MGMT 201: Ch 5

When a company produces and sells multiple products:

1) each product most likely has different costs 2) a change in the sales mix will most likely change the break-even point 3) each point most likely has a unique contribution margin

CVP analaysis focuses on how profits are affected by:

1) selling price 2) unit variable cost 3) total fixed cost 4) sales volume 5) mix of products sold

Chitter-Chatter sells phones and has a set a target profit of $975,000. The contribution margin ratio is 65%, and fixed costs are $195,000. Sales dollars needed to earn the target profit total _____.

1,800,000 ($975000 + 195000) / 0.65

Jump-It Corporation has a margin of safety of $272000. The company sold 100,000 units this year. If the company sells each unit of $17, the margin of safety percentage is ______

16% 272000 / (100000 x $17)

A company has an opportunity to make a bulk sale that would not impact regular sales or total fixed expenses. The variable cost per unit is $11 and the company desires a total profit of $4500. The quoted selling price per unit for 500 units should be $_____

20 (4,500 / 500) + 11

JVL Enterprises has set a target profit of $126,000. The company sells a single product for $50 per unit. Variable costs are $15 per unit and fixed costs total $98,000. How many units does JVL have to sell to Break-Even?

2800 $98,000 / ($50 - $15)

A company's current profit is $25,000 for a product that sells for $100 and has a unit contribution margin of $65. Fixed costs are $40,000. If the company increases sales by 50 units, total profit increase by $_________

3250

Paula's Perfumes has a target profit of $4,000 per month. Perfume sells for $15.00 per bottle and variable costs are $13.50 per bottle. Fixed costs are $3,200 per month. The number of bottles that must be sold each month to earn the target profit is ______.

4,800 (4,000 + 3,200) / ($15.00 - $13.50)

Blissful Blankets' target profit is $520,000 Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets that must be sold to achieve the target profit is ________

40,000 (520000 + 320000) / 21

Budgeted sales are $982,000, break-even sales are $932,200, and fixed expenses are $429,000. The company's budgeted margin of safety in dollars is ________

49,800 982000 - 932200

Seth's Speakers had actual sales of $1,630,000 if break-even sales equals $932,000. Seth's margin of safety in dollars is ______

695000 1630000 - 935000

A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. The Break-Even point in unit sales is ____

7625 305000 / 40

Define Operating Leverage

A measure of how sensitive net operating income is to percentage changes in sales aka How a percentage change is sale volume will affect profits

Define Contribution Margin (CM)

Amount remaining from sales revenue after variable expenses have been deducted Note: CM is used FIRST to cover fixed expenses. Any remaining CM goes to Net Operating Income

Define Structuring Sales Commission

Commission employees based on sales or salary + sales commission

Target Profit Analysis Formula Method Sales Dollars

Dollar Sales to Attain the Target Profit = (Target Profit + Fixed Expenses) / CM Ratio

Break-Even Point Dollar Sales (Equation and Formula)

Equation Method: Profit = CM ratio x sales - fixed expenses Formula Method: Dollar Sales to Break Even = fixed expenses / CM ratio

Define Target Profit Analysis

Estimate what sales volume is needed to achieve a target profit

Break-Even Points when Total Contribution Margin =

Fixed Expenses

Dollar Sales to Break-Even

Fixed expenses / CM ratio

Relationship btw Margin of Safety and Risk

Increase in Margin of Safety and Decrease in Risk

Definition Contribution Income Statement

Judging the impact on profits of change sin selling price, cost, or volume aka Cost Behavior

Margin of Safety in Units Formula

Margin of Safety in Dollars / Cost Per Unit

Margin of Safety Percentage Formula

Margin of Safety in Dollars / Total SAles

Relationship between Profit and CM Ratio with Formula

Profit = (CM ratio x Sales) - Fixed Expenses

CVP Relationships with Formula

Profit = (Sales - Variable Expenses) - Fixed Expenses

In Profit Graph, when is break-even?

Profit = 0 when... Profit = Unit CM x Q - Fixed Costs

Target Profit Analysis Equation Method Sales Dollars

Profit = CM ratio x Sales - Fixed Expenses

Break-Even Point Equation Method:

Profit = Unit CM x Q - Fixed Expenses Solve for Q

Target Profit Analysis Equation Method

Profit = Unit CM x Q - Fixed expenses Q (the goal): quantity of units that must be sold to attain the target profit

Formula for Contribution Margin

Sales - Variable Expense

In the CVP Graph, when is break-even?

Sales = Total Expenses

Define Margin of Safety

The amount of sales that your company could potentially lose before getting break-even point aka the difference between profit and breakeven

Target Profit Analysis Formula Method

Units Sales to Attain the Target Profit = (Target Profit + Fixed Expenses ) / CM Per Unit

Break-Even Point Formula Method:

Units sales to break even = Fixed expenses / Unit CM

Formula for Variable Expense Ratio (%)

Variable Expense/Sales

Tasty Tangerine is currently selling 50,000 boxes for $25 per box. Variable cost per box is $17 and fixed costs total $260,000. A plan is being considered to spend $60,000 on advertising and reduce the selling price by $12 per box. Management believes this plan will increase sales volume by 24,000 boxes. If management's predictions are correct, making these changes will cause net income for the year to __________

decrease by $16000 total contribution margin increase by $44000 = (74000 boxes x $6) - (50,000 boxes x $8) Increased CM of $44000 - 60000 in new fixed costs = $16,000 decrease

Bluin Corporation pays its sales person a flat salary of $5750 per month and is considering paying $30 per unit instead. Current unit sales are 250 per month, but Bluin believs the compensation change will increase unit sales by 50%. Bluin's current contribution margin is $100 per unit. If Bluin switches the compensation and sales grow as expected, net operating income will ____ per month.

increase by $7000 Current net operation income = ($100 x 250) - $5750 = $19250 Salary change -> variable cost & net operating income: ($100 - $30) x 250 x $150% = $26250

A company is currently selling 10,000 units per month of product for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 on advertising will increase sales by 750 units per month and enable them to increase the selling price to $45 per unit. If this change is implemented, profits will ____.

increase of $24,000 An increase in selling price of $5 will increase the contribution margin $5. The increased contribution margin of $74,000 ((10,750 x $32) - (10,000 x $27)) - the additional fixed costs of $50,000 = a profit increase of $24,000

A company sells 500 sleds per month for $80. Variable costs are $41 per unit and fixed expenses are $3500 per month. The company thinks that using a new material would increase sales by 70 units per month. If the new material increases variable costs by $4 per unit, the impact on contribution margin would be a _______

$450 increase The contribution margin is $39 per unit (80 - 41). $19500 ( 500 units x $39) total. The contribution margin would be $35 per unit ($39 - $4 new cost) $19950 (570 units x $35) 19950 - 19500

Formulas for Contribution Margin Ratio (CM Ratio)

1) Contribution Margin / Sales 2) 1 - Variable Expense Ratio

What is break-even point affected by?

1) Costs per unit 2) Selling price per unit 3) Sales mix

Two ways to find Break Even

1) Prepare Income Statement or 2) # of units sold above break-even x contribution margin per unit

Cost-Volume-Profit Analysis Assumptions

1) Selling price is constant 2) Costs are linear (divided into variable and fixed) 3) In multiproduct companies, the mix of products sold remains constant

Company A has fixed costs of $564,000 and has a set target profit of $800,000. If company A has a contribution margin ratio of 62%, sales dollars needed to reach the target profit equals _______

2,200,000 (564000 + 800000) / 0.62

ABC Inc. sells a product for $10 per unit. Variable costs are $4 per unit and total fixed costs equal $40,000. If sales increase from 10,000 units to 14,000 what will be the increase in overall profit?

24000 10 - 4 = 6 CM per unit 6 x 14000 = $84000 $84000 - $40000 = $44000 $60 CM x $10,000 - $40000 = 20000 44000 - 20000 = 24000

Degree of Operating Leverage Formula

Contribution Margin / Net Operating Income

Define Sales Mix

The relative proportion in which a company's product are sold

Margin of Safety in Dollars Formula

Total Sales - Break Even Sales

Break-Even Sales Dollars

Unit Selling Price x # of units required to break even

Sweet Dreams sells pillow for $25 each. Variable costs are $15 per pillow. The company is considering improving the quality of materials which will increase variable costs to $19. The company expects the improved materials will increase sales from 1,200 to 1,500 pillow per month. The impact of this change on total contribution margin would be __(increase/decrease)__ of $_______.

decrease; 3000

Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying $20 per unit instead. Sales are currently 200 units per month. Goldin believes the compensation change will increase unit sales by 25%. The current contribution margin is $80 per unit. If the change is implemented, net operating income will _______

increase by $4000 Current income: (80 x 200) - 5000 = 11000 Change in salary -> variable cost: (80 - 20) x 200 x 125% = 15000 15000 - 11000

A company's current sales are $300,000 and fixed expenses total $85,000. The contribution margin ratio is 30%. The company has decided to expand production which is expected to increase sales by $70,000 and fixed expenses by $15,000. If these results occur, net operating income will ____

increase by $6,000 ($70,000 x 30%) - $15,000