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Lecture 7

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ADM2304 Lecture 7: 7
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University of Ottawa

Administration

ADM2304

Tony Quon

Fall

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Target Prot Analysis: > The equation and formula methods can be used to determine the sales volume needed to achieve a target prot. e.g, Suppose Racing Bicycle Company wants to know how many bikes must be sold to earn a prot of 100,000. The CVP Equation Method: Sales = Variable expenses + Fixed expenses + Prots 500Q = 300Q + 80,000 + 100,000Q = 900 bikes Formula Approach: = (80K + 100 K) 200 per bike > 200 is from 500 300 from using algebra above e.g, The average selling price of a cup of coffee is 1.49 and the average variable expense per cup is 0.36. The average xed expense per month is 1,300. How many cups of coffee would have to be sold to attain target prots of 2,500 per month? 3,363 cups (1300 + 2500) (1.49 0.36) Margin of Safety > the excess of budgeted (or actual) sales over the breakeven volume of sales. Margin of safety = Total sales Breakeven sales e.g, If we assume that Racing Bicycle Company has actual sales of 250,000, given that we have already determined the breakeven sales to be 200,000, the margin of safety is 50,000 as shown. > The margin of safety can be expressed as 20 of sales. (50,000 250,000) > margin of safety can be expressed in terms of the number of units sold. The margin of safety at Racing is 50,000, and each bike sells for 500. 50 K 500 = 100 bikes

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