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