AC 212 Lecture Notes - Lecture 7: Contribution Margin, Operating Leverage, Variable Cost

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peachjellyfish757

4 Jan 2018

School

Quinnipiac University

Department

Accounting

Course

AC 212

Professor

Katherine Simione

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Document Summary

Lo 1 calculate the unit contribution margin and the contribution margin ratio. Cost-volume-profit (cvp) analysis: helps managers make business decisions, expresses relationship among costs, volume, and company"s profit or loss, determines how much the company must sell to cover costs/break even or achieve a targeted profit. Components of cvp analysis: sales price per unit, volume sold, variable costs per unit, fixed costs, profit or loss. Art. com may sell 15% posters, 25% unframed photographs, and 60% framed prints. She currently sells each poster for , while each poster has a variable cost of . Sales revenue (550 posters x ) $ 19,250. Less: variable expenses (550 possters x ) 11,550. The contribution margin is the dividing line - all variable expenses go above the line, and the fixed expenses go below the line. Managers can also use the unit contribution margin to quickly forecast income at any volume within their relevant range.

Related Questions

CVP is a powerfulanalytical tool that informs managers for business decision making.By the use of this tool, relationships between production orservice costs, volume, and profit can be modeled to determine salesvolume needed at a certain price to break even or earn a targetprofit level or amount.

What are the keycomponent of CVP Analysis? Discuss the basic assumptions of CVPanalysis. Define the terms Unit Contribution Margin andContribution Margin ratio.

lilachorse999

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

Exercise 11-19 Margin of safety LO 11-6

Information concerning a product produced by Ender Company appears here:


Sales price per unit	$	167
Variable cost per unit	$	78
Total annual fixed manufacturing and operating costs	$	623,000

Required

Determine the following:

Contribution margin per unit.

Number of units that Ender must sell to break even.

Sales level in units that Ender must reach to earn a profit of $222,500.

Determine the margin of safety in units, sales dollars, and as a percentage. (Round âPercentageâ answer to 1 decimal place (i.e., 0.234 should be entered as 23.4).)

crimsonmammoth545

AC 212 Lecture Notes - Lecture 7: Contribution Margin, Operating Leverage, Variable Cost

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