ACTG2020_Week4_2014_Ch5_6_7CMD

00 increase in sales results in a total contribution

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Unformatted text preview: : Unit CM CM Ratio = Unit selling price For Racing Bicycle Company the ratio is: $200 = 40% $500 LO 3 Contribution Margin Ratio If Racing Bicycle increases sales from 400 to 500 bikes ($50,000), contribution margin will increase by $20,000 ($50,000 × 40%). Here is the proof: 400 Units Sales $ 200,000 Less: variable expenses 120,000 Contribution margin 80,000 Less: fixed expenses 80,000 Net operating income $ - 500 Units $ 250,000 150,000 100,000 80,000 $ 20,000 A $50,000 increase in sales revenue results in a $20,000 increase in CM ($50,000 × 40% = $20,000). LO 3 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 LO 3 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? LO 4 Changes in Fixed Costs and Sales Volume $80,000 + $10,000 advertising = $90,000 $80,000 + $10,000 advertising = $90,000 Sales increased by $20,000, but net operating Sales iincreased by $20,000, but net operating Sales increased Sales ncreased iincome decreased by $2,000.. ncome decreased by $2,000 decreased decreased LO 4 Changes 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? LO 4 Changes in Variable Costs and Sales Volume 580 units × $310 variable cost/unit = $179,800 580 units × $310 variable cost/unit = $179,800 Sales increase by $40,000, Sales iincrease by $40,000, Sales increase Sales ncrease and net operating and net operating iincome increases by $10,200.. ncome iincreases by $10,200 increases ncreases LO 4 Changes 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? LO 4 Changes in Fixed Cost, Sales Price and Volume Sales increase by $62,000, Sales iincrease by $62,000, Sales increase Sales ncrease fixed costs increase by fixed costs increase by $15,000, and net operating income increases by $2,000.. $15,000, and net operating income iincreases by $2,000 increases ncreases LO 4 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? LO 4 Change in Regular Sales Price $ 3,000 ÷ 150 bikes = Variable cost per bike = Selling price required = $ 20 per bike 300 per bike $ 320 per bike 150 bikes × $320 per bike = $ 48,000 Total variable costs = 45,000 I ncrease in net income = $ 3,000 LO 4 Break-Even Analysis Break-even analysis can be approached in two ways: Equation method 2. Contribution margin method 1. LO 5 Equation Method Profits = (Sales – Variable expenses) – Fixed expenses OR Sales = Variable expenses + Fixed expenses + Profits At the break-even point At p...
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This note was uploaded on 03/28/2014 for the course ACTG 2020 taught by Professor Lizfarrel during the Spring '11 term at York University.

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