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ACC 2362 - Ch. 4
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Terms in this set (25)
Contribution Margin Income Statement
Contribution Margin (CM) income statement classifies costs by their behavior: variable and fixed
Contribution Margin (CM)
Revenues - Variable Costs
-CM is the amount remaining from sales revenue after variable expenses have been deducted
Basics of Cost-Volume-Profit Analysis
If Racing sells an additional bicycle, $200 additional CM will be generated to cover fixed expenses have been deducted
-Each month racing must generate at least $80,000 in total CM to break even
-If Racing sells 400 units in a month, it will be operating at the break-even point
-If Racing sells one more bike (401 bikes) net operating income will increase by $200
How can estimate profits at a particular sales volume without preparing an income statement?
By multiplying the number of units sold above break-even by the contribution margin per unit
Break Even points in units
OI = (Sales - Total Variable Costs) - FC
OR
OI = (SP x Units Sold) - (VC x Units Sold) - FC
OR
OI = (SP - VC) Units Sold - FC
OR
OI + FC = (SP - VC) Units Sold
Thus
Quantity to sell = Fixed Costs / (SP - VC)
OR
Quantity to sell = Fixed Costs/ CM per Unit
OI = Operating Income, FC = Total Fixed Costs, SP = Unit Sales Price, VC = Unit Variable Costs, CM = Unit Contribution Margin
Note = SP - VC = CM
At the break even point OI = O, Thus CM = FC
Variable Cost Ratio
VC Ratio = Total VC / Total Sales
Contribution Margin Ratio
CM Ratio = Total CM/Total Sales
Contribution Margin Ratio (in terms of ratio)
CM Ratio = Unit CM/Unit Selling Price
Break Even Point in Revenues
B-E Revenues can be calculated using the break even units calculated before.
-Revenue = Unit Sales Price x Break Even Units
-Or, the CM Ratio can be used to directly calculate the break even revenues
B-E Revenues = Fixed Costs/CM Ratio
Calculating the break even point
In Units: Quantity to sell = Fixed Costs/CM per Unit
In Revenues = Unit Sales Price x Break Even Units
Calculating the Break Even Point Using CM Ratio
In Revenues: Revenue = Fixed Costs/ CM Ratio
In Units: Units = Break Even Revenues / Unit Sales Price
Target Profit Analysis
The methods used to calculate break even units and revenues can be used to determine the sales volume or revenues needed to achieve a target profit
Quantity to sell
Fixed Costs + Target Operating Income / CM per unit
Target Revenues
Fixed Costs + Target Income / CM Percentage
Using Break Even Point to Calculate Target Operating Income
Quantity to sell = Target Profits/CM per unit + Break Even Volume
Assessing Impact Resulting From Changes in Sales
Changes in Profits = Unit CM x Change in Units Sold
Change in Profits = CM Ratio x Change in Sales
CVP Graph
Unit volume is usually represented on the horizontal (X) axis and dollars on the vertical (Y) axis
Key Assumptions of CVP Analysis
1) Selling Price is constant
2) Costs are linear
3) In multi-product companies, the sales mix is constant
4) In manufacturing companies, inventory is constant (units produced = units sold)
Multi-product break-even analysis
-Must calculate "average" contribution margin for all products
-Sales Mix - relative percentage of total units or total sales dollars expected from each product
Multi-product Example
It is often useful to use CM ratio for multi-product problems
-Bundle CM ratio = Bundle CM / Bundle Revenue
-BE Revenues = FC / CM Ratio
-# of Bundles = BE Revenues / Bundle Revenue
Margin of Safety
Margin of Safety is a measure of how far sales can drop until the break-even point is reached
-Margin of Safety = Budgeted Sales - BE Sales
-Budgeted revenues over & above breakeven revenues
Margin of Safety Ratio
The MOS ratio removes the firm's size from the output, and expresses itself in the form of percentage:
MOS Ratio = MOS / Budgeted Sales
Operating Leverage
is concerned with the mix of fixed costs and variable costs. For example, if a firm chooses to automate its operations, fixed costs increase, variable costs (direct labor) decrease, and operating leverage increases
-A company with a greater proportion of fixed costs relative to variable costs will have a higher operating leverage
Degree of Operating Leverage
is a measure of the sensitivity of profit changes to changes in sales volume. DOL measures the percentage of change in profit that results from a percentage of change in sales.
Degree of Operating Leverage = Contribution Margin / Operating Income
-Indicates how sensitive profit is to changes in sales volume
-Notice that CM and NI are identical, except for fixed costs
Effect of a Change in Sales Volume on Income
% Increase in Profit = DOL x % Change in Sales
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