The correct answer is: A. ${\text{Margin of Safety}} = \frac{{{\text{Profit}}}}{{\frac{{\text{P}}}{{\text{V}}}{\text{ratio}}}}$
The margin of safety is a measure of how much sales can decline before a company starts to lose money. It is calculated by dividing the contribution margin by the contribution margin ratio. The contribution margin is the amount of revenue that remains after variable costs have been deducted. The contribution margin ratio is the percentage of revenue that is left after variable costs have been deducted.
The formula for the margin of safety is:
Margin of safety = Contribution margin / Contribution margin ratio
The margin of safety is a useful measure for managers to track because it indicates how much risk the company is taking. A high margin of safety indicates that the company is not taking much risk, while a low margin of safety indicates that the company is taking a lot of risk.
The other options are all correct.
B. $\frac{{\text{P}}}{{\text{V}}}{\text{ratio}} = \frac{{{\text{Change in contribution}}}}{{{\text{Change in sales}}}} \times 100$
The profit-to-volume ratio is a measure of how much profit a company makes for every unit of sales. It is calculated by dividing the profit by the sales.
The formula for the profit-to-volume ratio is:
Profit-to-volume ratio = Profit / Sales
The profit-to-volume ratio is a useful measure for managers to track because it indicates how profitable the company is. A high profit-to-volume ratio indicates that the company is very profitable, while a low profit-to-volume ratio indicates that the company is not very profitable.
C. ${\text{Breakeven point in units}} = \frac{{{\text{Fixed Cost}}}}{{{\text{Contribution per unit}}}}}$
The breakeven point is the point at which a company’s revenue equals its costs. It is calculated by dividing the fixed costs by the contribution per unit.
The formula for the breakeven point in units is:
Breakeven point in units = Fixed cost / Contribution per unit
The breakeven point is a useful measure for managers to track because it indicates how much sales the company needs to make in order to cover its costs.
D. ${\text{Required sales to earn the desired profits}} = \frac{{{\text{Desired Profit}}}}{{\frac{{\text{P}}}{{\text{V}}}{\text{ratio}}}}}$
The required sales to earn the desired profits is the amount of sales that a company needs to make in order to earn the desired profits. It is calculated by dividing the desired profits by the profit-to-volume ratio.
The formula for the required sales to earn the desired profits is:
Required sales to earn the desired profits = Desired profit / Profit-to-volume ratio