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Unformatted text preview: BCOR 2000 Chapter 5M CostVolumeProfit Relationships CostVolumeProfit Analysis
CVP Analysis focuses on how profits are impacted by: Selling prices (and s therein) Sales volume (and s therein) Unit variable costs (and s therein) Total fixed costs (and s therein) Mix of products sold (and s therein) Contribution Approach and Contribution Margin Income statement format from CH 4M CM = sales revenue  variable expenses CM is amount available to cover fixed expenses and beyond that profits If CM is not sufficient to cover fixed expenses then a loss occurs CM can be expressed in total, as a percentage of sales, or on a per unit bases CVP Graph
Breakeven point (400 units or $200,000 in sales)
Dollars o fi t Pr r ea A oss L r ea A Fixed Costs = $80K SP /unit = $500 VC/unit = $300 Units Contribution Margin Ratio CM Ratio is CM as a % of sales CM Ratio = Contribution Margin Sales CM Ratio shows how the CM margin will be affected by a in total sales From previous example, CM Ratio is 40% ($500  $300)/$500, so for each $1 in sales, CM will by $0.40 Quick Check Coffee Klatch is an espresso stand in a downtown office building. 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 Coffee Klatch? a. 1.319 b. 0.758 c. 0.242 d. 4.139 Breakeven Point BreakEven Point is the level of sales at which profit = zero Once Breakeven is been reached, net operating income increases by the amount of the unit CM (SPVC) for each additional unit sold Breakeven is a special case of target profit when target profit = 0 BreakEven Analysis Approaches Breakeven analysis can be approached in two ways: 1. Equation method 2. Contribution margin method Equation Method
Profits = (Sales Variable Costs) OR Sales = Variable Costs + Fixed Costs + Profits Fixed Costs At the breakeven point profits equal zero Breakeven Analysis Contribution Margin Method The contribution margin method has two key equations:
Breakeven point = in units sold Breakeven point in total sales dollars = Fixed Costs CM per unit Fixed Costs CM ratio Quick Check Coffee Klatch is an espresso stand in a downtown office building. 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 breakeven sales in units? a. 872 cups b. 3,611 cups c. 1,200 cups d. 1,150 cups Quick Check Coffee Klatch is an espresso stand in a downtown office building. 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 breakeven sales in dollars? a. $1,300 b. $1,715 c. $1,788 d. $3,129 Target Profit Analysis Use CM formulas to determine the sales volume (units and $s) needed to achieve a target profit Target pt. in units sold = Fixed Costs + Target Profit Unit CM Target pt. in total sales = Fixed Costs + Target Profit CM Ratio Quick Check Coffee Klatch is an espresso stand in a downtown office building. 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. How many cups of coffee would have to be sold to attain target profits of $2,500 per month? a. 3,363 cups b. 2,212 cups c. 1,150 cups d. 4,200 cups Margin of Safety Margin of Safety is the excess of existing sales dollars over the breakeven point
Margin of Safety ($) = Total Sales Breakeven Sales Margin of Safety (units) = Unit Sales Breakeven unit Sales Margin of Safety % = Margin of Safety in Dollars Total Sales in Dollars Quick Check Coffee Klatch is an espresso stand in a downtown office building. 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 margin of safety? a. 3,250 cups b. 950 cups c. 1,150 cups d. 2,100 cups Cost Structure High Fixed Costs and Low Variable Costs Higher CM Ratio Lower Margin of Safety Wider swings in net operating income as sales fluctuate Low Fixed Costs and High Variable Costs Lower CM Ratio Higher Margin of Safety Greater profit stability Operating Leverage A measure of how sensitive net operating income is to % changes in sales Impacted by cost structure higher proportion of fixed costs higher operating leverage Degree of Contribution margin operating leverage = Net operating income Quick Check Coffee Klatch is an espresso stand in a downtown office building. 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 operating leverage?
a. 2.21 b. 0.45 c. 0.34 d. 2.92 Quick Check At Coffee Klatch the average selling price of a cup of coffee is $1.49, the average variable expense per cup is $0.36, the average fixed expense per month is $1,300 and an average of 2,100 cups are sold each month. If sales increase by 20%, by how much should net operating income increase? a. 30.0% b. 20.0% c. 22.1% d. 44.2% Structuring Sales Commissions and Sales Mix Commissions based on sales $s may not maximize profits Solution: Pay commissions based on CM Sales Mix  relative proportion a company's products are sold across multiple products Different products have different selling prices, cost structures, and CMs With multiple products, breakeven point changes as sales mix changes Achieve a mix that yields the largest profits (subject to market preferences) Key Assumptions of CVP Analysis
Selling price is constant. Costs are linear. In multiproduct companies, the sales mix is constant. In manufacturing companies, inventories do not change (units produced = units sold). Chapter 5M Exercises / Problems E5M10 E5M15 P5M19 Others time permitting ...
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This note was uploaded on 10/29/2011 for the course BCOR 2000 taught by Professor Brush during the Spring '07 term at Colorado.
 Spring '07
 BRUSH

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