COST ACCOUNTING
COST VOLUME PROFIT ANALYSIS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Actual contribution margin achieved compared with that required to break-even
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Actual sales compared with sales required to break-even
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Actual verses budgeted net profit margin
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Actual verses budgeted sales
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Detailed explanation-1: -The margin of safety is the difference between actual sales and break-even sales, while the degree of operating leverage (DOL) shows how a company’s operating income changes after a percentage change in its sales. Corporate Finance Institute.
Detailed explanation-2: -What is Margin of Safety? The margin of safety is the difference between the amount of expected profitability and the break-even point. The margin of safety formula is equal to current sales minus the breakeven point, divided by current sales.
Detailed explanation-3: -In accounting, margin of safety is the extent by which actual or projected sales exceed the break even sales.
Detailed explanation-4: -Break-even point: It is the point of intersection of the total cost line and total revenue line. There is neither profit nor loss at the break-even point. At the break-even point, the margin of safety ratio is 0.
Detailed explanation-5: -If the margin of safety is high, even a small decline in sales revenue may result in an operating loss.