ACTG 2300 Chapter Notes - Chapter 5,12: Earnings Before Interest And Taxes, Sunk Costs, Contribution Margin

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Cost-Volume-Profit Relationships – Chapter 5

Cost-volume-profit (CVP) analysis to estimate how profits are affected - five factors:

1. Selling prices

2. Sales volume

3. Unit variable costs

4. Total fixed costs

5. Mix of products sold

Assumptions:

1. Selling price is constant. The price of a product or service will not change as volume

changes.

2. Costs are linear and can be accurately divided into variable and fixed elements

3. In multiproduct companies, the mix of products sold remains constant.

4. In manufacturing companies, inventories don’t change (units produced = units sold)

Contribution margin: amount remaining from sales revenue after variable expenses have been

deducted (first to cover fixed expenses, and then remains goes toward profits)

Break-even point: level of sales at which profit is zero

     

        

        

         

        

      

Contribution margin ratio (CM ratio): the contribution margin as a percentage of sales

    

    

      

      

Variable expense ratio: ratio of variable expenses to sales

    

    

Break-even formula method:

   

  

Target Profit analysis: estimate what sales volume is needed to achieve a specific target profit



   



  

Margin of safety: excess of budgeted or actual sales dollars over the break-even volume of sales

dollars



   

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Document Summary

Cost-volume-profit (cvp) analysis to estimate how profits are affected - five factors: selling prices, sales volume, unit variable costs, total fixed costs, mix of products sold. Contribution margin: amount remaining from sales revenue after variable expenses have been deducted (first to cover fixed expenses, and then remains goes toward profits) Break-even point: level of sales at which profit is zero. Contribution margin ratio (cm ratio): the contribution margin as a percentage of sales. =(cid:4666)(cid:2202)(cid:2183)(cid:2200)(cid:2189)(cid:2187)(cid:2202) (cid:2198)(cid:2200)(cid:2197)(cid:2188)(cid:2191)(cid:2202)+(cid:2188)(cid:2191)(cid:2206)(cid:2187)(cid:2186) (cid:2187)(cid:2206)(cid:2198)(cid:2187)(cid:2196)(cid:2201)(cid:2187)(cid:2201)(cid:4667) (cid:2177)(cid:2196)(cid:2191)(cid:2202) (cid:2159) (cid:2160)(cid:2197)(cid:2194)(cid:2194)(cid:2183)(cid:2200) (cid:2201)(cid:2183)(cid:2194)(cid:2187)(cid:2201) (cid:2202)(cid:2197) (cid:2183)(cid:2202)(cid:2202)(cid:2183)(cid:2191)(cid:2196) (cid:2183) (cid:2202)(cid:2183)(cid:2200)(cid:2189)(cid:2187)(cid:2202) (cid:2198)(cid:2200)(cid:2197)(cid:2188)(cid:2191)(cid:2202) =(cid:2202)(cid:2197)(cid:2202)(cid:2183)(cid:2194) (cid:2184)(cid:2203)(cid:2186)(cid:2189)(cid:2187)(cid:2202)(cid:2187)(cid:2186) (cid:4666)(cid:2197)(cid:2200) (cid:2183)(cid:2185)(cid:2202)(cid:2203)(cid:2183)(cid:2194)(cid:4667)(cid:2201)(cid:2183)(cid:2194)(cid:2187)(cid:2201) (cid:2184)(cid:2200)(cid:2187)(cid:2183)(cid:2193)(cid:2187)(cid:2204)(cid:2187)(cid:2196) (cid:2201)(cid:2183)(cid:2194)(cid:2187)(cid:2201) dollars (cid:2183)(cid:2200)(cid:2189)(cid:2191)(cid:2196) (cid:2197)(cid:2188) (cid:2201)(cid:2183)(cid:2188)(cid:2187)(cid:2202)(cid:2207) (cid:2191)(cid:2196) (cid:2186)(cid:2197)(cid:2194)(cid:2194)(cid:2183)(cid:2200)(cid:2201) Target profit analysis: estimate what sales volume is needed to achieve a specific target profit. Margin of safety: excess of budgeted or actual sales dollars over the break-even volume of sales (cid:2183)(cid:2200)(cid:2189)(cid:2191)(cid:2196) (cid:2197)(cid:2188) (cid:2201)(cid:2183)(cid:2188)(cid:2187)(cid:2202)(cid:2207) (cid:2198)(cid:2187)(cid:2200)(cid:2185)(cid:2187)(cid:2196)(cid:2202)(cid:2183)(cid:2189)(cid:2187) =(cid:4666)(cid:2195)(cid:2183)(cid:2200)(cid:2189)(cid:2191)(cid:2196) (cid:2197)(cid:2188) (cid:2201)(cid:2183)(cid:2188)(cid:2187)(cid:2202)(cid:2207) (cid:2191)(cid:2196) (cid:2186)(cid:2197)(cid:2194)(cid:2194)(cid:2183)(cid:2200)(cid:2201)(cid:4667) (cid:2176)(cid:2197)(cid:2202)(cid:2183)(cid:2194)(cid:2184)(cid:2203)(cid:2186)(cid:2189)(cid:2187)(cid:2202)(cid:2187)(cid:2186) (cid:2201)(cid:2183)(cid:2194)(cid:2187)(cid:2201) (cid:2191)(cid:2196) (cid:2186)(cid:2197)(cid:2194)(cid:2194)(cid:2183)(cid:2200)(cid:2201) (cid:2160)(cid:2187)(cid:2189)(cid:2200)(cid:2187)(cid:2187) (cid:2197)(cid:2188) (cid:2197)(cid:2198)(cid:2187)(cid:2200)(cid:2183)(cid:2202)(cid:2191)(cid:2196)(cid:2189) (cid:2194)(cid:2187)(cid:2204)(cid:2187)(cid:2200)(cid:2183)(cid:2189)(cid:2187)=(cid:2185)(cid:2197)(cid:2196)(cid:2202)(cid:2200)(cid:2191)(cid:2184)(cid:2203)(cid:2202)(cid:2191)(cid:2197)(cid:2196) (cid:2195)(cid:2183)(cid:2200)(cid:2189)(cid:2191)(cid:2196) (cid:2196)(cid:2187)(cid:2202) (cid:2197)(cid:2198)(cid:2187)(cid:2200)(cid:2183)(cid:2202)(cid:2191)(cid:2196)(cid:2189) (cid:2191)(cid:2196)(cid:2185)(cid:2197)(cid:2195)(cid:2187)

Related Questions

________ is the excess of sales over the cost of goods sold.

A) Gross margin

B) Contribution-margin ratio

C) Variable-cost ratio

D) Contribution margin

Answer:

Which statement is FALSE?

A) Each different sales-mix of products has a differentbreak-even point.

B) Changes in the sales-mix of products sold affects a company'snet operating profit.

C) Changes in the sales-mix of products sold affects a company'scontribution margin.

D) If the sales-mix of products sold changes, the break-evenpoint does not change.

Answer:

With mixed costs, the ________ element is unchanged over therelevant range and the ________ element varies proportionately withcost-driver activity.

A) variable cost; fixed cost

B) fixed cost; variable cost

C) fixed cost; step cost

D) step cost; variable cost

Answer:

The sales price is $30 per unit, the contribution margin is $8per unit and total fixed costs are $32,000. What is the break-evenpoint in units?

A) 857

B) 1,200

C) 2,000

D) 4,000

Answer:

If the selling price per unit increases, what is the effect onthe break-even point? (Assume no other changes.)

A) The break-even point increases.

B) The break-even point decreases.

C) The break-even point remains the same.

D) The break-even point is zero.

plumcod490

The Madison Corporation has two identical divisions: Eastern and Southern. Their sales, production volume, and fixed manufacturing costs have been the same for both divisions for the last five years and that information for each are as follows:

	Year 1	Year 2	Year 3	Year 4 year 5
Units produced	100,000	100,000	100,000	100,000	100,000
Units sold	80,000	90,000	110,000	100,000	115,000
Fixed manufacturing costs	$500,000	$500,000	$500,000	$500,000	500,000

Eastern uses absorption costing and Southern uses variable costingand southern uses variable costing. Both use FIFO inventory methods. Variable manufacturing cost are $10 per unit. Both have identicals selling prices and selling and administrative expenses. There were no Year 1 beginning inventories.

Determine the difference in profits for each division for Years 1 through 5. explain why profits differ betweeen two divisions.

lemonbear257

Basic information
Exhibit 1 Hallstead Jewelers
Income Statements for YearsEnded January 31 (thousands of dollars)
	2003	2004	2006

Sales	$9,000,000	$8,000,000	$11,000,000
Cost of goods sold	4,050,000	3,600,000	4,950,000
Gross margin	$4,950,000	$4,400,000	$6,050,000
Expenses
Selling expense
Salaries	2,021,000	2,081,000	4,085,000
Commissions	450,000	400,000	550,000
Advertising	254,000	250,000	257,000
Administrative expenses	418,000	425,000	535,000
Rent	420,000	420,000	840,000
Depreciation	84,000	84,000	142,000
Miscellaneous expenses	53,000	93,000	122,000
Total expenses	$3,700,000	$3,753,000	$6,531,000
Net income	$1,250,000	$647,000	$(481,000)

Exhibit 2 Hallstead JewelersOperating Statistics

	2003	2004	2006

Sales space (square feet)	10,000	10,000	15,000
Sales per square foot	$900	$800	$733
Sales tickets	5,000	5,000	7,000
Average sales ticket	$1,800	$1,600	$1,571

Assumptions:

Sales price per ticket = $1,572

Variable cost per unit = $786 (cost of goods sold of $707 +Sales commissions of $79)

Complete the table below:

*Alternative #1*	*Per unit*	*Total*	*Per unit*	*Total*
# of sales tickets	7000
Selling price per ticket	$1,572	$11,000,000
Variable cost per ticket	$786	$5,500,000
Contribution margin per ticket	$786	$5,500,000
Total fixed costs	5,981,000
Net income	$(481,000)
Change in net income if accept alternative
Breakeven point in units	7,610

Review of Question #4 requirements. Increase advertisingby $20,000, increase sales revenue (volume) by 2%.

For each question, answer yes or no for each piece ofinformation listed.

Information	For this alternative only, is there a change in this item thataffects calculation of net income? Yes or No	For this alternative only, is there a change in this item thateffects the calculation of the new breakeven point? Yes or No
Selling price per unit
Variable cost per unit
Total fixed costs
Net income
Sales volume

Complete the table below:

*Alternative #3*	*Per unit*	*Total*	*Per unit*	*Total*
# of sales tickets	7000
Selling price per ticket	$1,572	$11,000,000
Variable cost per ticket	$786	$5,500,000
Contribution margin per ticket	$786	$5,500,000
Total fixed costs	5,981,000
Net income	$(481,000)
Change in net income if accept alternative
Breakeven point in units	7,610

Alternatives	Change in Net Income	New Breakeven point in units	Change in Breakeven point in units
#1 Decrease SP, Increase sales volume
#2 Eliminate sales commissions	Increases by $550,000	6,914	Decreases by 696
#3 increase Fixed costs by $20,000 to get increase of 2% salesrevenue (volume)

periwinklemink994

ACTG 2300 Chapter Notes - Chapter 5,12: Earnings Before Interest And Taxes, Sunk Costs, Contribution Margin

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