AFM123 Lecture Notes - Lecture 10: Vending Machine, Net Present Value, Earnings Before Interest And Taxes

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salmonkangaroo235

26 Oct 2015

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM123

Professor

Peter Blake

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Document Summary

Make decisions based on the numbers, need to know: selling price of product(s, sales volume / level of activity, per unit variable cost, fixed costs in total , mix of products sold. Exam! example 1 contribution margin = sales price - variable costs contribution ratio = contribution margin / sales. The level of sales where you"re operating income is sh! How fast operating income grows relative to sales growth once a certain income level is attained. = contribution margin in total / operating income in total. This means if sales increases by 10% , operating income increases by 35% Example: a company sells work benches for each. The contribution margin ratio? the breakeven sales? etc. Contribution margin/unit = 40 - 26 = 14. Contribution margin ratio = 14 / 40 = 35% Breakeven sales = 50,000 / 14 = 3,572 benches / month. Breakeven sales in dollars = 50,000 / 35% = 142,857.

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 â 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 â 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 â 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

redant669

Not sure how to complete this multi production CM incomestatement at breakeven. If you can be detailed inyour answers so I can understand it, that would be awesome! Thanksin advance!

Applicable to thecompany as a whole:
Net income earned during mostrecent period:				$ 65,000
Contribution marginratio:				15%
Fixed costs incurred duringmost recent period:				$ 175,000
Statutory tax rate:				37%
Operating income generated atbreakeven:				$ -
Applicable to the FootballDivision
Selling price perfootball				$ 18.00
Total variable cost dollarsincurred by Football Division				$ 952,088
Quantity of footballs soldduring most recent period:				64,000
Applicable to the BaseballDivision
Variable cost perbaseball:				$ 3.24

	Footballs			Baseballs			Total
	Total $	$ per Unit	Sales Ratios	Total $	$ per Unit	Sales Ratios	Total $	Sales Ratios*
Revenues	$ 1,152,000	$ 18.00	62%	$ 702,497	$ 3.65	38%	$ 1,854,497.35	100%
Variable Costs	$ 952,088	$ 14.88	60%	$ 624,235	$ 3.24	40%	$ 1,576,323	100%
Contribution Margin	$ 199,912	$ 3.12	72%	$ 78,263	$ 0.41	28%	$ 278,175	100%
Fixed Costs							$ 175,000
Operating income							$ 103,175
Income Tax							$ 38,174.60
Net income							$ 65,000

	Footballs			Baseballs			Total
	Total $	$ per Unit	Sales Ratios	Total $	$ per Unit	Sales Ratios	Total $	Sales Ratios
Revenues							$ 1,166,666.67
Variable Costs
Contribution Margin
Fixed Costs
Operating income
Income Tax
Net income

pearweasel731

Please help, I need to create contribution margin incomestatement at breakeven:

Requirement 3Schedule:

Input Data
Applicable to the company as awhole:
Net income earned during mostrecent period:				$ 65,000
Contribution marginratio:				15%
Fixed costs incurred duringmost recent period:				$ 175,000
Statutory tax rate:				37%
Operating income generated atbreakeven:				$ -
Applicable to the FootballDivision
Selling price perfootball				$ 18.00
Total variable cost dollarsincurred by Football Division				$ 952,088
Quantity of footballs soldduring most recent period:				64,000
Applicable to the BaseballDivision
Variable cost perbaseball:				$ 3.24