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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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