ACIS 2116 Chapter 7 PowerPoints Spring 2009-1

# ACIS 2116 Chapter 7 PowerPoints Spring 2009-1 - ACIS 2116...

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1 ACIS 2116 Chapter Seven 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. 30 X 200 = \$6,000
9 CVP Relationships in Graphic Form Use the following information to prepare a CVP graph. Income 300 units 400 units 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 Total 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? a. 1.319 b. 0.758 c. 0.242 d. 4.139
19 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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## This note was uploaded on 06/21/2010 for the course ACIS 2116 taught by Professor Cmeasterwood during the Fall '08 term at Virginia Tech.

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ACIS 2116 Chapter 7 PowerPoints Spring 2009-1 - ACIS 2116...

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