Review Notes Ch 19

Review Notes Ch 19 - CHAPTER 19 Cost-Volume Profit...

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Unformatted text preview: CHAPTER 19 Cost-Volume Profit Analysis: Additional Issues STUDY OBJECTIVES 1. DESCRIBE THE ESSENTIAL FEATURES OF A COST- VOLUME-PROFIT INCOME STATEMENT. 2. APPLY BASIC CVP CONCEPTS. 3. EXPLAIN THE TERM SALES MIX AND ITS EFFECTS ON BREAK-EVEN SALES. 4. DETERMINE SALES MIX WHEN A COMPANY HAS LIMITED RESOURCES. 5. UNDERSTAND HOW OPERATING LEVERAGE AFFECTS PROFITABILITY. *6. EXPLAIN THE DIFFERENCE BETWEEN ABSORPTION COSTING AND VARIABLE COSTING. *7. DISCUSS NET INCOME EFFECTS UNDER ABSORPTION COSTING VERSUS VARIABLE COSTING. *8. DISCUSS THE MERITS OF ABSORPTION VERSUS VARIABLE COSTING FOR MANAGEMENT DECISION MAKING. CHAPTER REVIEW Cost-Volume-Profit Income Statement 1. (S.O. 1) The Cost-Volume-Profit (CVP) income statement classifies costs as variable or fixed and computes a contribution margin. Contribution margin is the amount of revenue remaining after deducting variable costs. It is often stated both as a total amount and on a per unit basis. Desossa Music Player Company CVP Income Statement For the Month Ended June 30, 2011 Total Per Unit Sales $420,000 $120 Variable expenses Cost of goods sold $200,000 Selling expenses 35,000 Administrative expenses 10,000 Total variable expenses 245,000 70 Contribution margin 175,000 $ 50 Fixed expenses Cost of goods sold 50,000 Selling expenses 25,000 Administrative expenses 19,500 Total fixed expenses 94,500 Net income $ 80,500 Basic Computations 2. (S.O. 2) Desossa Music Players CVP income statement shows that total contribution margin (sales minus variable expenses) is $175,000, and the companys contribution margin per unit is $50. The contribution margin ratio (contribution margin divided by sales) is 41.67% ($50 $120). Desossas break-even point in units (using contribution margin per unit) or in dollars (using contribution margin ratio) are calculated as follows: Fixed cost Contribution margin per unit = Break-even point in units $94,500 $50 = 1,890 units Fixed cost Contribution margin ratio = Break-even point in dollars $94,500 .4167 = $226,800 3. Assuming Desossas management has a target net income of $100,000, the required sales in units and dollars to achieve its target net income are calculated as follows: (Fixed cost + Target net income) Contribution margin per unit = Required sales in units ($94,500 + $100,000) $50 = 3,890 units (Fixed cost + Target net income) Contribution margin ratio = Required sales in dollars ($94,500 + $100,000) .4167 = $466,762 4. Desossas margin of safety in dollars or as a ratio are calculated as follows: Actual (expected) sales Break-even sales = Margin of safety in dollars $420,000 $226,800 = $193,200 Margin of safety in dollars Actual (expected) sales = Margin of safety ratio $193,200 $420,000 = 46% CVP and Changes in the Business Environment 5. To better understand how CVP analysis works, lets assume that shipping costs have increased significantly causing the unit variable cost to increase by 10%. What effect will this have on Desossas significantly causing the unit variable cost to increase by 10%....
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This note was uploaded on 08/18/2010 for the course ACCOUNTING 6020 taught by Professor Seki during the Spring '10 term at FAU.

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Review Notes Ch 19 - CHAPTER 19 Cost-Volume Profit...

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