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ACC 406 Lecture Notes - Lecture 3: Operating Leverage, Earnings Before Interest And Taxes, Contribution Margin

98 views6 pages
carminezebra136
25 Apr 2017
School
Ryerson University
Department
Accounting
Course
ACC 406
Professor
Nicholas Bordignon

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Document Summary

Chapter 4: cost-volume-profit analysis: a managerial planning tool. Break-even point (bep) is where profits are zero. The income statement format that is based on the separation of costs into fixed and variable components is called the contribution margin income statement. Contribution margin is used to cover fixed costs and operating income. Costs are divided into variable and fixed components. The focus is on the firm as a whole. Therefore, the costs refer to all costs of the company production, selling, and. Important subtotal is contribution margin = sales revenue minus variable expenses. administration. So variable costs are all costs that increase as more units are sold, including: Acc 406 direct materials direct labour: variable factory overhead, variable selling and administrative costs. Similarly, fixed costs include: fixed factory overhead, fixed selling and administrative expenses. Overhead related to the product but not directly. Managers may prefer to use sales revenue as the measure of sales activity instead of units sold.

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Related Questions

The Hampshire Company manufactures umbrellas that sell for$12.50 each. In 2014, the company made and sold 60,000 umbrellas.The company had fixed manufacturing costs of $216,000. It also hadfixed costs for administration of $79,525. The per-unit costs ofeach umbrella are as follows:

Direct Materials: $3.00

Direct Labor: $1.50

Variable Manufacturing Overhead: $0.40

Variable Selling Expenses: $1.10

Using the information above, perform a cost-volume-profit (CVP)analysis by completing the steps below.

1. Compute net income before tax.

2. Compute the unit contribution margin in dollars and thecontribution margin ratio for one umbrella.

3. Calculate the break-even point in units and dollars ofrevenue.

4. Calculate the margin of safety:

In units

In sales dollars

As a percentage

5. Calculate the degree of operating leverage.

6. Assume that sales will increase by 20% in 2015. Calculate thepercentage of before-tax income for this increase. Providecalculations to prove that your percentage increase is correctbased on the operating leverage calculated in step 5.

7. Compute the number of umbrellas that Hampshire is required tosell if it plans to earn $150,000 in income before taxes by usingthe target income formula. Proof your calculation.

8. A company that specializes in tours in England has offered topurchase 5,000 umbrellas at $11 each from Hampshire. The variableselling costs of these additional units will be $1.30 as opposed to$1.10 per unit. Also, this production activity will incur another$15,000 of fixed administrative costs. Should Hampshire agree tosell these additional 5,000 umbrellas to the touring business?Provide calculations to support your decision.

Requirement 1
Units Price Totals
Sales X $ $
Variable Costs X $ $
Fixed Costs $
Net Income $
Requirement 2
Contribution Margin per Unitin Dollars = Selling Price – Variable Costs
Selling Price Variable Costs Contribution Margin per Unit
Contribution Margin Ratio =Contribution Margin/Selling Price
Contribution Margin Selling Price Contribution Margin Ratio
Requirement 3
Break-Even Point = Fixed Costs/ Contribution Margin
Fixed Costs Contribution Margin Break-Even Point in Units (Rounded)
Break-Even Point in Units XSelling Price per Unit = Break-Even Point Sales
Break-Even Point in Units Selling Price per Unit Break-Even Point in Sales (Rounded)
Requirement 4A
Margin of Safety in Units =Current Unit Sales – Break-Even Point in Unit Sales
Current Unit Sales Break-Even Point in Sales Margin of Safety in Units
Requirement 4B
Margin of Safety in Dollars =Current Sales in Dollars – Break-Even Point Sales in Dollars
Current Sales in Dollars Break-Even Point in Dollars Margin of Safety in Dollars
Requirement 4C
Margin of Safety as aPercentage = Margin of Sales in Units / Current Unit Sales
Margin of Safety in Units Current Unit Sales Margin of Safety Percentage
Requirement 5
Degree of Operating Leverage =Contribution Margin / Operating Income
Contribution Margin Operating Income Operating Leverage
Requirement 6
Units $ Per Unit Totals
Sales X $ $
Variable Costs X $ $
Fixed Costs $
Net Income $
Operating Leverage Times % Increase Increase would be XX%
Prior Income $ From Part 1
Increase $ Prior Income X XX% Above
Total $
Requirement 7
Targeted Income = (Fixed Costs+ Target Income) / Contribution Margin
Fixed Costs + Target Income Divided by Contribution Margin # of Units (Rounded)
Fixed Costs $
Target Income $
Total $ $ X
# of Units Above X $ Per Unit
Proof Revenue XX,XXX X $XX.XX $
Variable Costs XX,XXX X $X.XX $
Contribution Margin $
Fixed Costs $
Net Income $
Requirement 8
Sales Mix
Current Specialty Total
Expected Sales Units X X
Revenue = Sales X Price $ $ $
Variable Costs X Units $ $ $
Contribution Margin $ $ $
Fixed Costs $ $ $
Operating Income $
Prior Net Income FromRequirement 1 $
Additional Operating Income (Operating Income Above Less Prior Income) $
Decision With Explanation

Comfi Airways, Inc., a small two-plane passenger airline, has asked for your assistance in some basic analysis of its operations. Both planes seat 10 passengers each, and they fly commuters from Comfi’s base airport to the major city in the state, Metropolis. Each month, 40 round-trip flights are made. Shown below is a recent month’s activity in the form of a cost-volume-profit income statement. Fare revenues (400 passenger flights) $48,000 Variable costs Fuel $12,280 Snacks and drinks 760 Landing fees 1,800 Supplies and forms 1,000 15,840 Contribution margin 32,160 Fixed costs Depreciation 3,100 Salaries 16,458 Advertising 500 Airport hanger fees 1,650 21,708 Net income $10,452 Calculate the break-even point in dollars. Break-even point $ LINK TO TEXT Calculate the break-even point in number of passenger flights. Break-even point flights LINK TO TEXT Without calculations, determine the contribution margin at the break-even point. Break-even point $ LINK TO TEXT If ticket prices were decreased by 10%, passenger flights would increase by 25%. However, total variable costs would increase by the same percentage as passenger flights.

Question 1

Suppose that Head-First Company now sells both bicycle helmetsand motorcycle helmets. The bicycle helmets are priced at $74 andhave variable costs of $48 each. The motorcycle helmets are pricedat $215 and have variable costs of $130 each. Total fixed cost forHead-First as a whole equals $60,000 (includes all fixed factoryoverhead and fixed selling and administrative expense). Next year,Head-First expects to sell 4,850 bicycle helmets and 1,940motorcycle helmets.

Refer to the list below for the exact wording of text itemswithin your income statement.

AmountDescriptions
Operating income
Operating loss
Sales
Total contribution margin
Total fixed expense
Total variable expense

1. Form a package of bicycle and motorcycle helmets based on thesales mix expected for the coming year.

Product Price Unit Variable Cost Unit Contribution Margin Sales Mix Package Contribution Margin
Bicycle helmet
Motorcycle helmet
Package total

2. Calculate the break-even point in units for bicycle helmetsand for motorcycle helmets.

Break-Even Bicycle Helmets:
Break-Even Motorcycle Helmets :

Check your answer by preparing a contribution margin incomestatement. Refer to the list of Amount Descriptions for the exactwording of text items within your income statement.

Head-First Company

Contribution Margin Income Statement

At Break-Even Point

1

2

3

4

5

Question 2

Head-First Company now sells both bicycle helmets and motorcyclehelmets. Next year, Head- First expects to produce total revenue of$575,000 and incur total variable cost of $400,000. Total fixedcost is expected to be $60,500.

Refer to the list below for the exact wording of text itemswithin your income statement.

AmountDescriptions
Operating income
Operating loss
Sales
Total contribution margin
Total fixed expense
Total variable expense

. Calculate the break-even point in sales dollars forHead-First. Round the contribution margin ratio to four decimalplaces and sales to the nearest dollar.

The break-even point in sales equals .

Check your answer by preparing a contribution margin incomestatement. Refer to the list of Amount Descriptions for the exactwording of text items within your income statement.

Head-First Company

Contribution Margin Income Statement

At Break-Even Sales Dollars

1

2

3

4

5