Unformatted text preview: rofits equal zero
profits LO 5 BreakEven Analysis
Here is the information from Racing Bicycle
Company:
Total
Sales (500 bikes)
$ 250,000
Less: variable expenses
150,000
Contribution margin
$ 100,000
Less: fixed expenses
80,000
Net operating income
$ 20,000 Per Unit
$
500
300
$
200 Percent
100%
60%
40% LO 5 Equation Method
We calculate the breakeven point as follows:
Sales = Variable expenses + Fixed expenses + Profits $500Q = $300Q + $80,000 + $0
$200Q = $80,000
Q = $80,000 ÷ $200 per bike
Q = 400 bikes LO 5 Equation Method
The equation can be modified to calculate the
breakeven point in sales dollars.
Sales = Variable expenses + Fixed expenses + Profits X = 0.60X + $80,000 + $0
0.40X = $80,000
X = $80,000 ÷ 0.40
X = $200,000
LO 5 Finding the BreakEven Point
The breakeven point may be expressed in
units or in dollars of sales.
Fixed Costs
Breakeven point in units =
Contribution margin per unit Unit sales price less unit variable cost Joelle Pokrajac, MBA, CMA Contribution Margin Method
The contribution margin method has two key
equations.
Breakeven point
=
in units sold
Breakeven point in
=
total sales dollars Fixed expenses
CM per unit
Fixed expenses
CM ratio LO 5 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
LO 5
LO 5 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
LO 5 Target Profit Analysis
The equation and contribution margin methods
can be used to determine the sales volume
needed to achieve a target profit.
Suppose Racing Bicycle Company wants to
know how many bikes must be sold to earn a
profit of $100,000. LO 6 The CVP Equation Method
Sales = Variable expenses + Fixed expenses + Profits $500Q = $300Q + $80,000 + $100,000
$200Q = $180,000
Q = 900 bikes LO 6 The Contribution Margin Approach
The contribution margin method can be used to
determine that 900 bikes must be sold to earn
the target profit of $100,000.
Unit sales to attain
=
the target profit Fixed expenses + Target profit
CM per unit $80,000 + $100,000
= 900 bikes
$200/bike
LO 6 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
LO 6 The Margin of Safety...
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 Spring '11
 LizFarrel
 Accounting, Managerial Accounting, Contribution Margin

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