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250_Notes_7A - ACCT 250 – ACCOUNTING FOR DECISION MAKING...

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ACCT 250 – ACCOUNTING FOR DECISION MAKING NOTES – CHAPTER 7A SPRING 2008 SUMMARY Here we take the output from Chapter 6, a cost function, and use it to estimate profitability of the firm, or changes in profits, given a set of conditions or assumptions. NOTES 1) Three key concepts • HFI has identified the following cost function for a new line of TV tables that they are considering introducing to the marketplace: Y = 60,000 + 35X a) Contribution income statement – an income statement where expenses are grouped as fixed and variable as opposed to product and period (GAAP) • Assume HFI produces and sells 2,400 units of the new product at $75 each b) Contribution margin c) Contribution margin ratio 2) Breakeven analysis • Basic CVP formula Sales = Fixed cost + Total variable cost + Operating Profit pQ = F + vQ + N Where: p = price per unit Q = quantity produced and sold F = fixed cost v = variable cost per unit 4bde407feb57f1d40cb11e3a6b6a219558591acf.doc PAGE 1 OF 3
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Unformatted text preview: ACCT 250 – ACCOUNTING FOR DECISION MAKING NOTES – CHAPTER 7A SPRING 2008 N = operating profit a) Breakeven in unit sales • How many units must HFI produce to breakeven (operating profits = zero) • Equation approach – use basic CVP formula • Contribution margin method – an alternate approach Q = (F + N) / (p - v) b) Breakeven in total sales • How much total sales ($) must HFI achieve to breakeven • Equation approach – use basic CVP formula replacing Q with Y/p pQ = F + vQ + N becomes Y = F + ((v/p)Y) + N • Contribution margin method – an alternate approach Q = (F + N) / (p - v) becomes Y = (F + N) / ((p – v) / p) 4bde407feb57f1d40cb11e3a6b6a219558591acf.doc PAGE 2 OF 3 ACCT 250 – ACCOUNTING FOR DECISION MAKING NOTES – CHAPTER 7A SPRING 2008 3) Target profit – use same formulas as above, but substitute desired OI for N 4bde407feb57f1d40cb11e3a6b6a219558591acf.doc PAGE 3 OF 3...
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