Accounting Exam #2
companywide break-even point formula in dollars example: traceable fixed expense=170,000 common fixed expense=25,000 sales=500,000 CM=270,000
BEP=(traceable fixed costs+common expenses)/CM ratio CM ratio=270,000/500,000 =0.54 170,000+25,000=195,000 195,000/0.54 =361,111
Data concerning Follick Corporation's single product appear below: Selling price per unit $300.00 Variable expense per unit $78.00 Fixed expense per month $164,280
CM ratio = Unit contribution margin ÷ Unit selling price = ($300.00 per unit - $78.00 per unit) ÷ $300.00 per unit = $222.00 per unit ÷ $300.00 per unit = 0.74 Dollar sales to break even = Fixed expenses ÷ CM ratio = $164,280 ÷ 0.74 = $222,000
CM ratio and variable expense ratio can be related to one another
CM ratio= CM/Sales CM ratio= Sales-variable expenses/sales CM ratio=1-variable expense ratio if 120,000/200,000=60% variable expense ratio then, 1-60%= 40% CM ratio
Sales $100,000 Variable expenses 50,000 Contribution margin 50,000 Fixed expenses 20,000 Net Operating income$30,000 If sales increase by $50,000, what will be the net operating income for the company?
CM ratio=50,000/100,000 =50% profit=(50%*150,000)-20,000 =55,000
contribution margin as a % of sales is the contribution margin ratio (CM ratio) and the formula is:
CM ratio=contribution margin/sales example: 80,000/200,000= 40% so, for each $1.00 increase in sales results in a total contribution margin increase of 40 cents
Kuzio Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $150 at 100% of sales Variable expenses 60 40% of sales Contribution margin $90 60% of sales The company is currently selling 7,000 units per month. Fixed expenses are $183,000 per month. The marketing manager believes that a $5,100 increase in the monthly advertising budget would result in a 130 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?
Contribution Income Statement 7,000 units7,130 unitsSales (at $150 per unit)$1,050,000 $1,069,500 Variable expenses (at $60 per unit) 420,000 427,800 Contribution margin 630,000 641,700 Fixed expenses ($5,100 increase) 183,000 188,100 Net operating income$447,000 $453,600 Net operating income would increase by $6,600.
Mossfeet Shoe Corporation is a single product firm. The company is predicting that a price increase next year will not cause unit sales to decrease. What effect would this price increase have on the following items for next year?
Contribution margin ratio will increase and break even point will decrease
units produced>units sold units produced<units sold relationship between absorption and variable incomes and how is inventory affected?
*inventory increases, absorption>variable *inventory decreases, absorption<variable
Advantages and disadvantages of high and low fixed cost structures
-advantage of high fixed cost structure is that income will be higher in good years compared to companies with lower proportions of fixed costs -disadvantage of high fixed cost structure is that income will be lower in bad years compared to companies with lower proportion of fixed costs **companies with low fixed cost structures enjoy greater stability in income across good and bad years
inappropriate methods of allocating costs among segments
-failure to trace costs directly costs specific for a segment shouldn't be allocated to other segments -inappropriate allocation base "someone has to cover the common cost" may make profitable business segment appear unprofitable forces managers to be held accountable for costs they can't control
Variable costing
-not concerned about produced/period costs -period costs immediately expensed on the income statement -looks at how the behaves -only variable production costs are included in product costs
Enabling CVP analysis
-variable cost much easier to use this income statement format for CVP analysis because variable and fixed costs are categorized (segregates how the cost behavior is) *because absorption costing assigns fixed manufacturing overhead costs to units produced, a portion of fixed manufacturing overhead resides in inventory when units remain unsold. the potential result is positive operating income when number of units sold is less than the breakeven point
Lindon Company is the exclusive distributor for an automotive product that sells for $28.00 per unit and has a CM ratio of 30%. The company's fixed expenses are $147,000 per year. The company plans to sell 19,500 units this year. 1. What are the variable expenses per unit? (Round your "per unit" answer to 2 decimal places.) 2. What is the break-even point in unit sales and in dollar sales? 3. What amount of unit sales and dollar sales is required to attain a target profit of $63,000 per year? 4. Assume that by using a more efficient shipper, the company is able to reduce its variable expenses by $2.80 per unit. What is the company's new break-even point in unit sales and in dollar sales? What dollar sales is required to attain a target profit of $63,000?
1. variable expenses per unit selling price 28.000 (1-30%)=70% 28*70%=19.6 2. 147,000/8.4 unit CM =17,500 break even point in units 147,000/30% =490,000 break even point in dollars 3. (63,000+147,000)/8.4 =25,000 unit sales needed to attain target profit (63,000+147,000)/30% =700,000 dollar sales needed to attain target profit 4.(19.6-2.80)=16.8 variable 28-16.8=11.2 unit CM 147,000/11.2=13,125 new break even point in unit sales 11.2/28=40% 147,000/40%=367,500 new break even point in dollar sales (63,000+147,000)/40% =525,000 dollar sales needed to attain target profit
suppose square feet is used as the basis for allocating common fixed expense of 200,000. how much would be allocated to the bar if the bar occupies 1,000 square feet and restaurant occupies 9,000 square feet?
1/10*200,000 =20,000
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
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?
200
margin of safety percentage in dollars example: 250,000 total sales break even sales 200,000
250,000 total sales- 200,000=50,000 margin of safety (50,000/250,000)= 20% of sales
if RBC has the opportunity to sell 150 bikes to a wholesaler without disturbing sales to other customers or fixed expenses, what price would it quote to the wholesaler if it wants to increase monthly profits by $3,000? -variable cost per bike= $300
3,000/150bikes= $20 per bike variable cost per bike= 300 selling price required= $320 per bike **check answer below so, 150 bikes* 320 per bike=48,000 total variable cost=45,000 increase in net operating income= 3,000
margin of safety in units margin of safety=50,000 each bike sells for 500 what is margin of safety in units?
50,000/500= 100 bikes
if RBC increases sales from 400 to 500 bikes, contribution margin will increase by how much? selling price is 500 variable expense price is 300 fixed expense is 80,000 contribution margin is 80,000
500-400=100 100 extra bikes * 500=50,000 CM ratio= 80,000/200,000= 40% 50,000*40%=$20,000 increase in CM
Q1: 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? Q2: 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?
60% 40%
Mcmurtry Corporation sells a product for $340 per unit. The product's current sales are 14,500 units and its break-even sales are 11,745 units. The margin of safety as a percentage of sales is closest to:
Margin of safety in dollars = Total sales - Break-even sales = ($340 per unit × 14,500 units) - ($340 per unit × 11,745 units) = $4,930,000 - $3,993,300 = $936,700 Margin of safety percentage = Margin of safety in dollars ÷ Total sales = $936,700 ÷ $4,930,000 = 0.19 =19%
relationship between profit and CM ratio can be expressed using: example: if RBC increased sales volume to 500 bikes, what would management expect profit or net operating income to be? -CM ratio=200/500=40% -selling price is 500
Profit= (CM ratio*sales)-fixed expenses (40%*250,000)-80,000
absorption costing income statement for: -20,000 units sold for $30 -fixed manufacturing over head 150,000 -fixed selling and administrative expenses 100,000 -# of units produced annually 25,000 -variable cost per unit :for DM, DL, and variable manufacturing overhead $10 :for selling and administrative expenses $3 unit product cost for absorption= $10 for variable and $6 for fixed manufacturing overhead (150,000/25,000) so 16 unit product for variable= $10
Sales 600, 000 COGS 320,000 (20,000*16) Gross Margin=280,000 Less selling and administrative expenses: variable 60,000 (20,000*3) fixed 100,000 Net operating income120,000 fixed manufacturing overhead deferred in inventory is 5,000 units *$6=30,000
Younie Corporation has two divisions: the South Division and the West Division. The corporation's net operating income is $26,900. The South Division's divisional segment margin is $42,800 and the West Division's divisional segment margin is $29,900. What is the amount of the common fixed expense not traceable to the individual divisions?
Total segment margin = $42,800 + $29,900 = $72,700 Total net operating income = Total segment margin - Common fixed expenses $26,900 = $72,700 - Common fixed expenses Common fixed expenses = $72,700 - $26,900 = $45,800
it is often useful to express the simple profit equation in terms of the unit contribution margin (unit CM) as follows:
Unit CM= selling price per unit-variable expenses per unit
Ferkil Corporation manufacturers a single product that has a selling price of $40.00 per unit. Fixed expenses total $75,000 per year, and the company must sell 7,500 units to break even. If the company has a target profit of $16,000, sales in units must be:
Unit sales to break even = Fixed expenses ÷ Unit CM 7,500 units = $75,000 ÷ Unit CM Unit CM = $75,000 ÷ 7,500 units = $10 per unit Unit sales to attain a target profit = (Target profit + Fixed expenses) ÷ Unit CM = ($16,000 + $75,000) ÷ $10 per unit = $91,000 ÷ $10 per unit = 9,100 units
A company produces a single product. Variable production costs are $13.90 per unit and variable selling and administrative expenses are $4.90 per unit. Fixed manufacturing overhead totals $55,000 and fixed selling and administration expenses total $59,000. Assuming a beginning inventory of zero, production of 5,900 units and sales of 4,550 units, the dollar value of the ending inventory under variable costing would be:
Units in ending inventory = Units in beginning inventory + Units produced − Units sold = 0 units + 5,900 units − 4,550 units = 1,350 units Value of ending inventory under variable costing = Units in ending inventory × Variable production cost = 1,350 units × $13.90 per unit = $18,765
In its first year of operations, Bronfren Corporation produced 800,000 sets and sold 780,000 sets of artificial tan lines. What would have happened to net operating income in this first year under the following costing methods if Bronfren had produced 20,000 fewer sets? (Assume that Bronfren has both variable and fixed production costs.)
Variable costing-no effect absorption-decrease
operating leverage and degree of operating leverage formula
a measure of how sensitive net operating income is to a given percentage change in sales -it is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits degree of operating leverage= CM/net operating income
which method will produce the highest values for work in process and finished good inventories?
absorption costing -because it is more cost absorbed
Variable versus absorption costing
absorption costing: fixed manufacturing costs must be assigned to products to properly match revenues and costs (matching principle) variable costing: fixed manufacturing costs are capacity costs and will be incurred even if nothing is produced
segment definition and two keys to building income statements with segments
any part or activity of an organization about which managers seek cost, revenue, or profit data (profit loss analysis of operating units or departments) example: individual store like dollar general -contribution format used because it separates variable and fixed costs and calculates contribution margin -traceable fixed cost separate from common fixed costs to enable calculation of segment margin
traceable fixed costs
arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared exampe: salary of fritos manager at Pepsi is traceable fixed costs (if pepsi got rid of fritos, salary of manager would go away)
absorption costing
direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead are used when determining unit product cost -fixed cost manufacturing overhead/number of units produced annually (150,000/25,000)=6
target profit analysis formula method equation- sales dollars solution example: what is the sales volume that must be generated to earn a target profit of 100,000 fixed expenses 80,000 CM ratio=80,000 CM/200,000 Sales=40%
dollar sales to attain target profit= target profit+fixed expenses/CM ratio (100,000+80,000)/40% -450,000 dollar sales
break-even analysis dollar sales using CM ratio example: average selling price 1.49 average variable expense 0.36 average fixed expense 1,300 average sold 21,00 what is break-even sales dollars?
dollar sales to break even= fixed expenses/CM ratio 1.49-0.36=1.13 1.13/1.49=0.758 CM ratio CM per unit/sales per unit 1,300/0.758= 1,715
**important that traceable fixed costs of one segment may be a common fixed cost of another segment
example: landing fee to land an airplane at an airport is traceable to particular flight but isn't traceable to first class, or business class because it doesn't matter if its just first class people on board, the fee will still be paid
The smaller the contribution margin ratio, the smaller the amount of sales required to cover a given amount of fixed expenses.
false
**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 by 14,200
what is the profit impact if RBC can increase unit sales from 500 to 540 by increasing monthly advertising budget to 10,000? -fixed expense for 500 units is 80,000 -contribution margin per unit is 200
increase in CM (40*200)=8,000 increase in advertising expense=10,000 decrease in net operating income=-2,000
segment margin and formula
is the best gauge of the long run profitability of a segment CM-traceable fixed costs=segment margin
The contribution income statement
it is helpful to managers in judging the impact on profits of changes in selling price, costs, or volume
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:
not change
Estimating profits at a particular sales volume
number of units sold above break-even * contribution margin per unit example: originally sells 400 bikes, but then sells 430 bikes and the contribution margin per unit is $200, then 30 units * $200= $6,000
Degree of operating calculation CM=100,000 net income=20,000 sales=250,000 what is the degree of operating leverage and if sales increase by 10% how much would net operating income increase by?
percent increase in sales 10% degree of operating leverage 5 percent increase in profit= 50%
cost structure
refers to the relative proportion of fixed and variable costs in an organization -managers often have some latitude in determining their organization's cost structure
Does GAAp and IFRS require absorption costing or variable costing?
requires absorption costing for external reports
average selling price 1.49 average variable expense 0.36 average fixed expense 1,300 average of 2,100 sold per month what is operating leverage?
sales=3,129 variable expense=756 contribution margin=2,373 fixed expenses=2,373-1,300 net operating income=1,073 2,373/1,073=2.21
average selling price 1.49 average variable expense 0.36 average fixed expense 1,300 average of 2,100 sold per month if sales increase by 20%, by how much should net operating income increase?
sales=3,129 variable expense=756 contribution margin=2,373 fixed expenses=2,373-1,300 net operating income=1,073 2,373/1,073=2.21 increase in sales 20% times 2.21 (DOL)= 44.20%
CVP graph information
steps: unit volume is on the horizontal axis -dollars is on the vertical axis -fixed expenses is a straight horizontal line -point total expenses for a certain unit (fixed +variable expenses) for a specific unit -plot total sales -even simpler form of CVP graph is called profit graph
margin of safety in dollars
the excess of budgeted (or actual) sales dollars over the break-even volume of sales dollars -amount by which sales can drop before losses are incurred. -the higher the margin of safety, the lower the risk of not breaking and incurring a loss formula: total sales-break even sales
break even point for a segment example for TV CM=150,000 Sales=300,000 traceable fixed expense=90,000
traceable fixed expenses/CM ratio CM ratio=150,000/300,000 =0.50 90,000/0.50 =180,000
For a capital intensive, automated company the break-even point will tend to be higher and the margin of safety will be lower than for a less capital intensive company with the same sales.
true
average selling price 1.49 average variable expense 0.36 average fixed expense 1,300 average of 2,100 sold each month what is the margin of safety expressed in cups?
unit CM=1.13 BEP=1,300/1.13 =1,150 cups MOS in cups= 2,100-1,150 =950 cups
target profit analysis formula method equation how many bikes must be sold to earn a profit of 100,000? -fixed expenses 80,000 CM per unit=200
unit sales to attain the target profit= (target profit+fixed expenses)/CM per unit (100,000+80,000)/200= 900 units
break-even analysis formula method
unit sales to break even = fixed expenses / unit CM
supporting decision making
variable costing correctly identifies the additional variable costs incurred to make one more unit and impacts the total fixed costs on profit (we are going to incur fixed costs) -because absorption costing assigns fixed manufactured overhead costs to units produced, it gives impression that FMOH is variable with respect to number of units produced but it isn't. -result can be inappropriate pricing decisions and product discontinuation decisions. (fixed costs are not variable)
changes in net operating income
variable costing income is only affected by changes in unit sales -not affected by the units produced absorption costing income is affected by changes in unit sales and units of production. net operating income can be increased simply by producing more units even if those units are not sold (because units produced are being absorbed)
variable expense ratio formula:
variable expenses/sales
Sales (41,000 units) 287,000 at unit cost $7.00 Variable expenses 164,000 at unit cost of 4.00 Contribution margin 123,000 at $3 Fixed expenses 48,000 Net operating income$75,000 1. What is the revised net operating income if unit sales increase by 10%? 2. What is the revised net operating income if the selling price decreases by $1.30 per unit and the number of units sold increases by 23%? 3. What is the revised net operating income if the selling price increases by $1.30 per unit, fixed expenses increase by $5,000, and the number of units sold decreases by 3%? 4. What is the revised net operating income if the selling price per unit increases by 10%, variable expenses increase by 40 cents per unit, and the number of units sold decreases by 15%?
1. 41,000 units*1.10%=45,100 45,100*3=135,300 135,300-48,000=87,300 2. 7.00-1.30=5.70 new selling price 5.70-4,00=1.70 unit CM new units sold=41,000*1.23%=50,430 (50,430*1.70)-48,000=37,731 3. 41,000*3%=39,770 39,770*8.30=330,091 sales 39,770*4=159,080 =171,011-53,000 =118,011 4. 41,000*15%=34,850 34,850*(7.7)=268,345 sales 34,850*4.4=153,340 =115,005 CM-48,000 =67,005
Lynch Company manufactures and sells a single product. The following costs were incurred during the company's first year of operations: Variable costs per unit: Manufacturing: Direct materials $10 Direct labor $4 Variable manufacturing overhead $1 Variable selling and administrative $1 Fixed costs per year: Fixed manufacturing overhead $231,000 Fixed selling and administrative $141,000 During the year, the company produced 21,000 units and sold 17,000 units. The selling price of the company's product is $40 per unit. Required: 1. Assume that the company uses absorption costing: a. Compute the unit product cost. b. Prepare an income statement for the year. 2. Assume that the company uses variable costing: a. Compute the unit product cost. b. Prepare an income statement for the year.
1. unit product cost=26 2. Sales 680,000 Cost of goods 442,000 Gross margin 238,000 Selling and administrative expense 158,000 Net operating income$80,000 3. unit product cost=15 4. Sales $680,000 Variable expenses: Variable cost of goods $255,000 Variable selling and administrative expense 17,000 =272,000 Contribution margin 408,000 Fixed expenses: Fixed manufacturing overhead 231,000 Fixed selling and administrative 141,000 =372,000 Net operating income $36,000
average selling price 1.49 average variable expense 0.36 average fixed expense 1,300 use the formula method to determine how many cups would need to be sold to attain target profit of 2,500 per month?
1.49-0.36=1.13 unit CM (2,500+1,300)/1.13 =3,363
average selling price 1.49 average variable expense 0.36 average fixed expense 1,300 average sold 21,00 what is the break-even sales in units?
1.49-0.36=1.13 unit CM 1,300/1.13= 1,150 cups
average selling price 1.49 average variable expense 0.36 average fixed expense 1,300 use the formula method to determine the sales dollars that must be generated to attain target profit of 2,500 per month?
1.49-0.36=1.13 unit CM 1.13/1.49=0.758 (2,500+1,300)/0.758 =5,013
average selling price=1.49 average variable expense=0.36 average fixed expense=1,300 average cups sold per month=2,100 what is the CM ratio for coffee?
1.49-0.36=1.13 unit CM CM ratio=unit CM/selling price 1.13/1.49=0.758
common fixed costs
arise because of the overall operation of the company and would not disappear if any particular segment were eliminated example: salary of CEO for motors is common for various division of motors *do not allocate common costs to segments
suppose square feet is used as the basis for allocating common fixed expense of 200,000. the bar occupies 1,000 square feet and restaurant occupies 9,000 square feet. if it allocates its common fixed expenses to the bar and restaurant, what would be reported profit for each segment? and should the bar be eliminated?
bar=1/10*200,000 =20,000 restaurant=9/10*200,000 =180,000 no because the profit was 44,000 with the bar and if we eliminate it, the profit drops from 44,000 to 30,000. (44,000-14,000) **14,000 is the bar's segment margin
CM ratio "per unit" basis formula:
contribution margin per unit/selling price per unit
