ACIS 2116 Chapter 7 Part 1

ACIS 2116 Chapter 7 Part 1 - ACIS 2116 Chapter Seven Part 1

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1 ACIS 2116 Chapter Seven – Part 1 Cost-Volume-Profit Analysis and Variable Costing
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2 Basics of Cost-Volume-Profit Analysis Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted.
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3 Basics of Cost-Volume-Profit Analysis CM is used first to cover fixed expenses. Any remaining CM contributes to net operating income.
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4 The Contribution Approach If Racing sells an additional bicycle, $200 additional CM will be generated to cover fixed expenses and profit
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5 The Contribution Approach Each month Racing must generate at least $80,000 in total CM to break even.
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6 The Contribution Approach If Racing sells 400 units 400 units in a month, it will be operating at the break-even point .
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7 The Contribution Approach If Racing sells one more bike ( 401 bikes 401 bikes ), net operating income will increase by $200 .
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8 The Contribution Approach How can we estimate profits at a particular sales volume without preparing an income statement? If Racing sells 430 bikes, its net income will be? By multiplying the number of units sold above break-even by the contribution margin per unit. 30 x 200= $6000
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9 CVP Relationships in Graphic Form Use the following information to prepare a CVP graph. Income 300 units Income 400 units Income 500 units Sales 150,000 $ 200,000 $ 250,000 $ Less: variable expenses 90,000 120,000 150,000 Contribution margin 60,000 $ 80,000 $ 100,000 $ Less: fixed expenses 80,000 80,000 80,000 Net operating income (20,000) $ - $ 20,000 $
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10 CVP Graph Units Dollars Unit volume is usually represented on the horizontal (X) axis and dollars on the vertical (Y) axis .
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11 CVP Graph Units Dollars Fixed Expenses $80,000
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12 CVP Graph Dollars Units Fixed Expenses Total Expenses
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13 CVP Graph Fixed Expenses Dollars Total Expenses Total sales Units
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14 CVP Graph Dollars Units Break-even point (400 units or $200,000 in sales) Profit Area Loss Area
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15 Contribution Margin Ratio The contribution margin ratio is: For Racing Bicycle Company the ratio is: Total CM Total sales CM Ratio = Each $1.00 increase in sales results in a total contribution margin increase of 40¢. = 40% $80,000 $200,000
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16 Contribution Margin Ratio Or, in terms of units , the contribution margin ratio is: For Racing Bicycle Company the ratio is: $200 $500 = 40% Unit CM Unit selling price CM Ratio =
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17 400 Bikes 500 Bikes Sales 200,000 $ 250,000 $ Less: variable expenses 120,000 150,000 Contribution margin 80,000 100,000 Less: fixed expenses 80,000 80,000 Net operating income - $ 20,000 $ Contribution Margin Ratio A $50,000 increase in sales revenue results in a $20,000 increase in CM. ($50,000 × 40%= $20,000)
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Test Your Knowledge Assume the Hokie Coffee Stand sells coffee on campus. 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. 2,100 cups are sold each month on average. What is the CM Ratio for Hokie Coffee? a. 1.319
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ACIS 2116 Chapter 7 Part 1 - ACIS 2116 Chapter Seven Part 1

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