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ACC 406 Chapter Notes - Chapter 4: Variable Cost, Sensitivity Analysis, Operating Leverage

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School
Ryerson University
Department
Accounting
Course
ACC 406
Professor
Anthony Chan

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Document Summary

Chapter 4 cost-volume-profit analysis: a managerial planning tool: determine the breakeven point in number of units and in total sales dollars. At breakeven, total costs (variable and fixed) equal total sales revenue. Breakeven units equal total fixed costs divided by the contribution margin (price variable cost per unit) Breakeven revenue equals total fixed costs divided by the contribution margin ratio: determine the number of units that must be sold, and the amount of revenue required, to earn a target profit. To earn a target profit, total cost + the amount of target profit must = total sales revenue. Units to earn target profit = total fixed costs + target profit / by the contribution margin. Sales revenue to earn target profit = total fixed costs + target profit / by the contribution margin ratio: prepare a profit volume graph and a cost-volume-profit graph, and explain the meaning of each.

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Related Questions

Break-Even Sales: Sales for Target Profit

Health-Temp Company is a placement agency for temporary nurses. It serves hospitals and clinics throughout the metropolitan area. Health-Temp Company believes it will place temporary nurses for a total of 23,500 hours next year. Health-Temp charges the hospitals and clinics $90 per hour and has variable costs of $75.60 per hour (this includes the payment to the nurse). Total fixed costs equal $321,000.

Required:

1. Calculate the contribution margin per unit and the contribution margin ratio (express the ratio as a decimal rather than a percentage). If required, round your answers to two decimal places.

Contribution margin per unit $
Contribution margin ratio

2. Calculate the sales revenue needed to break even.
$

3. Calculate the sales revenue needed to achieve a target profit of $100,000.
$

4. What if Health-Temp had target operating income (profit) of $110,000? Would sales revenue be larger or smaller than the one calculated in Requirement 3?

Larger

Smaller

By how much?
$

Calculate the missing amounts for each columnm

NUmber of units 2900 units 14540 units 4620 units
sale price per unit 360 4600 5500
variable cost per unit 270 2760 1665
total fixed cost 81000 828000 5244750
target profit 180,000 27,600,000 12,703,960
Contributution margin per unit
contribution margin ratio
required units to achieve target profit
required units to break even
required sales dollars to break even

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