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Breakeven Analysis vs. Operating Leverage

Discuss and give examples of the following formulas that are used in breakeven analysis:

Contribution Margin Method - Breakeven in Units and Breakeven in Sales Dollars.

Targeted Profit Analysis - Targeted Profit in Units and Targeted Profit in Sales Dollars.

Margin of Safety - Margin of Safety in dollars and Margin of Safety Percentage.

How is Breakeven Analysis beneficial to Management and Planning? Is Breakeven Analysis very useful in sensitivity analysis? Discuss Operating Leverage. Is there any relationship between Breakeven Analysis and Operating Leverage? Discuss.

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Breakeven Analysis and Operating Leverage
Discuss and give examples of the following formulas that are used in breakeven analysis:
Contribution Margin Method - Breakeven in Units and Breakeven in Sales Dollars.
Targeted Profit Analysis - Targeted Profit in Units and Targeted Profit in Sales Dollars.
Margin of Safety - Margin of Safety in dollars and Margin of Safety Percentage.
How is Breakeven Analysis beneficial to Management and Planning? Is Breakeven Analysis very useful in sensitivity analysis? Discuss Operating Leverage. Is there any relationship between Breakeven Analysis and Operating Leverage? Discuss.
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Contribution Margin Method: The contribution margin ratio is the ratio of the total contribution margin to total sales revenue. It can be used in a variety of ways. For example, the change in total contribution margin from a given change in total sales revenue can be estimated by multiplying the change in total sales revenue by the CM ratio. If fixed costs do not change, then a dollar increase in contribution margin will result in a dollar increase in net operating income. The CM ratio can also be used in break even analysis. Knowledge of a products CM ratio is extremely helpful in forecasting contribution margin and net operating income.

Break-even analysis: One of the most common tools used in evaluating the economic feasibility of a new enterprise or product is the break-even analysis. The break-even point is the point at which revenue is exactly equal to costs. At this point, no profit is made and no losses are incurred. The break-even point can be expressed in terms of unit sales or dollar sales. That is, the break-even units indicate the level of sales that are required to cover costs. Sales above that number result in profit and sales below that number result in a loss. The break-even sales indicate the dollars of gross sales required to break-even.

A company will not necessarily produce a product just because it is expected to breakeven. Many times, a certain level of profitability or return on investment is desired. If this objective cannot be reached, which may mean selling a substantial number of units above break-even, the product may not be produced. However, the break-even is an excellent tool to help quantify the level of production needed for a new business or a new product. Break-even analysis is based on two types of costs: fixed costs and variable costs. Fixed costs are overhead-type expenses that are constant and do not change as ...

Solution Summary

The solution discusses and lists examples of the formulas that are used in breakeven analysis. It also discusses how breakeven analysis is beneficial to management and planning. Sensistivity analysis and operating leverage are also discussed.

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