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Managerial Accounting CH 3.docx

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Northeastern University
ACCT 2301
Ed Dinan

Anna Wang Managerial Accounting 3 Chapter 3Analysis of Cost, Volume, and Pricing to Increase Profitability Determining the Break-Even Point Bright Days decides to sell Delatine for $36/bottle. Each bottle costs $24.Advertising on TV costs $60,000. Equation Method Sales – Variable Costs – Fixed Costs = Profit (Net Income) $36N - $24N – 60,000 = 0 N = 5,000 Must sell 5,000 units in order to break even Contribution Margin per Unit Method Break Even Fixed Costs _ Point in Units Contribution Margin per Unit = 60,000 ÷ 12 = 5,000 units Contribution Margin per unit = Sales Price – Variable Cost per unit Contribution Margin Ration Method - gives the break-even point in dollars Contribution Contribution Margin (can use total contribut marg/total sales or Margin Ratio Sales contribut margin per unit / sale price) Break Even Fixed Costs In Dollars Contribution Margin Ratio * All methods yield the same result because all derived from the same equation Determining the Sales Volume Necessary to Reach Desired Profit Want to make a $40,000 profit 1 Anna Wang Managerial Accounting 3 Equation Method Sales – Variable Cost – Fixed Cost = Profit $36N - $24N – 60,000 = 40,000 N = 8,333 units Contribution Margin per Unit Method Sales Volume Fixed Costs + Desired Profit In Units Contribution Margin / Unit = 60,000 + 40,000 = 8,333 units 12 Assessing the Pricing Strategy - Cost-Plus Pricing – set selling price at cost plus a markup equal to a % of the cost - Prestige Pricing – set price at a premium under the assumption that customers will pay more for the product because of its prestige, brand name, media attention, etc - Target Pricing / Target Costing – determine price at which customers are willing to pay, then focus on developing the product at a cost that will yield a profit Market research shows that Delatine could sustain a long-term price of $28/bottle rather than $36/bottle. New contribution margin per unit becomes $4. Sales – Variable Cost – Fixed Cost = Profit 28N – 24N – 60,000 = 40,000 N = 25,000 Sales Volume in order to achieve $40,000 profit = 25,000 units Impossible to sell 25,000 bottles  target costing  need to lower cost/bottle Assessing the Effects of Changes in Variable Costs Considered alternative packaging, which reduced variable cost from $24/bottle to $12/bottle. Contribution margin per unit becomes $16. Sales – Variable Cost – Fixed Cost = Profit 28N – 12N – 60,000 = 4000 N = 6,250 Sales Volume in order to achieve $40,000 profit = 6,250 units Management is still unsure about ability to sell that many bottles 2 Anna Wang Managerial Accounting 3 Assessing the Effects of Changes in Fixed Costs Decide to advertise on radio, which is less effective, instead of on TV. Reduce fixed cost from $60,000 to $30,000. Since radio advertising is half of TV advertising, the desired profit could be attained at a lower sales volume. Sales – Variable Cost – Fixed Cost = Profit 28N – 12N – 30,000 = 4000 N = 4,375 Sales Volume in order to achieve $40,000 profit = 4,375 units Effect of Cost Structure on Break Even Points - fixed cost structure  higher risk  higher break even points - Variable cost structure  lower risk  lower break even points - High fixed cost structure  if failure to attain the required sales  leveraged loss Using the Cost-Volume-Profit (CVP) Graph (1) Draw and label axes X-axis: level of activity in units Y-axis: $$ (2) Draw Fixed Cost Line Horizontal line (3) Draw Total Cost Line (4) Draw Sales Line Sales $$$ Total Cots Fixed Costs Activity in Units 3 Anna Wang Managerial Accounting 3 Calculating the Margin of Safety Margin of Safety – cushion btw budgeted sales and breakeven point; am by which actual sales can fall short of expectation before incurring a loss (can be units, dollars, or percent) Margin of Budgeted Sales – Breakeven Sales Safety (%) Budgeted Sales Performing Sensitivity Analysis Using Excel - takes into account the differences from expectations of fixed and variable costs as well as sales volume - SensitivityAnalysis – investigating a multitude of what-if possibilities involving simultaneous changes in fixed costs, variable costs, and sales volume BudgetedIncomeStatement
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