ACC 117 Lecture Notes - Lecture 6: Operating Leverage, Contribution Margin, Fixed Cost

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Estimates how changes in the following three factors affect a company"s profit. Company"s use cvp analysis to help them reach important benchmarks like breakeven point. The point where total revenue = total cost. Total revenue = total cost or total revenue - total cost = zero profit. This is the level of sales where contribution margin just covers fixed cost and when operating income equals zero. Contribution margin: the difference between sales and variable expense. Operating income = (price * number of units sold) - (vc per unit * number of units sold) Break even units = (total fixed cost) / (price - vc per unit) Break-even sales = total fixed expenses / cm ratio. Since total cm is the revenue remaining after total variable costs are covered, it must be the revenue available to cover fixed costs and contribute to profit. Fixed cost = cm, company breaks even. Fixed cost < cm, , company makes profit.

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