10014_031510_18 - Sell 400 bikes: Sales 200,000 500 100 VC...

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Chapter 6 Cost – Volume – Profit Affects Net Income Selling Price (SP) Unit Variable Cost (VC) Sales Volume (SV) Total FC Model answers question: What products do we make/sell? Pricing strategy Production facilities needed (FC) I. Contribution Income Statement - start for analysis - highlights cost behavior A. Contribution margin (CM) – amount remaining form sales once VC are deducted. B. Break even point (BEP) – sales level where profit is zero. * Net income will increase by the unit CM for each additional unit sold Example: Selling mountain bikes SP = 500 VC = 300 FC = 80,000 Sell 1 bike: Total Per Unit % Sales 500 500 100 - VC 300 300 60 CM 200 200 40 - FC 80,000 NI (loss) <79,800> Sell 2 bikes: Sales 1,000 500 100 - VC 600 300 60 CM 400 200 40 - FC 80,000 NI <79,600> 1. The CM must cover FC first. It if doesn’t, we have a loss. 2. As additional units are sold, FC decreases until they are covered.
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Unformatted text preview: Sell 400 bikes: Sales 200,000 500 100 VC 120,000 300 60 CM 80,000 200 40 FC 80,000 NI 3. If we sell 400 bikes, it will just break even. No profit, no loss. Total sales = total costs (VC + FC). Total CM = Total FC Sell 401 bikes: Sales 200,500 500 100 VC 120,300 300 60 CM 80,200 200 40 CMR FC 80,000 NI 200 4. Each additional unit sold increases net income by the amount of CM (unit) II. Contribution Margin Ratio Total CM or Unit CM Total Sales SP Shows the impact on net income when you know the increase in sales Example: SP = $12 FC = $120,000 (doesnt influence the decision) VC = $3.36 Spend $15,000 for advertising, sales increase by $50,000 1. CM = 12.00 3.36 = 8.64 2. 8.64/12.00 = 72% 3. Increase in Sales 50,000 x CMR________ x .72__ Increase in CM 36,000- Increase in FC_- 15,000 Increase in NI 21,000...
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10014_031510_18 - Sell 400 bikes: Sales 200,000 500 100 VC...

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