ACCT - Chapter 3 - company aims to develop a product that...

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Alex Fish ACCT – Chapter 3 Determining the Break-Even Point Equation method: Sales - Variable Costs – Fixed Costs = Profit Contribution Margin Per Unit Method o Break Even Point (Units) = (Fixed Costs) / (Contribution Margin Per Unit) o Contribution Margin per Unit = Price – Variable Cost Per Unit Contribution Margin Ratio Method o Break Even Point (Dollars) = Fixed Costs / Contribution Margin Ratio o Contribution Margin Ratio = (Contribution Margin) / (Sales) (total or per unit) Determining the sales volume necessary to reach a desired profit Equation Method is used in the exact same manner, except profit is not equal to 0 Contribution Margin Method Per Unit Method: o Sales Volume (Units) = (Fixed Costs + Desired Profit) / Contribution Margin Per Unit) Assessing the Pricing Strategy Cost-Plus Strategy: Setting a price as the cost plus a percentage markup of the cost Prestige Pricing: Pricing a product higher because it is new, or the brand name is prestigious Target Pricing: Determine the price at which the product will sell in the market; then, the
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Unformatted text preview: company aims to develop a product that is cheap enough to produce and make a profit at this price. This is also called product costing Changes in fixed / variable costs need to be adjusted for in the equation or contribution margin method Using the Cost-Volume-Profit Graph Horizontal axis is sales in units, vertical axis is dollars Draw fixed cost line, its flat at the level of total fixed costs Draw total cost line, it starts where fixed cost intersects vertical axis and increases at the rate of variable cost per units Draw the sales line, it starts at the origin, and increases at the rate of the sales price. Calculate the Margin of Safety It measures the cushion between budgeted sales and the break-even point. It tells a company how much their sales can drop without incurring a loss. Margin of Safety = (Budgeted Sales Break Even Sales) / (Budgeted Sales)...
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This note was uploaded on 05/31/2010 for the course ACCT 1237 taught by Professor Hillman during the Spring '10 term at Drake University .

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ACCT - Chapter 3 - company aims to develop a product that...

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