Chpt_7_outline - CHAPTER 7 Net income in y = mx + b form...

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CHAPTER 7 Net income in y = mx + b form For simplicity, assume a company only produces one product. Each unit of product has fixed and variable costs. The variable costs are usually direct materials, direct labor, and those parts of OH that are variable (e.g., production supplies and indirect labor). For example, say we produce bags of potato chips which we sell for $0.99 each. Our variable costs may be: $0.20 direct materials $0.24 direct labor $0.15 variable manufacturing OH $0.59 variable cost per bag Per-unit CM Total CM Since Net Income = CM – fixed costs , our equation for net income may be restated as: where Contribution Margin Ratio Once we know the total contribution, we can divide it by total sales revenue to get the CM%. This tells us what % of each dollar of sales revenue may be contributed to cover fixed costs and be left over for profits.
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Example ABC Company has a total contribution margin of $117k and total sales of $215k. What is the CM%? Answer: $117k / $215k = 54.4% Breakeven point The breakeven point is where your contribution margin exactly covers your fixed costs. The number of units needed to break even may be calculated as: Breakeven units = Total FC / CM per unit You can use this definition to calculate any target amount that should be covered by selling these goods. For breakeven units, our target is to only cover fixed costs. If we want to make a profit, we need to target fixed costs plus whatever profit we’re going to shoot for. Here’s an example: For its new brand of shampoo, Bright Day is starting an advertising campaign which will cost $60,000. (Is this fixed or variable?) If Bright Day earns a contribution margin of $12, how many units will it need to sell to break even on the marketing campaign? How many units will it need to sell to earn a $40,000 profit?
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This note was uploaded on 10/08/2011 for the course ACCT 101 taught by Professor Kang during the Spring '08 term at S.F. State.

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Chpt_7_outline - CHAPTER 7 Net income in y = mx + b form...

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