ACC 208 Lecture Notes - Lecture 14: Earnings Before Interest And Taxes, Contribution Margin, Operating Leverage

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lemonsnake712

15 Dec 2016

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Cost volume profit analysis helps managers make many important decisions such as what products and services to offer, what prices to charge, what marketing strategy to use, and what cost structure to maintain. Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted. It is the amount available to cover fixed expenses and then to provide profits for the period. It is used first to cover the fixed expenses, and then whatever remains goes toward profits. The break even point is the level of sales at which profit is zero. Once the break even point has been reached, net operating income will increase by the amount of the unit contribution margin for each additional unit sold. If sales a(cid:396)e ze(cid:396)o, the (cid:272)o(cid:373)pa(cid:374)(cid:455)"s loss would e(cid:395)ual its fi(cid:454)ed e(cid:454)pe(cid:374)ses. Ea(cid:272)h u(cid:374)it that is sold reduces the loss by the amount of the unit contribution margin. Profit = (p x q v x q) fixed expenses.

Related Questions

EXERCISE 5-18 Break-Even and Target Profit Analysis; Margin of Safety; CM Ratio [LO5-1, L05-3, L05-5, L05-6, L05-7] Menlo Company distributes a single product. The company's sales and expenses for last month follow: Per Unit $30 Total $450,000 180,000 270,000 216,000 $ 54,000 Variable expenses ...... Contribution margin. Fixed expenses Net operating income ....... 12 Required: 1. What is the monthly break-even point in unit sales and in dollar sales? 2. Without resorting to computations, what is the total contribution margin at the break-even point? 3. How many units would have to be sold each month to earn a target profit of $90,000? Use the formula method. Verify your answer by preparing a contribution format income statement at the target sales level. 4. Refer to the original data. Compute the company's margin of safety in both dollar and per- centage terms. 5. What is the company's CM ratio? If sales increase by $50,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Break-Even Sales Under Present and Proposed Conditions

Battonkill Company, operating at full capacity, sold 172,900units at a price of $126 per unit during 2014. Its income statementfor 2014 is as follows:

Sales		$21,785,400
Cost of goods sold		7,728,000
Gross profit		$14,057,400
Expenses:
Selling expenses	$3,864,000
Administrative expenses	2,310,000
Total expenses		6,174,000
Income from operations		$7,883,400

The division of costs between fixed and variable is asfollows:

	Fixed	Variable
Cost of goods sold	40%	60%
Selling expenses	50%	50%
Administrative expenses	70%	30%

Management is considering a plant expansion program that willpermit an increase of $2,142,000 in yearly sales. The expansionwill increase fixed costs by $285,600, but will not affect therelationship between sales and variable costs.

Required:

1. Determine for 2014 the total fixed costs andthe total variable costs.

Total fixed costs	$
Total variable costs	$

2. Determine for 2014 (a) the unit variablecost and (b) the unit contribution margin.

Unit variable cost	$
Unit contribution margin	$

3. Compute the break-even sales (units) for2014.
units

4. Compute the break-even sales (units) underthe proposed program.
units

5. Determine the amount of sales (units) thatwould be necessary under the proposed program to realize the$7,883,400 of income from operations that was earned in 2014.
units

6. Determine the maximum income from operationspossible with the expanded plant.
$

7. If the proposal is accepted and sales remainat the 2014 level, what will the income or loss from operations befor 2015?
$ SelectIncomeLoss

lemonbeaver448

Break-Even Sales Under Present and Proposed Conditions

Battonkill Company, operating at full capacity, sold 172,900units at a price of $126 per unit during 2014. Its income statementfor 2014 is as follows:

Sales		$21,785,400
Cost of goods sold		7,728,000
Gross profit		$14,057,400
Expenses:
Selling expenses	$3,864,000
Administrative expenses	2,310,000
Total expenses		6,174,000
Income from operations		$7,883,400

The division of costs between fixed and variable is asfollows:

	Fixed	Variable
Cost of goods sold	40%	60%
Selling expenses	50%	50%
Administrative expenses	70%	30%

Required: PLEASE JUST ANSWER QUESTIONS 5,67

1. Determine for 2014 the total fixed costs andthe total variable costs.

Total fixed costs	$
Total variable costs	$

2. Determine for 2014 (a) the unit variablecost and (b) the unit contribution margin.

Unit variable cost	$
Unit contribution margin	$

3. Compute the break-even sales (units) for2014.
units

4. Compute the break-even sales (units) underthe proposed program.
units

5. Determine the amount of sales (units) thatwould be necessary under the proposed program to realize the$7,883,400 of income from operations that was earned in 2014.
units

6. Determine the maximum income from operationspossible with the expanded plant.
$

7. If the proposal is accepted and sales remainat the 2014 level, what will the income or loss from operations befor 2015?
$

apricotherring974

ACC 208 Lecture Notes - Lecture 14: Earnings Before Interest And Taxes, Contribution Margin, Operating Leverage

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