break even point

Question 4

Margin of safety formula

Answer 4

actual/budgeted units - break even point

Question 5

What do you do when, for example, they say calculate margin of safety in terms of…

Answer 5

divide by what the in terms of is

Question 6

What is the contribution margin ratio

Answer 6

The difference between a companys sales and variable costs as a percentage of sales

Question 7

Contribution margin ratio formula

Answer 7

contribution margin / revenue x 100 = %

Question 8

How to find out revenue at break even point

Answer 8

Fixed costs / CM Ratio

Question 9

How to find out what will be the increase in total contribution margin if sales increase by x amount

Answer 9

multiply increase by contribution margin ratio

Question 10

How to work out how many units you need to sell to reach target profit

Answer 10

fixed costs + target profit / contribution margin

Question 11

How to work out, using the contribution margin ratio, which level of sales pound is required to cover all costs?

Answer 11

fixed costs/contribution margin ratio

round to 1 whole pound