ACCT 201B Chapter 6

unit sales to attain break even

(Target Profit + Fixed Expenses) / Unit CM

dollar sales to attain target profit

(target profit + fixed expenses) / CM ratio

Relationship between Profit and CM Ratio

- Profit = (CM ratio x Sales) - Fixed Expenses - Change in Profit = (CM Ratio x Change in Sales) - Change in fixed expenses

How are profits motivated in Cost-Volume Profit

1. Selling Price 2. Sales volume 3. Unit Variable Cost 4. Total Fixed Cost 5. Mix of product sold

The following assumptions underlie each CVP analysis. - Selling price is ____ - Cost = - In multi-product companies, mix of products remain ____

1. selling price is *constant* (product/service does change w/ volume 2. Cost = linear and divided into variable/fixed components - Variable cost: Constant per unit - Fixed Cost: constant in total = Within relevant range 3. In multi-product companies, mix of products remain constant

Degree of Operating Leverage

A measure, at a given level of sales, of how a percentage change in sales will affect profits. The degree of operating leverage is computed by dividing contribution margin by net operating income. - is *not constant* it is the greatest of sales *near* break-eve point and decreases as sales and profit rise

Percentage change in Net-Operating Income

degree of operating leverage x percentage change in sales

Contribution Income Statement - judging the impact on ____ of changes in ______ , _______ , or _______ . The emphasis is on ________ .

helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. The emphasis is on cost behavior.

Cost -volume -profit

helps managers understand the interrelationships among cost, volume, and profit by focusing their attention on the interactions among the prices of products, volume of activity, per unit variable costs, total fixed costs, and mix of products sold.

Margin of Safety (%)

margin of safety / Actual sales

How to use Break-Even point of calculate Sales Volume

multiply the number of units sold above break-even by the contribution margin per unit.

Margin of Safety

the excess of budgeted or actual dollar sales over the break-even dollar sales can drop before losses occur

Break-Even Point

the level of sales at which profit is zero - when reached, net operating income *increases* by amount of unit contribution *for each* unit sold

The use of contribution margin

used first to cover fixed expenses. Any remaining contribution margin contributes to net operating income.

Variable Expense Ratio

variable expenses/sales

Variable Expense Ratio and Contribution Margin Ratio Relationship

Both related, as both values with equal to 100% together, so if you know the CM ratio, you can determine Variable Expense Ratio Inversely

Change in CM =

CM Ratio X Change in Sales - For each dollar increase in sales, total CM increases by change in sales x CM ratio

Profit Equations

Contribution Income Statement Format: Profit = (sales - Variable Exp) - fixed expenses Profit for company with single product Profit = (P x Q (-) V x Q) - Fixed Expenses Sales = P x Q = Selling price per unit x quantity Variable expenses = V x Q = Variable cost x quantity Profit = Unit CM - Fixed Expenses

Degree of Operating Leverage Formula

Contribution Margin / Net Operating Income

Contribution Margin Ratio

Contribution Margin / Sales

A shift in the sales mix from high-margin items to low-margin items can cause total profit to ________.

Decrease even if total sales increase - True is said inversely, shift from low-margin to high-margin items can cause total profits to increase even though total sales decrease

Sales Mix and Break Even Analysis

Different products have different selling prices, costs, and CM and Break even point depends on which mix varies are sold - If sales mix changes, break-even point also changes

Dollar sales to break even

Fixed Expenses / CM Ratio

unit sales to break even

Fixed Expenses / Unit CM

Contribution Margin

Sales - Variable Costs

Break-Even point on CVP Graph

The break-even point is where the total revenue and total expenses lines intersect,

Profit and Loss Area on CVP Graph

The profit area is above the break-even point and the loss area is below the break-even point.

cost-volume-profit (CVP) Graph

The relationships among revenue, cost, profit, and volume can be expressed graphically - Profit Graph - In a CVP graph, unit volume is usually represented on the horizontal (X) axis and dollars on the vertical (Y) axis. - Expressed on equation = (Unit CM X Q) - Fixed Exp

Sales Mix

The relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales. - idea is to achieve, combine, or mix that will yield highest profits

Operating Leverage

a measure of how sensitive net operating income is to a given percentage change in dollar sales - If O.L. is high = small % increase in unit sales can product larger % increase in Net operating income

Margin of Safety ($)

actual sales - break even sales

Contribution Margin Per unit

contribution margin / units sold