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Unformatted text preview: CostVolumeProfit (CVP) Analysis Lecture #6 (Chapter 7&8) Dr. Minlei Ye 1 Learning Objectives • Compute Contribution margin (CM) • Calculate BreakEvenPoint (BEP) • Prepare Break even graph • Profit planning, Margin of Safety, Operating Leverage, Sales mix • Assumptions • Compare variable costing and absorption costing 2 Contribution Margin (CM) Racing Bike Co. Total Unit Sales Revenue (500 units) 250,000 $ 500 $ Less: Variable costs 150,000 300 Contribution margin 100,000 $ 200 $ Less: Fixed costs 80,000 Net operating income 20,000 $ Contribution margin = Sales – VC CM per unit=PriceVC per unit CM Ratio =CM/Sales or CM per unit/price = 40% 3 Example 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? 4 The effects on profits through contribution margin of changes in variable costs, fixed costs, selling price, and volume Changes in fixed costs and sales volume: What is the profit impact if Racing can increase unit sales from 500 to 540 by increasing the monthly advertising budget by $10,000? 5 Change in Variable Costs and Sales Volume What is the profit impact if Racing can use higher quality raw materials, thus increasing variable costs per unit by $10, to generate an increase in unit sales from 500 to 580? 6 Change in Fixed Cost, Sales Price and Volume What is the profit impact if Racing ( 1 ) cuts its selling price $20 per unit, ( 2 ) increases its advertising budget by $15,000 per month, and ( 3 ) increases sales from 500 to 650 units per month? 7 Change in Variable Cost, Fixed Cost and Sales Volume What is the profit impact if Racing ( 1 ) pays a $15 sales commission per bike sold instead of paying salespersons flat salaries that currently total $6,000 per month, and ( 2 ) increases unit sales from 500 to 575 bikes? 8 Change in Regular Sales Price If Racing has an opportunity to sell 150 bikes to a wholesaler without disturbing sales to other customers or fixed expenses, what price would it quote to the wholesaler if it wants to increase monthly profits by $3,000? 9 BreakEvenPoint (BEP) • At BEP, Profit=0: Sales – VC – FC = 0 • BEP in units ( number of units to sell to break even=X ): (1) Equation method: X * Sales per unit – X * VC per unit – FC = 0 (2) Contribution margin method: BEP in units = Fixed expense / contribution margin per unit • Sales/unit = $500 and VC/unit= $300 and 10 BreakEvenPoint (BEP) • BEP in dollars ($) (amount of sales $ to break even=X) – (1) Equation method: X – X * (1CM%) – FC = 0 – (2) Contribution margin method: BEP in dollars = Fixed expense / contribution margin ratio • Sales = $250,000 and VC=$150,000 and FC=$80,000.What is the BEP in dollars?...
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 Spring '12
 Wong
 Sales, gross margin, Coffee Klatch

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