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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 BreakEven Analysis
Breakeven 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 breakeven point
At
p...
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 Spring '11
 LizFarrel
 Accounting, Managerial Accounting, Contribution Margin

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