ACTG2020_Week4_2014_Ch5_6_7CMD

36 the average fixed expense per month is 1300 how

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Unformatted text preview: The margin of safety is the excess of budgeted (or actual) sales over the break-even volume of sales. Margin of safety = Total sales – Break-even sales Let’s look at Racing Bicycle Company and determine the margin of safety. LO 7 The Margin of Safety Racing Bicycle Company has actual sales of $250,000, given that we have already determined the break-even sales to be $200,000 Break-even sales 400 units Sales $ 200,000 Less: variable expenses 120,000 Contribution margin 80,000 Less: fixed expenses 80,000 Net operating income $ - Actual sales 500 units $ 250,000 150,000 100,000 80,000 $ 20,000 LO 7 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 LO 7 Cost Structure and Profit Stability There are advantages and disadvantages to high fixed cost (or low variable cost) and low fixed cost (or high variable cost) structures. An advantage of a high fixed cost structure is that income A disadvantage of a high fixed will be higher in good years cost structure is that income compared to companies will be lower in bad years with lower proportion of compared to companies fixed costs. with lower proportion of fixed costs. Companies with low fixed cost structures enjoy greater stability in income across good and bad years. LO 8 Operating Leverage A measure of how sensitive net operating income is to percentage changes in sales. Degree of Contribution margin = operating leverage Net operating income LO 8 Operating Leverage 10% increase in sales from $250,000 to $275,000 . . . . . . results in a 50% increase in income from $20,000 to $30,000. LO 8 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 LO 8 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? . 30.0% . 20.0% . 22.1% LO 8 Verify Increase in Profit Actual sales 2,100 cups Sales $ 3,129 Less: Variable expenses 756 Contribution margin 2,373 Less: Fixed expenses 1,300 Net operating income $ 1,073 % change in sales % change in net operating income Increased sales 2,520 cups $ 3,755 907 2,848 1,300 $ 1,548 20.0% 44.2% LO 8 Structuring Sales Commissions Pipeline Unlimited produces two types of surfboards: Price/unit CM/unit XR7 $100 $25 Turbo $150 $18 The sales force at Pipeline Unlimited is compensated based on sales commissions. LO 8 The Concept of Sales Mix Sales mix is the relative proportion in which a company’s products are sold. Different products have different selling prices, cost structures, and contribution margins. Let’s assume Racing Bicycle Company sells bikes and carts and that the sales mix between the two products remains the same. LO 9 Multi-product break-even analysis Racing Bicycle Co. provides the following information: $265,000 = 48.2% (rounded) $550,000 LO 9 Multi-product break-even analysis Break-even sales Fixed expenses = CM Ratio $170,000 = 48.2% = $352,697 LO 9...
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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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