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ACTG2020_Week4_2014_Ch5_6_7CMD

Contribution margin method 1 lo 5 equation method

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Unformatted text preview: rofits equal zero profits LO 5 Break-Even 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 break-even 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 break-even 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 Break-Even Point The break-even point may be expressed in units or in dollars of sales. Fixed Costs Break-even 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. Break-even point = in units sold Break-even 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 break-even 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 break-even 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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