Question

1. What is meant by the term break-even point?

2.What is meant by the margin of safety?

3.What is meant by a product’s contribution margin ratio? How is this ratio useful in planning business operations?

4. What is significant about the relevant range?

5. What does the contribution margin ratio's calculate and how is that useful for

business operations?

Answer 1

1. Break even point is the sales at which the profit is equal to Zero or it is the ppont at which the sales is equal to expenses.

2. Margin of safety is the sales above break even sales or it is how much the sales or the output can decline before the business reaches its break even point.

3. Contribution margin ratio is the difference between the sales and variable expenses expressed as a percentage of sales. It is the amount available to meet company's fixed cost.

Usefulness in Planning: The company can estimate the amount available for fixed cost and so it can estimate profit or loss and take necessary steps to prevent the company going into loss.

4. Relevant range represents the normal operating capacity of business. It is significant because the company need to know its relevant range to estimate the costs and expenses for running the business.

5. Contibution margin ratio calculates the contribution as a percentage of revenue and it is useful to budget the entity's cost, sales and fixed cost.