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ACC 406 Lecture Notes - Lecture 4: Operating Leverage, Earnings Before Interest And Taxes, Fixed Cost

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School
Ryerson University
Department
Accounting
Course
ACC 406
Professor
Alison Beavis

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Document Summary

Sales variable cost = contribution margin. Contribution margin fixed costs = operating income. Operating income = sales total variable expenses total fixed expenses. Break-even number of units = total fixed expenses/ price variable cost. Units to be sold to achieve a target income. # (cid:1873)(cid:1866)(cid:1872)(cid:1871) (cid:1872)(cid:1867) (cid:1857)(cid:1853)(cid:1870)(cid:1866) (cid:1872)(cid:1853)(cid:1870)(cid:1859)(cid:1857)(cid:1872) (cid:1866)(cid:1855)(cid:1867)(cid:1865)(cid:1857)= (cid:1868)(cid:1870)(cid:1855)(cid:1857) (cid:1874)(cid:1853)(cid:1870)(cid:1853)(cid:1854)(cid:1864)(cid:1857) (cid:1855)(cid:1867)(cid:1871)(cid:1872) (cid:1868)(cid:1857)(cid:1870) (cid:1873)(cid:1866)(cid:1872) (cid:4666)(cid:4667) (cid:1871)(cid:1853)(cid:1864)(cid:1857)(cid:1871) (cid:1856)(cid:1867)(cid:1864)(cid:1864)(cid:1853)(cid:1870)(cid:1871) (cid:1872)(cid:1867) (cid:1857)(cid:1853)(cid:1870)(cid:1866) (cid:1872)(cid:1853)(cid:1870)(cid:1859)(cid:1857)(cid:1872) (cid:1866)(cid:1855)(cid:1867)(cid:1865)(cid:1857)= (cid:1858)(cid:1857)(cid:1856) (cid:1855)(cid:1867)(cid:1871)(cid:1872)+(cid:1872)(cid:1853)(cid:1870)(cid:1859)(cid:1857)(cid:1872) (cid:1866)(cid:1855)(cid:1867)(cid:1865)(cid:1857) (cid:1870)(cid:1853)(cid:1872)(cid:1867) Visually portrays the relationship between profits and units sold. The profit-volume graph is the graph of the operating income equation. Depicts the relationship among cost, volume and profit. Graphs two separate lines: total revenue; total cost. Assumptions: revenue and cost functions are linear, all units produced are sold, sales mix is constant, selling prices and costs are known with certainty. Sales mix is difficult to predict with certainty. Assumes cost and revenue functions are linear.

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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

________ is the excess of sales over the cost of goods sold.

A) Gross margin

B) Contribution-margin ratio

C) Variable-cost ratio

D) Contribution margin

Answer:

Which statement is FALSE?

A) Each different sales-mix of products has a differentbreak-even point.

B) Changes in the sales-mix of products sold affects a company'snet operating profit.

C) Changes in the sales-mix of products sold affects a company'scontribution margin.

D) If the sales-mix of products sold changes, the break-evenpoint does not change.

Answer:

With mixed costs, the ________ element is unchanged over therelevant range and the ________ element varies proportionately withcost-driver activity.

A) variable cost; fixed cost

B) fixed cost; variable cost

C) fixed cost; step cost

D) step cost; variable cost

Answer:

The sales price is $30 per unit, the contribution margin is $8per unit and total fixed costs are $32,000. What is the break-evenpoint in units?

A) 857

B) 1,200

C) 2,000

D) 4,000

Answer:

If the selling price per unit increases, what is the effect onthe break-even point? (Assume no other changes.)

A) The break-even point increases.

B) The break-even point decreases.

C) The break-even point remains the same.

D) The break-even point is zero.

Calculate the missing amounts for each columnm

NUmber of units 2900 units 14540 units 4620 units
sale price per unit 360 4600 5500
variable cost per unit 270 2760 1665
total fixed cost 81000 828000 5244750
target profit 180,000 27,600,000 12,703,960
Contributution margin per unit
contribution margin ratio
required units to achieve target profit
required units to break even
required sales dollars to break even