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ACCT 2101 Lecture Notes - Lecture 11: Contribution Margin, Fixed Income, Fixed Cost

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School
UConn
Department
Accounting
Course
ACCT 2101
Professor
Joshua Racca

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ACCT 2101 Full Course Notes
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ACCT 2101 Full Course Notes
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Document Summary

Sales - variable expense - fixed expenses = sh. Contribution margin = sales - variable expenses. Contribution margin and fixed income must be the same to equal sh. The amount contributed to paying off fixed expenses. Profit = sales - variable expenses- fixed expenses. Revenue = unit sales price x sales volume. Break even point (in units) = fixed expenses / unit contribution margin. Contribution margin / sales = cm ratio. So fixed expense / cm ratio = break-even point (in dollars) Break even units x price = break even point in dollars. When sales is higher than expenses, we have profit. Break even point is where sale line intercepts expenses. How much do i have to make/sell to profit x 0 (fixed expenses + target profit)/ unit contribution margin. Use the unit contribution to find out units. Use contribution price to find out $ Sales rev x - variable expensesx - fixed expenses = profit.

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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 – 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 – 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 – 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

In the month of March, Style Salon services 610 clients at anaverage price of $180. During the month, fixed costs were $25,758and variable costs were 70% of sales.

(a) Determine the contribution margin in dollars, per unit, andas a ratio.

Contribution margin $____________?
Contribution margin per unit $____________?
Contribution margin ration ____________%?

(b) Using the contribution margin technique, compute thebreak-even point in dollars and in units.

Break-even sales $______________?
Break-even sales _____________ units?

Lucent Manufacturing Company makes a product that it sells for$70 per unit. The company incurs variable manufacturing costs of$21 per unit. Variable selling expenses are $10 per unit, annualfixed manufacturing costs are $195,000, and fixed selling andadministrative costs are $334,230 per year. Required: Determine thebreak-even point in units and dollars using each of the followingapproaches:

a. Equation method.

break-even point in units

break-even points in dollars

b. contribution margin per unit

contribution margin per unit

break-even points in units

break-even points in dollars

c. contribution margin ratio

contribution margin ratio

break-even points in dollars

break-even points in units

d. Lucent manufacturing company

contribution margin income statement