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# Managerial Accounting CH 3.docx

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Northeastern University

Accounting

ACCT 2301

Ed Dinan

Spring

Description

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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