ACTG 2300 Lecture Notes - Lecture 5: Earnings Before Interest And Taxes, Contribution Margin, Operating Leverage

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brownhornet492

7 Nov 2017

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Cost-volume-profit (cvp) analysis is concerned with the effects on net operating income of: Cost-volume-profit relationships: selling prices, sales volume, unit variable costs, total fixed costs, the mix of products sold, review of contribution income statement, effects of changes in sales volume on net operating income. Agenda: cvp relationships in equation form, cvp and profit graphs, contribution margin (cm) ratio, target profit analysis, break-even analysis, margin of safety, operating leverage, multiproduct break-even analysis. Variable costs behave in the same manner as sales while fixed costs, as we know, remain constant in total within the relevant range. A contribution format income statement is very useful in cvp analysis because it highlights cost behavior. Example: last month"s contribution income statement for nord corporation, a manufacturer of exercise bicycles, follows: Contribution income statements are given on this and the following page for monthly sales of 1, 2, 400, and 401 bikes. Note the following points: the contribution margin must first cover the fixed expenses.

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

Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):


Sales	$	45,000
Variable expenses		31,500
Contribution margin		13,500
Fixed expenses		8,640
Net operating income	$	4,860
1. What is the contribution margin per unit? (Round your answer to 2 decimal places.) 2. What is the contribution margin ratio? 4. If sales increase to 1,001 units, what would be the increase in net operating income? (Round your answer to 2 decimal places.) 6. If the selling price increases by $2 per unit and the sales volume decreases by 100 units, what would be the net operating income? 7. If the variable cost per unit increases by $1, spending on advertising increases by $1,350, and unit sales increase by 170 units, what would be the net operating income? 8. What is the break-even point in unit sales? 9. What is the break-even point in dollar sales? 10. How many units must be sold to achieve a target profit of $8,100? 11. What is the margin of safety in dollars? What is the margin of safety percentage? 12. What is the degree of operating leverage? (Round your answer to 2 decimal places.) 13. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in sales? (Round your intermediate calculations and final answer to 2 decimal places.)

burgundygerbil919

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?

ACTG 2300 Lecture Notes - Lecture 5: Earnings Before Interest And Taxes, Contribution Margin, Operating Leverage

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