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Handout 7.1 ACC 312 Sample Questions & Formulas Unit Sales Price$400 Variable Expenses per Unit$100 Unit Contribution Margin$300 75%: Contribution Margin Ratio (300/400) UNITS$$$$Breakeven: Base FormulaFixed ExpensesFixed ExpensesUnit Contribution MarginContribution Margin RatioBreakeven: With Target Profit (before Taxes)Fixed Expenses + Target ProfitFixed Expenses + Target ProfitUnit Contribution MarginContribution Margin RatioBreakeven: With Target Profit (after tax)Fixed Exp. + (Target Profit/(1-tax rate))Fixed Exp. + (Target Profit/(1-tax rate))Unit Contribution MarginContribution Margin RatioMargin Of Safety (as a %)Current Sales units - Breakeven unitsCurrent Sales $$ - Breakeven $$Current Sales unitsCurrent Sales $$Profit FormulasHandout7.1
Pre-Tax Profit = Revenue - Variable expenses - Fixed ExpensessoPre-Tax Profit = Contribution Margin - Fixed expensesandPre-Tax Profit = (Unit Contribution Margin x Sales Volume) - Fixed ExpensesandPre-Tax Profit =(Contribution Margin Ratio x Revenue) - Fixed ExpensesNote 1:also review (a) break-even profit equation on page 272 and (b) target profit equation on page 276. Note 2:Effect of income taxes is covered in the Appendix to Chapter 7. Not all formulas are listed on this handout. Handout7.1
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Deere John Corp currently sells Tractors for $200 and incurs variable costs of $150 a tractor and total fixed costs of $8,000. Currently, it sells exactly the number of units to break even. At the end of the current year, Deere John Corp learns that for the next year it has an opportunity to automate its production process: this choice means that the following three things will all happen simultaneously: A.) Add additional fixed costs of $12,000; B.) Decrease current variable costs by $110 per unit; and C.) Decrease sales by 20% from its current level 1. What is Deere John’s current Unit Contribution Margin? __________2. What is Deere John’s current Break Even Volume in tractors? _________ What are Deere John’s expected total Fixed and Unit Variable Costs if it makes the automating choice?3. Fixed ___________ 4. Unit Variable________ 5. What is Deere John’s expected Breakeven Revenue if it makes the automating choice? $_________________6. What is Deere John’s expected profit if it makes the automating choice? $___________ 7.Assume University T-Shirt Shop has a selling price of $25 and unit variable cost of $10 for its long-sleeve cotton shirts. Fixed costs total $1,000. University believes increasing its price to $27 will not cause a reduction in the number of shirts it will sell. If University's sales volume for the month is 300 shirts, how will net profit be affected by the change in selling price?$_______________Handout7.1