ACC 202 Chapter 5

The Variable Expense Ratio

The variable expense ratio is the ratio of variable expenses to sales. It can be computed by dividing the total variable expenses by the total sales, or in a single product analysis, it can be computed by dividing the variable expenses per unit by the unit selling price.

Break-even in sales: Equation Method

Dollar Sales to break even = Fixed Expenses / CM Ratio

The Formula Method

Unit sales to attain the target profit = (Target profit + Fixed expenses)/ CM per unit

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?

$1,715

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.

$5,013

Profit (CM Ratio) =

(CM ratio x Sales) - Fixed expenses

Profit (CVP) =

(P x Q - V x Q) - Fixed Expenses Q= quantity sold P= selling price per unit V= variable expenses per unit

Contribution Margin (CM)

The amount remaining from sales revenue after variable expenses have been deducted

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?

2.21

Profit (Equation Method) =

Unit CM x Q - Fixed expenses

Break-Even Point

the point at which the costs of producing a product equal the revenue made from selling the product

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?

0.758

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?

1,150 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. 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.

3,363 Cups

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?

44.2%

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

950 Cups

CVP Relationships in Equation Form

Profit = (Sales - Variable expenses) - Fixed expenses

Break-even in Unit Sales: Equation Method

Profits (0) = Unit CM x Q - Fixed expenses

Unit CM =

Selling price per unit (P) - Variable expenses per unit (V)

Contribution Margin Ratio (CM Ratio)

The CM ratio is calculated by dividing the total contribution margin by total sales

The Contribution Approach

a presentation format used for the income statement, where all variable costs are aggregated and deducted from revenue in order to arrive at a contribution margin, after which all fixed costs are deducted from the contribution margin in order to arrive at the net profit or loss