Chapter 6 Reading Summary The margin of safety is the difference between LOI: Use cost-volume-profit analysis to find the break-even point. Cost-volume-profit (CVP) analysis is a decision-making tool that focuses on the The margin of safety identifies how much sales can drop before businesses will expenerce u The margin of safety is considered most relevant to companies that face risk of not making a profit o Three examples of these types of companies include: Break-even analysis is the simplest form of CVP analysis. Companies that face extreme Companies that face abrupt changes in The goal of break-even is to determine the level of sales needed to break even, or " profit. Margin of sufety is calculated as sales minus To find the break-even point, set the equation equal to zero. sales. Use this formula to determine the to break-even. o To calculate margin of safety as a percentage, the margin of safety by the actual or budgeted sales. LO2: Use cost-volume-profit analysis to determine the sales needed to achieve a target profit Target profit analysis is an extension of break-even analysis that allows managers to determine Lod: Analyze how changes in prices and cost structure affect cost-volume-profit relationships Managers use CVP to make various decisions for the compuny, such as: the price of a product For example, CVP would allow managers to determine what happens to contribation margin if selling price increases elae to variable costs. o Two additional methods that can be used to achieve break-cven or a target profit besides tho profit equation method include the method and the Buying materials from a Paying employees salary instead of commission. It is important to know more than one way to solve a CVP problem to understand the relationships among the vurious methods and formulas. Managers use CVP to see howchanging one or more will affect the others. This will help when dealing with real-world scenarios as managers, such as dealing LOS: Calcwlate the degree of operating leverage and use it to predict the effect a change in sales ill have on prafit. with information o Managers are accustomed to dealing with information provided on a basis, especially when dealing with multiple what affects a company's operating leverage: products or services. Knowing the different methods of CVP can help calculate break-even point and target profit given different variables such as unit o The degree of operating leverage measures the extent to which used to aperate the business. and ixed costs indicate that a company is more highly leveraged LOS: Compute the margin of safety. The degree of operating leverage is calculated by dividing the (numerator) by the