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AFM481 Chapter Notes -Operating Leverage, Variable Cost, Fixed Cost

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orangecoyote929
6 Nov 2013
School
University of Waterloo
Department
Accounting & Financial Management
Course
AFM481
Professor
Grant Russell

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Document Summary

To examine changes in profits in response to changes in sales volumes, cost and prices. Contribution margin = total revenue total variable cost. Contribution margin (cmu) = selling price per unit variable cost per unit. Earnings before tax (ebt) = (selling price variable cost) quantity fixed costs. Assume that fixed costs, selling price and variable costs are constant. We can use the formula to solve for q. This will give us quantity required to achieve our target profit (ebt) Q = (fixed costs + ebt) / cmu. Contribution margin ratio (cmr) is the % of the selling price per unit over the variable cost per unit. Cmr = (s v) / s for a single unit. Selling price q (revenue) = (fixed costs + ebt) / cmr. Level of operating activity so that sales revenue = 0. We went to set ebt = 0. Breakeven quantity is the q that will make ebt = 0.

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Related Questions

Sales Mix and Break-Even Analysis

Heyden Company has fixed costs of $1,179,900. The unit sellingprice, variable cost per unit, and contribution margin per unit forthe company's two products are provided below.

Product Selling Price Variable Cost per Unit Contribution Margin per Unit
Q $360 $140 $220
Z 270 150 120

The sales mix for products Q and Z is 70% and 30%, respectively.Determine the break-even point in units of Q and Z. If required,round your answers to the nearest whole number.

a. Product Q units

b. Product Z units

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

Cost-volume-profit (CVP)

posted Nov 28, 2016, 4:07 AM

Cost-volume-profit (CVP) analysis is a key step in manydecisions. CVP analysis involves specifying a model of therelations among the prices of products, the volume or level ofactivity, unit variable costs, total fixed costs, and the salesmix. This model is used to predict the impact on profits of changesin those parameters. Explain how changes in activity affectcontribution margin and net operating income.