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Chapter 3 Notes

# Chapter 3 Notes - Chapter Three Cost Volume Profit Analysis...

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Chapter Three Cost – Volume – Profit Analysis

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Cost-Volume-Profit Relationship There are 3 methods to analyze: (1.) Contribution Margin per Unit (2.) Contribution Ratio (3.) Equation Method NOTE: Each method yields the same results.
Cost-Plus Pricing Strategy I t sets prices at cost plus a mark-up For example: Product cost \$20 to make Mgmt decides to mark-up 30% Selling Price = \$20 + (\$20 * 30%) = \$26

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Break-Even Point Point where Total Revenue = Total Costs Break-even Volume in Units = Fixed Costs / Contribution Margin per Unit Once fixed costs have been covered, net income will increase per unit contribution margin for each additional unit sold
Determining the Break-even Point Bright Day produces one product called Delatine. The  company uses a cost-plus-pricing strategy; it sets prices  at cost plus a markup of 50% of cost. Delatine cost \$24  per bottle to manufacture, so a bottle sells for \$36 (\$24 +  [50%  × \$24]). The contribution margin per bottle is: Sales revenue per bottle 36 \$ Variable cost per bottle 24 Contribution margin per bottle 12 \$ The company’s first concern is if can sell enough bottles  The company’s first concern is if can sell enough bottles  of Delatine to cover it fixed costs and make a profit! of Delatine to cover it fixed costs and make a profit!

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Determining the Break-even Point The break-even point is the point where  total revenue  total revenue  equals total costs equals total costs  (both variable and fixed). For Bright  Day, the cost of advertising is estimated to be \$60,000.  Advertising costs are the fixed costs of the company. We  use the following formula to determine the break-even  point in  units . Break-even Break-even volume in units volume in units = = Fixed costs Fixed costs Contribution margin per unit Contribution margin per unit = \$60,000 \$12 5,000 units 5,000 units
Determining the Break-even Point For Delatine, the break-even point in sales dollars is  \$180,000 (5,000 bottles  × \$36 selling price).

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Determining the Break-even Point Once all fixed costs have been covered (5,000 bottles  sold), net income will increase by  \$12 per unit contribution  \$12 per unit contribution  margin. margin. What will be the increase in net income if units sold  What will be the increase in net income if units sold  increase from 5,000 units to \$5,600 units? increase from 5,000 units to \$5,600 units? \$12 \$12 4,998 4,999 5,000 5,001 5,002 Revenue @ \$36 179,928 \$ 179,964 \$ 180,000 \$ 180,036 \$ 180,072 \$ Variable Expenses @ \$24 (119,952) (119,976) (120,000) (120,024) (120,048) Contribution Margin @\$12 59,976 59,988 60,000 60,012 60,024 Fixed Expenses (60,000) (60,000) (60,000) (60,000) (60,000) Net Income (24) \$ (12) \$ - \$ 12 \$ 24 \$ Number of Units Sold
Determining the Break-even Point What will be the increase in net income if units sold  What will be the increase in net income if units sold  increase from 5,000 units to \$5,600 units?

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