Ch 5 Mang Acct

Company A's product sells for $90 and has a variable cost of $35 per unit. Fixed costs total $550,000. If Company A sells 16,000 units, the contribution margin per unit is...

$90-$35 = $55

Company A has fixed costs of $564,000 and a contribution margin of 62%. Sales dollars to break-even rounded to the nearest whole dollar equals

$909,677 $564,000/0.62

unit sales to attain the target profit

(Target Profit + Fixed Expenses) / Unit CM

CVP graph

(break-even chart) unit volume: x-axis dollars: y-axis anticipated profit or loss: vertical distance between the total revenue line (sales) and the total expense line (variable expense plus fixed expense)

Cost-Volume-Profit Analysis

-what products, services to offer -what prices to charge -marketing strategy to use -cost structure to maintain

greatest danger lies in relying one simple CVP analysis

-when manager is contemplating a large change in sales volume that lies outside the relevant range

CM ratio relating to variable expense

1 - variable expense ratio

CVP 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. The variable element is constant per unit. The fixed element is constant in total over the entire relevant range. 3. In multi product companies, the mix of products sold remains constant.

change in contribution margin

CM ratio x change in sales the impact on net operating income of an given dollar change in total sales can be computed by applying the CM ratio in the dollar change

elation between change in profit and the CM ratio

CM ratio x change in sales - change in fixed expense

Contribution margin

amount remaining from sales revenue after variable expenses have been deducted. -amount available to cover fixed expenses and then to provide profits for the period -used *first* to cover fixed expenses then whatever is left goes toward profits -if margin is not sufficient to cover fixed expense, it is a loss for the period

An income statement constructed under the ___ approach allows users to easily judge the impact on profits of changes in selling price, cost of volume

contribution margin

to calculate the effect on profits of a planned increase in sales, you need the increase in units sold, any change in fixed costs and the

contribution margin per unit

Which tool can be used to calculate the change in profit resulting from a change in sales price, sales volume, variable costs or fixed costs?

cvp analysis

break-even point

level of sales at which profit is zero -once it has been reached, net income will increase by the amount of the unit contribution margin for each additional unit sold

margin of safety percentage

margin of safety in dollars / total budgeted (or actual) sales in dollars

operating leverage

measure of how sensitive net operating income is to a given percentage change in dollar sales if leverage is high, small % increase in sales can produce a much larger % income in net operating income

profit equation

net operating income contribution margin-total fixed cost (sales-variable expenses)-fixed expenses

relation between profit and the CM ratio

profit = CM ratio x Sales - fixed expense

unit contribution margin

profit = UnitCM x Q -fixed expense

A company's break-even point is 17,000 units. If the contribution margin is $22 per unit and 26,000 units are sold, net operating profit will be:

$198,000 Net operating income = (26,000 - 17,000) x $22 = $198,000

JVL Enterprises has set a target profit of $126,000. The company sells a single product for $50 per unit. Variable costs are $15 per unit and fixed costs total $98,000. How many units does JVL have to sell to BREAK-EVEN?

$2,800 98,000/(50-15) = 2,800

Daisy's Dolls sold 30,000 dolls this year for $40 each. Each doll's variable cost was $19. If Daisy incurred $250,000 of fixed expenses, net operating income for the year is...

$380,000 [net operating income= 30,000 x (40-19) - 25,000]

Sales total $500,000, and fixed costs total $300,000. The contribution margin ratio is 68%. Profit = ______.

$40,000 (500,000 x 68% - 300,000 = 40,000

Shonda's Shoes sell for $95 per pair. If Shonda must sell 284 pairs of shoes to break-even, and a total of 450 pairs to achieve her target profit, sales dollars needed to earn the target profit equals

$42,750 total sales = $95 x 450

Its (CVP) primary purpose is to estimate how profits are affected by the following five factors

-Selling prices. -Sales volume. -Unit variable costs. -Total fixed costs. -Mix of products sold

Run Like the Wind sells ceiling fans. Target profit for the year is $470,000. If each fan's contribution margin is $32 and fixed costs total $222,640, the number of fans required to meet the company's goal is:

21,645 sales volume = ($470,000+$222,640)/$32

Spice sells paprika for $9.00 per bottle. Each bottle incurs $2.43 in variable cost. Spice incurs annual fixed costs of $825,000. The variable expense ratio for paprika is:

27% $2.43 / $9 = 27%

A product has a selling price of $10 per unit, variable expenses of $6 per unit and total fixed costs of $35,000. If 10,000 units are sold, net operating income will be $______.

5000 (10-6)x10000 - 35000 = 5000

A company's selling price is $90 per unit; its variable cost per unit is $28; and its total fixed expenses are $320,000. What sales volume is needed to achieve the target profit of $200,800

8,400 sales volume = ($320,000 + $200,000)/($90-$28)

expected total contribution margin

???

expected total contribution margin with lower selling price

???

expected total contribution margin with sales staff on commissions

???

incremental contribution margin

???

Degree of Operating Leverage

Contribution Margin / Net Operating Income a measure at a given level of sales, of how a % change in sales volume will affect profits

contribution income statement

Emphasizes the behavior of costs and therefore is extremely helpful to managers in judging the impact on profits of changes in selling price, cost or volume.

unit sales to break even equation

Fixed Expenses / Unit CM

Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. Each $1 increase in sales will have which of the following effects?

Net operating income will increase by $0.70 Total contribution margin will increase by $0.70

Elle's Elephant Shop sells giant stuffed elephants for $55 each. Elle incurs $10 of variable costs for each elephant and a total of $700 fixed costs. Assuming Elle will sell 35 elephants this month, which of the following statements are true?

Profits = $875 [35 X ($55 - $10) - $700]Total Sales = $1,925[35 X $55]Total Variable Costs = $350[35 X $10]

A company is currently selling 10,000 units of product. The selling price is $40 per unit and the contribution margin is $27 per unit. The company thinks spending $50,000 on advertising will increase sales by 750 units per month and allow them to increase the selling price to $45 per unit. If this is correct, which of the following statements is true?

The company should accept the idea because profit will increase by $24,000 (An increase in selling price is $5 will increase the contribution margin $5 (from $27 to $32). The increased contribution margin of $74,000 ((10,750 X $32)-(10,000 X $27)) - the additional fixed costs of $50,000 = a profit increase of $24,000

CM ratio

Total Contribution Margin / Total Sales how contribution margin will be affected by a change in total sales

Variable expense ratio

Total variable expenses/ Total sales

Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying him $20 per unit instead. Sales are currently 200 units per month. Goldin believes that compensation change will increase unit sales by 50%. The current contribution margin is $80 per unit. Should Goldin implement the change?

Yes, income will increase by $7,000. Current income:($80 x 200) - $5,000 = $11,000 With the change: ($80 - $20) x 200 x 150% = $18,000, an increase of $7,000 per month.

When a company sells one unit above the number required to break-even, the company's net operating income will

change from zero to a net operating profit

Assuming the sales price remains constant, an increase in the variable cost per unit will _______ the contribution margin per unit.

decrease

Company considering changing compensation for sales staff from salaries to commission. FC decrease from 50,000 to 40,000 per month and VC increase by $20/unit. Current CM is $90/unit. President confident total sales increase from 1,000/month to 1,400/month. Calculate change in net operating income if change is made

decrease by $16,000 If the change is implemented, total contribution margin would increase by $44,000 ((74,000 boxes x $6)-(50,000 boxes x $8)). Additional contribution margin of $44,000-$60,000 in new fixed costs = a net operating income decrease of $16,000

The break-even point is reached when the contribution margin is:

equal fixed expense

A company's current sales are $300,000 and fixed expenses total $225,000. The Contribution Margin Ratio is 30%. The company has decided to expand production which is expected to increase sales by $70,000 and fixed expenses by $15,000. If these results occur, net operating income will: ?

increase by $6,000 change in net operating income = $70,000 x 30% - $15,000 + $6,000 increase

sales mix

relative proportions in which a company's products are sold -achieve the mix that will yield the greatest profits -profit will be greater if high-margin rather than low-margin items make up a relatively large proportion of total sales -a shift in the sales mix from high-margin items to low-margin items can cause total profits to decrease even though total sales may increase

CM ratio w/ sales

sales - Variable expense / sales

single product sale equation

sales = selling price per unit X quantity sold = P x Q variable expense = variable expenses per unit X quantity sold = V x Q *profit&* = (PxQ - VxQ) - fixed expenses

which of the following represents the equation that should be used in setting a target selling price for a special order bulk sale that does not affect a company's normal sales?

selling price per unit= variable cost per unit+ desired profit per unit a special order bulk sale will not increase fixed costs and therefore they should not be considered in setting price. Variable costs are what will be incurred to complete the order

contribution margin

sold units x (selling price - variable cost per unit)

margin of safety in dollars

total budgeted (or actual) sales - break-even sales the excess of budgeted or actual dollar sales over the break-even dollar sales -sales can drop before losses are incurred -higher the safety, lower the risk of not breaking even and incurring a loss

Which of the following is needed to calculate profit?

unit contribution margin, unit sales, and total fixed costs