Textbook Notes (363,074)
Accounting (526)
ACC 410 (34)
Chapter 3

# Chapter 3

10 Pages
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School
Ryerson University
Department
Accounting
Course
ACC 410
Professor
Maurizio Di Maio
Semester
Summer

Description
Chapter 3 – Cost-Volume-Profit Analysis Cost-volume-profit (CVP) analysis: is a technique that examines changes in profits in response to changes in sales volumes, costs, and prices CVP analysis begins with the basic profit equation: PROFIT = TOTAL REVENUE – TOTAL COSTS or if separating costs into variable and fixed categories, we express profit as: PROFIT or EARNING = TOTAL REVENUE – TOTAL VARIABLE COSTS – TOTAL FIXED COSTS Contribution Margin Contribution Margin: is the total revenue minus the total variable costs Contribution Margin per unit (CMu): is the selling price per unit minus the variable cost per unit Contribution margin per unit tells us how much revenue from each unit sold can be applied toward fixed costs or contributed to cover fixed costs Once enough units have been sold to cover all fixed costs, the contribution margin per unit from all remaining sales becomprofit TP = S = V = (S – V) = Q = F = www.notesolution.com TP = (S x Q) – (V x Q) – F or TP = [(S – V) x Q] – F Cost-Volume-Profit Analysis in Units Example: Suppose that Magik Bicycles wants to produce a new mountain bike called Magikbike III and has forecasted the following information: Price per bike = \$800 Variable cost per bike = \$300 Fixed costs related to bike production = \$5,500,000 Target Profit = \$200,000 Estimated sales = 12,000 bikes Input values into formula to determine the quantity of bikes needed to achieve profit of \$200,000 * Cost-Volume-Profit Analysis in Revenues Contribution margin ratio (CMR): the percentage by which the selling price (or revenue) per unit exceeds the variable cost per unit, or contribution margin as a percentage of revenue For single product Contribution Margin Ratio (CMR) = www.notesolution.com CVP in terms of total revenue instead of units, substitute the contribution margin ratio for the contribution margin per unit Recall previous example First: calculate contribution margin ratio = (S – V)/S (\$800 – \$300)/\$800 = 0.625 (62.5%) then, Input values into formula to determine the sales (revenue) needed to achieve profit of \$200,000 +,- ***Contribution as an Income Statement . / , ,-+ / !" + / # + + / !" # www.notesolution.com Sales revenue - Variable Cost . Contribution Margin - Fixed Cost . = Profit before taxes Breakeven Point A CVP analysis can be used to determine the breakeven point, or level of operating activity at which revenues cover all fixed and variable costs, resulting in zero profit Since TP is set at 0 when trying to find the breakeven point, the formula for breakeven is simply... \$* Recall previous Magik Bicycles example, \$* ,,,,, * * \$* Recall previous Magik Bicycles example, \$* ,,, , , +, \$% CVP with Income Taxes An organization’s after-tax earnings are calculated by subtracting income tax from pre-tax earnings %%&%\$%\$ ' %%&%\$ www.notesolution.com If managers wanted to know the pre-tax earnings needed to achieve a target level of after-tax earnings, we rearrange the previous formula % %\$%& Example: suppose that Magik Bicycle plans for after-tax earnings of \$20,000 and its tax rate is 30%. Then: %\$, , Therefore, the company needs earnings before tax of \$28,571 to earn earnings after tax of \$20,000 CVP with Variable Amount of Earning Managers may want to set an earning as a variable amount of sales. This variable amount of earning should be calculated as an additional variable cost Example: Suppose Magik Bicycles plans for before-tax earnings of 7.5% of sales o Recall Profit equation: EBT = (S-V)-F Solving for S 1S – 0.375S – 5,500,000 = 0.075S 0.625S – 0.075S = 5,500,000 S = \$10,000,000 CVP for Multiple Products Sales mix: the proportion of different products or services that an organization sells. CVP Calculations for a Sales Mix If the manager wanted to use CVP results to plan future operations for individual products, the required revenue for each product needs to be determined Sales mix analysis allows managers to achieve the combination of sales that will yield the greatest amount of earnings www.notesolution.com When performing CVP computations for sales mix, we assume that the products a company sells are in a constant ratio For instance, Magik Bicycle developed three different products, a small bike for children and youths, a road bike, and a mountain bike. o Whenever Magik Bicycles sells 5 youth bikes, it sells 9 road bikes and 6 mountain bikes, therefore, the ratio is expressed 5:9:6 Youth Road Mountain Price per unit \$200 \$700 \$800 Variable cost per unit 75 250 300 Contribution margin \$125 \$450 \$500 per unit Contribution margin 62.50% 64.29% 62.50% ratio Also assuming, fixed costs are \$14,700,00
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