COMMERCE 2AB3 Lecture Notes - Lecture 3: Lemonade, Contribution Margin, Qti

248 views8 pages
CHAPTER 3 – CLASS NOTES
Sales Unit Selling Price (USP) X Qty
- All Variable Unit Variable Cost X Qty
Total Contribution Margin (SUP-UVC) X Qty
- Total Fixed Costs (TFC)
Operating Income
- Tax
Net Income
If you are given tax information, calculate net income to the final step.
If not, your operating income is your net income.
EXAMPLE
Given:
USP = 5
UVC = 3
TFC = 500
Target Profit = $60
Tax Rate = 40%
Not taking tax into account:
If you sell 1 pen, Income is:
(5 x 1) – (3 x 1) = (2 x 1) – 500 = -498
If you sell 2 pens, Income is: -496
If you sell 250 units, Net Income Is: 0
If you sell 251 units, Net Income Is: $2
If you sell 18 units on top of breakeven: (18 x $20)
Contribution Margin: is the addition to the Net Income, as a result of selling 1 extra
unit.
If this is POSITIVE you WILL make money one day as long as you sell more.
If this is NEGATIVE it is BETTER you declare a bankruptcy, if you continue to
sell you will make yourself worse off.
FORMULAS:
1. Sales – All Variable Costs (VC) = Total Contribution Margin (TCM)
2. TCM – TFC = Operating Income
3. USP - UVC = Unit Contribution Margin (UCM)
find more resources at oneclass.com
find more resources at oneclass.com
Unlock document

This preview shows pages 1-3 of the document.
Unlock all 8 pages and 3 million more documents.

Already have an account? Log in
4. USP – UVC = UCM = CM% or CM Ratio
USP USP
A portion of the selling price that makes its way to the bottom, you want this
number to be high.
5. QBreakEven(BE) = TFC ALWAYS ROUND UP
USP - UVC
6. How much $ needs to be made to Break Even:
$BreakEven(BE) = TFC OR TFC ALWAYS ROUND UP
QBE x USP CM%
7. Opposite of CM% = VC
CM% + VC% = 1
8. VC% = UVC/USP
9. Don’t want to only break even, want to make some money:
Q(TI)TargetIncome = TFC + OI
USP-UVC
10. OI(Target Income Before Taxes) = TIAfter Tax (ALSO CALLED NET INCOME)
1- t(tax rate)
11. $(TI) = Q(TI) X USP = TFC + TIBT
CM%
12. Margin of Safety (MOS) in units = Current Sales in Units – BE Sales In Units
13. MOS in $ = Current Sales in Dollars – BE Sales in Dollars
14. MOS Ratio = MOS in $ / Current Sales = X%
You can drop your sales by X% but you will not go in a loss.
15. Degree of Operating Leverage (DOL) = TCM / OI
The split between a FC and VC.
Equal to 1 when there’s no FC.
At BE point, DOL is undefined = TCM/0
No outsourcing: FC is high, DOL is high because OI falls.
A high DOL:
- High FC
- High BE Point
- High Risk
- Small change in sales will lead to a large change in income.
16. % Change in Income = DOL x (% change in Sales)
CVP CHALLENGE QUESTION
Aladdin Co. manufacturers magic lamps. The following information
pertains to the company for the most recent accounting period:
find more resources at oneclass.com
find more resources at oneclass.com
Unlock document

This preview shows pages 1-3 of the document.
Unlock all 8 pages and 3 million more documents.

Already have an account? Log in
Lamps Produced & Sold = 40,000
Total Cost = $480,000
UFC = $2
CM% = 0.50 = 50%
Target Income = $5000
Tax Rate = 35%
What is the BEP in Q?
BE = TFC / Q x USP
BE = 80,000 / .50
= 160,000
17. TFC
USP - UVC
UFC is useless without a denominator level!
$2 x 40,000 = 80,000 (TFC)
TVC = 480,000 – TFC (80,000) = 400,000 / 40,000 units = 10
VC% = 50% + CM% (50%) = 1
VC% = 80,000 / 10 x x
50% = 80,000 / 10 + x
20 = USP
IN CLASS HOMEWORK
1. A) BE Units = TFC
USP – UVC
TFC = 180,000 / 36 – 24 = 15,000
B) 180K + 200K / 36 – 24 = 31,667
C) $BE = 150 x 36 OR TFC / CM% = 180,000 / (36-24 / 36)
January 27, 2016
Next week’s tutorial question is similar to 1 midterm question
PRACTISE QUESTIONS
2) x-After-Tax Profit: $15,000, Income Tax Rate: 40%
$TI = TFC + OI / CM% (which is USP – UVC / USP)
$TI = 90000 + (15000/1-0.4) / (6-4/6)
$TI = $345,000
1) (cont.) Units required to make an after tax profit:
QTI = TFC + OI / UCM
QTI = 90,000 + (15,000/1-0.4) / (6-4)
QTI = 57,700 units
find more resources at oneclass.com
find more resources at oneclass.com
Unlock document

This preview shows pages 1-3 of the document.
Unlock all 8 pages and 3 million more documents.

Already have an account? Log in

Document Summary

All variable unit variable cost x qty. If you are given tax information, calculate net income to the final step. If not, your operating income is your net income. If you sell 1 pen, income is: (5 x 1) (3 x 1) = (2 x 1) 500 = -498. If you sell 2 pens, income is: -496. If you sell 250 units, net income is: 0. If you sell 251 units, net income is: . If you sell 18 units on top of breakeven: (18 x ) Contribution margin: is the addition to the net income, as a result of selling 1 extra unit. If this is positive you will make money one day as long as you sell more. If this is negative it is better you declare a bankruptcy, if you continue to sell you will make yourself worse off.

Get access

Grade+20% off
$8 USD/m$10 USD/m
Billed $96 USD annually
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
40 Verified Answers
Class+
$8 USD/m
Billed $96 USD annually
Class+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
30 Verified Answers

Related Documents