ACC 202 Ch. 5- BURGESS

margin of safety will increase.

If sales volume increases and all other factors remain constant, then the: margin of safety will increase. contribution margin ratio will increase. break-even point will decrease. net operating income will decrease.

net operating income.

If the degree of operating leverage is 4, then a one percent change in sales dollars (units sold) should result in a four percent change in: variable expense. net operating income. revenue. unit contribution margin.

Margin of Safety Equation

Margin of Safety=Total Sales-Break Even Point

Variable Expense Ratio

variable expenses/sales

Target Profit Analysis: Dollar Sales

(target profit + fixed expenses) / CM ratio

Degree of Operating Leverage

A measure of how sensitive net operating income is to a given percentage change in sales. It is computed by dividing the contribution margin by net operating income.

decrease

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

CM and Variable Expense Ratio

Add up to 100%

Contribution Margin (CM)

Amount remaining from sales revenue after variable expenses have been deducted. Used first to cover fixed expenses. Any remaining CM contributes to net income

d. 44.2% % increase in profit= % increase in sales* Degree of operating leverage= 20%*2.21=44.2

At Coffee Klatch the average selling price of a cup of coffee is $1.49, the average variable expense per cup is $0.36, the average fixed expense per month is $1,300, and an average of 2,100 cups are sold each month. If sales increase by 20%, by how much should net operating income increase? a. 30.0% b. 20.0% c. 22.1% d. 44.2%

$200 Unit Contribution Margin = Selling price per unit of $500 - Variable expenses per unit of $300 = $200.

Atlas Corporation sells 100 bicycles during a month at a price of $500 per unit. The variable expenses amount to $300 per bicycle. How much does profit increase if it sells one more bicycle? $500 $300 $200 $20,200

total revenue = total costs

Break-even point is the level of sales at which ______. total profits = total costs total profits >total costs total revenue = total costs total sales = total projections

60% CM ratio = Unit CM ÷ Unit selling price = ($50 − $20) ÷ $50 = 60%

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's contribution margin ratio? 140% 60% 100% 20%

b. $5,013 Sales Dollars= (Target profit+fixed expenses)/CM Ratio)= (2500+1300)/0.758) CMR= CM/Sales= 1.13/1.49= 0.758 CM= Sales-variable= 1.49-0.36= 1.13

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. Use the formula method to determine the sales dollars that must be generated to attain target profits of $2,500 per month. a. $2,550 b. $5,013 c. $8,458 d. $10,555

b. 0.758 ((1.49-0.36)/1.49)

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the CM Ratio for Coffee Klatch? a. 1.319 b. 0.758 c. 0.242 d. 4.139

b. $1,715 BE Dollar Sales= Fixed/CMR= 1300/0.758= 1715 CMR=CM/Sales= 1.13/1.49= 0.758 CM= Sales- Variable (1.49-0.36)= 1.13

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the break-even sales dollars? a. $1,300 b. $1,715 c. $1,788 d. $3,129

contribution approach

Do not need to prepare an income statement to estimate profits at a particular sales volume. Number of units sold above BE point* CM per unit

BE Analysis: Dollar Sales using CM Ratio

Dollar sales to BE= Fixed expenses/CM Ratio

break-even analysis

Equation and formula methods can be used to determine the unit sales and dollar sales needed to achieve a target profit of zero. Profit= Unit CM*Q- Fixed expenses Unit Sales BE= Fixed/Cm

Target Profit Analysis

Estimate what sales volume is needed to achieve a specific target product.

100 units Unit CM = Selling price of $80 − Variable expense of $30 = $50Unit sales to break-even = Fixed expenses of $5,000 ÷ Unit CM of $50 = 100 units.

Frank Corporation has a single product. Its selling price is $80 and the variable costs are $30. The company's fixed expenses are $5,000. What is the company's break-even point in unit sales? 63 units 167 units 50 units 100 units

CM ratio shows how the Contribution margin will be affected by a change in sales volume.

Net Operating Income will also increase by 40 cents, assuming that fixed costs are not affected by increase in unit sales. · Change in contribution margin= CM Ratio * Change in Sales o Impact on net operating income of a change in the sales volume can be computed by. Multiplying the CM Ratio by the corresponding change in dollar sales.

Fixed costs

Not driven by activity level

Break-Even

Not make profit or loss and cover all the costs. Level of sales at which profit is zero. · Once the break-even point has been reached, net operating income will increase by the amount of the unit contribution margin for each additional unit sold. · If sales are zero, the company's loss would equal its fixed expenses. Each unit that is sold reduces the loss by the amount of the unit contribution margin. Once break-even point has been reached, each additional unit sold increases the company's profit by the amount of the unit contribution margin.

unit contribution margin

Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold. unit contribution margin unit selling price variable expense per unit fixed expense per unit

Contribution Margin Ratio (CM Ratio)

Percentage of sales CM Ratio= CM/ Sales or CM Ratio= CM per unit/ Selling price per unit

CVP Relationships in Equation form

Profit = (Sales - Variable Expenses) - Fixed Expenses

$1 million

Selling price 200 per unit VC= 150 per unit FC= 1,000,000 per year Unit sales= 25,000 per year What is Ralph Corporation's margin of safety in dollars? $4 million $5 million $1 million $2.2 million

20

Selling price 200 per unit VC= 150 per unit FC= 1,000,000 per year Unit sales= 25,000 per year What is Ralph Corporation's margin of safety in percentage? 20% 100% 80% 50%

4,000 units Unit sales to attain the target profit = (Target profit + Fixed Expenses) ÷ Unit CM Unit sales to achieve the target profit = ($120,000 + $40,000) ÷ $40 = 4,000 units.

Target Profit= 120,000 Unit CM= 40 Fixed expenses= 40,000 CMR= 0.40 Selling Price= 100 What are the unit sales required to attain a target profit of $120,000? 400,000 units 400 units 1,600 units 4,000 units

Decrease of $12,000 Contribution margin per unit = ($190,000 − $76,000)/1,000 units = $114 per unit

Taylor Company has current sales of 1,000 units, which generates sales revenue of $190,000, variable costs of $76,000, and fixed expenses of $96,000. The company believes sales will increase by 300 units, if advertising increases by $20,000. What is the change in net operating income after the changes? Increase of $20,000 Decrease of $20,000 Increase of $14,200 Decrease of $12,000

60% Percentage change in net operating income = Degree of operating leverage × Percentage change in sales = 2 × 30% = 60%.

The current sales of Trent, Inc., are $400,000, with a contribution margin of $200,000. The company's degree of operating leverage is 2. If the company anticipates a 30% increase in sales, what is the percentage change in net operating income for Trent, Inc.? 24% 30% 60% 25%

CVP Using Unit CM

Useful to express the simple profit equation in terms of the unit cm Unit CM= Selling price-Variable expenses per unit Unit CM= P-V

$400,000 Dollar sales to attain the target profit = (Target profit + Fixed expenses) ÷ CM ratio Dollar sales to achieve the target profit = ($120,000 + $40,000) ÷ 0.40 = $400,000

What are the sales dollars required to attain a target profit of $120,000? $400,000 $300,000 $10,000 $60,000

Contribution Income Statement

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

Cost Structure

refers to the relative proportion of fixed and variable costs in an organization

Unit CM

selling price per unit - variable expenses per unit

Margin of Safety

the excess of budgeted or actual dollar sales over the break-even dollar sales The amount by which sales can drop before losses are incurred. Higher the margin of safety, the lower the risk of not breaking even and incurring a loss.

$12,000 Net operating income = Contribution margin of $20,000 (or 100 units × Unit contribution margin of $200 per unit) − Fixed expenses of $8,000 = $12,000.

Atlas Corporation sells 100 bicycles during a month. The contribution margin per bicycle is $200. The monthly fixed expenses are $8,000. What is the profit from the sale of 100 bicycles? $12,000 $10,000 $20,000 $8,000

500 units and $8,000 Explanation: CM ratio = Contribution margin ÷ Sales = $7,920 ÷ $17,600 = 0.45 Dollar sales to break even = Fixed expenses ÷ CM ratio = $3,600 ÷ 0.45 = $8,000 Unit sales to break even = $8,000 ÷ $16.00 per unit = 500 units

Bear Publishing sells a nature guide. The following information was reported for a typical month: Sales $ 17,600 $16.00 Variable expenses 9,680 Contribution margin 7,920 Fixed expenses 3,600 Net operating income $ 4,320 What is Bear's current break-even point in unit and dollars? 1,100 units and $17,600 1,100 units and $8,000 500 units and $8,000 8,000 units and $500

40% Variable expense ratio = Variable expense ÷ Sales = $20 ÷ $50 = 40%

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's variable cost ratio? 40% 60% 100% 20%

$16

Carver Corporation produces a product which sells for $40. Variable manufacturing costs are $18 per unit. Fixed manufacturing costs are $5 per unit based on the current level of activity, and fixed selling and administrative costs are $4 per unit. A selling commission of 15% of the selling price is paid on each unit sold. The contribution margin per unit is: $7 $16 $22 $17

a. 3,363 cups Unit Sales= ((Target Profit+fixed)/Unit CM)= 2500+1300/1.13 Unit CM= Sales-Variable= 1.49-0.36=1.13

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. Use the formula method to determine how many cups of coffee would have to be sold to attain target profits of $2,500 per month. a. 3,363 cups b. 2,212 cups c. 1,150 cups d. 4,200 cups

d. 1,150 cups BE Per Unit= Fixed Expenses/ CM Per unit= (1300/1.13) CM Per Unit= 1.49-0.36= 1.13

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the break-even sales in units? a. 872 cups b. 3,611 cups c. 1,200 cups d. 1,150 cups

b. 950 cups Margin of safety= total sales- BE Sales= 2100 cups-1150 cups

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the margin of safety expressed in cups? a. 3,250 cups b. 950 cups c. 1,150 cups d. 2,100 cups

a. 2.21 Operating leverage= CM/Net income= 2373/1073= 2.21 CM= Sales-variable= 3129-756= 2373 Net operating income= sales-expenses= 3129-756-1300= 1073

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the operating leverage? a. 2.21 b. 0.45 c. 0.34 d. 2.92

Degree of Operating Leverage Equation

Contribution Margin / Net Operating Income

sales - variable cost

Contribution margin equals ________. sales - fixed cost fixed cost -variable cost sales -variable cost -fixed cost sales - variable cost

increase of $27,500 Contribution Income Statement6,000 units 6,500 unitsSales (at $100 per unit) $ 600,000 $ 650,000Variable expenses (at $20 and $29 per unit) 120,000 188,500Contribution margin 480,000 461,500Fixed expenses (decreases by $46,000) 384,000 338,000Net operating income $ 96,000 $ 123,500 Net operating income increases by $27,500.

Data concerning Bazin Corporation's single product appear below: Per Unit Percent of Sales Selling price $ 100 100% Variable expenses 20 20% Contribution margin $ 80 80% Fixed expenses are $384,000 per month. The company is currently selling 6,000 units per month. The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $9 per unit. In exchange, the sales staff would accept a decrease in their salaries of $46,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 500 units. What should be the overall effect on the company's monthly net operating income of this change? increase of $27,500 increase of $507,500 increase of $41,500 decrease of $64,500

$25,000 CM ratio = (Sales - Variable expenses) ÷ Sales = ($100 - $60) ÷ $100 = $40 ÷ $100 = 40% or 0.40Dollar sales to break-even = Fixed expenses ÷ CM Ratio = $10,000 ÷ 0.40 = $25,000

Future Corporation has a single product; the product selling price is $100 and variable costs are $60. The company's fixed expenses are $10,000. What is the company's break-even point in sales dollars? $25,000 $2,500 $250 $16,667

b) not change

If a company increases its selling price by $2 per unit due to an increase in its variable labor cost of $2 per unit, the break-even point in units will: a) change but direction cannot be determined. b) not change c)decrease. d)increase.

Margin of Safety in Units

Margin of safety can be expressed in terms of the number of units sold.

Margin of Safety in Units Equation

Margin of safety/per unit price

Dollar sales to break even = Fixed expenses ÷ CM ratio = $84,000 ÷ 0.30 = $280,000 Unit sales to break even = $280,000 ÷ $20 per person = 14,000 persons Dollar sales to attain a target profit = (Target profit + Fixed expenses) ÷ CM ratio = ($42,000 + $84,000) ÷ 0.30 = $420,000 Unit sales to attain a target profit = $420,000 ÷ $20 per person = 21,000 persons

Mio Canoe Livery rents canoes and transports canoes and customers to and from their canoe trip on a local river. The trip is priced at $20 per person and has a CM ratio of 30%. Mio's fixed expenses are $84,000. Last year, sales were $400,000 and profit was $36,000. How many units (canoe rentals) need to be sold to break-even, and how many need to be sold to earn a profit of $42,000? 14,000 and 21,000 6,000 and 8,143 4,200 and 6,300 1,800 and 2,100

Increase in sales volume

Profit= (CM Ratio* Sales)- Fixed Expenses

Break even equation method

Profit= CM Ratio* Sales- Fixed expenses

Target Profit Analysis Equation Method

Profit= Unit CM*Q- Fixed Expenses

Sales Mix

Refers to relative proportions in which a company's products are sold. The idea to achieve the combination, or mix, that will yield the greatest profits. Profits will depend to some extent on company's sales mix. Profits will be greater if high-margin rather than low-margin items make up a relatively large proportion of total sales.

$55,000 CM ratio = Total CM ÷ Total sales = $50,000 ÷ $100,000 = 50% Profit = (CM ratio × Sales) − Fixed Expenses = (50% × $150,000) − $20,000= $55,000

Sales= 100,000 VC= 50,000 CM= 50,000 FC= 20,000 Net income= 30,000 If sales increase by $50,000, what will be the net operating income for the company? $25,000 $55,000 $15,000 $50,000

$21,500 New contribution margin per unit = $175 − $100 = $75 New contribution margin = $75 × 1,300 units = $97,500 New fixed cost = $96,000 − 20,000 = $76,000 New net operating income = $97,500 − 76,000 = $21,500

Taylor Company has current sales of 1,000 units, at a selling price of $190 per unit, variable costs per unit of $76, and fixed expenses of $96,000. The company believes sales will increase by 300 units, if the company introduces sales commissions as an incentive for the sales staff. The change will decrease the selling price to $175 per unit, increase variable cost per unit to $100, and decrease fixed expenses by $20,000. What is the net operating income after the changes? $21,500 $30,000 $24,500 $22,000

Contribution Margin

The amount remaining from sales revenue after variable expenses have been deducted. Thus, it is the amount available to cover fixed expenses and then to provide profits for the period. Notice the sequence here- contribution margin is used first to cover the fixed expenses, and then whatever remains goes toward profits. · If CM is not sufficient to cover the fixed expenses, then loss for the period.

$150 The formula for BE in units = Total Fixed Expense / CM per unit, therefore, 1000 = $150,000 / N , where N is the CM per unit Solve for N, N= $150 which is the amount of the CM per unit. So the next unit sold after breakeven would add $150 to the profit

The following information pertains to Nova Co.'s cost-volume-profit relationships: Breakeven point in units sold 1,000Variable expenses per unit $ 500Total fixed expenses $ 150,000 How much will be contributed to net operating income by the 1,001st unit sold? $650 $0 $150 $500

operating leverage

The measure of how sensitive net operating income is to a given percentage change in volume sales is called _______. sensitivity leverage operating leverage risk leverage

Profit = Unit CM x Q - FC

The profit graph is based on the following linear equation: Profit = Unit CM x Q - FC Sales = Unit CM - Unit VC Profit = Unit CM x Q + FC Profit = Selling Price x Q - Unit CM x Q

(Fixed expenses + Target net profit)/Contribution margin ratio

To obtain the dollar sales volume necessary to attain a given target profit, which of the following formulas should be used? Fixed expenses/Contribution margin per unit (Fixed expenses + Target net profit)/Contribution margin ratio Target net profit/Contribution margin ratio (Fixed expenses + Target net profit)/Total contribution margin

$300 Required profit per unit = Target profit of $4,000 ÷ 40 units = $100Selling price per unit = Required profit per unit of $100 + Variable cost per unit of $200 = $300

Walton Corporation is currently selling 104 units of its product. The company is deciding the price that it should charge for a bulk order of 40 units. The variable cost per unit is $200. This order will not involve any additional fixed costs and the company's current sales will not be affected. The company targets a profit of $4,000 on the bulk order. What selling price per unit should the company quote for the bulk order?

34,286 units Profit = (P - V) × Q - Fixed expenses $20,000 = ($9.50 per unit - $6.00 per unit) × Q - $100,000 ($9.50 per unit - $6.00 per unit) × Q = $120,000 $3.50 per unit × Q = $120,000 Q = $120,000 ÷ $3.50 per unit Q = 34,286 units

Warbler Gift's reported the following information for the sales of their single product: Total Per UnitSales $ 300,000 $10 per unit Variable expenses 180,000 $6 per unit Contribution margin 120,000 $4 per unit Fixed expenses 100,000 Net operating income $20,000 Warbler's salesmen have proposed to decrease the selling price by 50 cents per unit. How many units will need to be sold for Warbler to earn at least the same net operating income? 34,286 units 5,715 units 28,572 units 36,000 units

Unit volume

What is represented on the X axis of a cost-volume-profit (CVP) graph? Sales revenue Fixed cost Unit volume Variable cost

Fixed expenses

What is usually plotted as a horizontal line on the CVP graph? Fixed expenses Variable costs Sales revenues Break-even volume

3 Degree of operating leverage = Contribution margin ÷ Net operating incomeDegree of operating leverage = $300,000 ÷ $100,000 = 3.00

Winter Corporation's current sales are $500,000. The contribution margin is $300,000 and the net operating income is $100,000. What is the company's degree of operating leverage? 3 0.6 2 1.67

Break-even point, loss area, and profit area

With regards to interpretation, what are the important areas that appear on a CVP graph? Excess of variable costs over fixed costs Break-even point, loss area, and profit area Contribution margin Year-to-year sales volumes and dollars

Target Profit Analysis Formula Method

unit sales to attain the target profit = (target profit + fixed expenses) / unit CM