ACC 202 Chapter 5
Break-even in sales: Equation Method
Dollar Sales to break even = Fixed Expenses / CM Ratio
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. 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
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%
The Formula Method
Unit sales to attain the target profit = (Target profit + Fixed expenses)/ CM per unit
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.