Chapter 6, Problem 5.4GAP

To determine

Concept introduction:

Cost Volume Profit (CVP) Analysis:

The Cost Volume Profit analysis is the analysis of the relation between cost, volume, and profit of a product. It analyzes the cost and profits at the different level of production, in order to determine the breakeven point and required the level of sales to earn the desired profit.

Contribution margin means the margin that is left with the company after recovering variable cost out of revenue earned by selling smart phones. The formula for contribution margin is as follows:

Contribution margin = Sales - Variable cost.

Similarly contribution margin ratio = Contribution/sales

Breakeven Point:

The Breakeven point is the level of sales at which the net profit is nil. It can be explained as a situation where the business is generating a sale that is equal to the expenses incurred and hence no profits no loss. Breakeven point in $ is calculated with the help of following formula:

$\text{Breakeven point }\left(\text{units}\right)\text{ = }\frac{\text{Total Fixed Costs}}{\text{(Sales Price Per unit -Variable Cost per unit)}}$

Margin of Safety:

Margin of safety is sales over and above the breakeven level. Margin of safety can be calculated as dollar amount and in units as follows:

$Marginofsafety\left(\$\right)=ActualSales–Breakevensales$

$Marginofsafety\left(\%\right)=\frac{\text{(}ActualSales–Breakevensales)}{ActualSales}$

To calculate:

The Margin of Safety and Margin of Safety as % of sales