ACIS
ACIS 2116 Chapter 7 Part 1 with blanks

# ACIS 2116 Chapter 7 Part 1 with blanks - ACIS 2116 Chapter...

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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.
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.
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 .
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. 30X 200= \$6000
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 .
11 CVP Graph Units Dollars Fixed Expenses \$80,000

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12 CVP Graph Dollars Units Fixed Expenses Variable Expenses
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
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 =
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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18 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?
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