12 terms

Six assumptions

1) Changes in the level of revenues and costs arise only b/c of changesin the number of product units produced or sold

2)Total costs cand be divided into fixed component

3) Behaviour o total revenues and total costs is linear in relation to output within relevent range

4) Unit selling price, unit variable costs, and toatl fixed costs are known

5) Analsis covers a single poducts or assumes a given revenue mix

6) revenues and costs can be added and compared w/out time value of money

2)Total costs cand be divided into fixed component

3) Behaviour o total revenues and total costs is linear in relation to output within relevent range

4) Unit selling price, unit variable costs, and toatl fixed costs are known

5) Analsis covers a single poducts or assumes a given revenue mix

6) revenues and costs can be added and compared w/out time value of money

Contribution margin

Revenues - Variable costs

Contribution margin per unit

Difference b/w selling price and variable cost per unit

Contribution margin %

CM / Selling price

Equation Metod

Revenues - Variable costs - Fixed costs = Operating income

(USP x Q) - (UVC x Q) - FC = OI

(USP x Q) - (UVC x Q) - FC = OI

Contribution Margin Method

Break even point: Q = FC+OI / UCM

Breakeven

Fixed costs / Unit contribution margin = FC/UCM

CM in revenue dollars

FC / CM%

Contribtuion margin income statement

Revenues XXXX

Variable costs (XXX)

----------

Contribution margin XXX

Fixed costs (XXX)

---------

Operating income XXX

Variable costs (XXX)

----------

Contribution margin XXX

Fixed costs (XXX)

---------

Operating income XXX

Revenue (sales) mix

Let S = Number of units in product A

Let 2S = Number of units in product B

Revenue - VC - FC = OI

[$200(2S) + $200(S)] - [120(2S) + 90(S)] - FC = OI

Let 2S = Number of units in product B

Revenue - VC - FC = OI

[$200(2S) + $200(S)] - [120(2S) + 90(S)] - FC = OI

How many units must be sold to earn an $ amount operating income

Let Q = Number of units sold to earn target operating income

Revenues (Q) - Variable costs(Q) - fixed costs = Targeted operating income

Use of CM:

Q = FC+TOI / CMU

Revenues (Q) - Variable costs(Q) - fixed costs = Targeted operating income

Use of CM:

Q = FC+TOI / CMU

How many units must be sold to earn an $ amount of Net income (use this when we have tax rate)

Let Q = number of units sold to earn target net income

Revenues(Q) - variable costs (Q) - fixed cost =

Target NI / (1 - tax rate)

furthermore,

Target operating income = Target NI / (1 - Tax rate)

Revenues(Q) - variable costs (Q) - fixed cost =

Target NI / (1 - tax rate)

furthermore,

Target operating income = Target NI / (1 - Tax rate)