ACG 2071 Chapter Notes - Chapter 7: Contribution Margin, Earnings Before Interest And Taxes, Fixed Cost
Document Summary
These costs are linear throughout the relevant range of volume: revenues are linear throughout the relevant range of volume, the sales mix of products will not change. Insert the target operating income into the unit contribution margin. Plot the points for total sales revenue at that volume. Draw the sales revenue line from the origin through the point. The line starts at the origin because no sales means no revenue: draw the fixed expense line. The fixed expense line is flat because fixed expense are the same within a relevant range: draw the total expense line. Total expense is the sum of variable expense plus fixed expense. If the sales price decreases, then the unit contribution margin decreases, then the volume needed to break even or achieve target profits increases. Expenses)/operating income: the operating leverage factor, at a given level of sales, indicates the percentage change in operating income that will occur from a 1% change in volume.
