Mowen3e Ch04--Revised

Mowen3e Ch04--Revised - Ch#4 Cost-Volume-Profit Analysis A...

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Ch #4: Cost-Volume-Profit Analysis: A Managerial Planning Tool

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Determine the break-even point in number of units and in total sales dollars. OBJECTIVE B 1
Cost-Volume-Profit Analysis A powerful tool for planning and decision making. It can be used to calculate: The number of units that must be sold to break-even The impact of a given reduction in fixed costs on the break-even point The impact of an increase in price on profit 33

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Break-Even Point Total Revenue = Total Cost Or put it another way : Total Revenue - Total Costs Zero Profit 44
Using Operating Income in Cost-Volume-Profit Analysis Contribution Margin Sales - Variable Expense = Contribution Margin is then used to cover Fixed Costs and Operating Income. Contribution Margin 55

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Contribution Margin Income Statement Divides costs based on behavior Costs are divided into variable and fixed components Important subtotal is contribution margin 66
Using Operating Income in Cost-Volume-Profit Analysis Contribution Margin Sales - Variable Expense = Contribution Margin Break-even point is when Operating Income is zero. Contribution Margin Fixed Costs Operating Income - = 77

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HOW TO Prepare a Contribution Margin Income Statement 88
Example: Here are the facts…. Whittier Company plans to sell 1,000 mowers at \$400 each in the coming year. Product costs include: Direct Materials per mower \$180 Direct Labor per mower \$100 Variable overhead per mower \$25 Total fixed factory overhead \$15,000 Variable selling expense is a commission of \$20 per mower; fixed selling and administrative expense totals \$30,000 99

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And your task is to… Calculate the total variable cost per unit. Calculate the total fixed expense for the year. Prepare a contribution margin income statement for Whittier Company for the coming year. 1010
Variable Cost Variable Cost Per unit = Direct Materials + Direct Labor Variable Overhead Variable Selling + + = \$180 + \$100 \$25 \$20 + + = \$325 1111 Remember-- Product costs include: Direct Materials per mower \$180 Direct Labor per mower \$100 Variable overhead per mower \$25 Total fixed factory overhead \$15,000 Variable selling expense is a commission of \$20 per mower ; fixed selling and administrative expense totals \$30,000

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Fixed Expenses Total Fixed Expenses = Fixed Overhead + Fixed Selling & Administrative Expense = \$15,000 + \$30,000 = \$45,000 1212 Remember-- Product costs include: Direct Materials per mower \$180 Direct Labor per mower \$100 Variable overhead per mower \$25 Total fixed factory overhead \$15,000 Variable selling expense is a commission of \$20 per mower; fixed selling and administrative expense totals \$30,000
Contribution Margin Income Statement Total Per Unit Sales (\$400 x 1,000 mowers) \$400,000 \$400 Total Variable Expense (\$325 x 1,000) 325,000 325 Total Contribution Margin \$ 75,000 \$ 75 Total Fixed Expense 45,000 \$ 30,000 Operating Income Each unit contributes \$75 to cover fixed costs. 1313

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This note was uploaded on 05/04/2011 for the course ACCOUNTING 2102 taught by Professor Wurst during the Spring '11 term at Temple.

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Mowen3e Ch04--Revised - Ch#4 Cost-Volume-Profit Analysis A...

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