ACTG2020_Week4_2014_Ch5_6_7CMD

Uses of break even analysis new product decisions

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Unformatted text preview: oelle Pokrajac, MBA, CMA Cost Volume Profit (CVP) Analysis Studies how costs and profits vary with volume Recognizes that some costs are Fixed, some are Variable Understand the basic concept, the rest is Algebra Contribution Margin Breakeven Point ($ and units) After-tax profits Joelle Pokrajac, MBA, CMA Calculating Contribution Margins Contribution Margin $ = Selling Price per unit – Variable Cost per Unit Contribution Margin % = Selling Price per unit – Variable Cost per Unit Selling Price per Unit Joelle Pokrajac, MBA, CMA Basics of Cost-Volume-Profit Analysis The contribution income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. The emphasis is on cost behaviour. Racing Bicycle Company Contribution Income Statement For the Month of June Sales (500 bicycles) $ 250,000 Less: Variable expenses 150,000 Contribution margin 100,000 Less: Fixed expenses 80,000 Net operating income $ 20,000 Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted. LO 1 Contribution Margin (CM) Sales, variable expenses, and contribution margin can also be expressed on a per unit basis. If Racing sells an additional bicycle, $200 additional CM will be generated to cover fixed expenses and profit. Racing Bicycle Company Contribution Income Statement For the Month of June Total Per Unit Sales (500 bicycles) $ 250,000 $ 500 Less: Variable expenses 150,000 300 Contribution margin 100,000 $ 200 Less: Fixed expenses 80,000 Net operating income $ 20,000 CM per unit = CM Ratio = SP per unit $200 $500 CM Ratio 100% 60% 40% = 40% LO 1 Contribution Approach If Racing sells 400 units in a month, it will be 400 operating at the break-even point. Racing Bicycle Company Contribution Income Statement For the Month of June Total Per Unit Sales (400 bicycles) $ 200,000 $ 500 Less: Variable expenses 120,000 300 Contribution margin 80,000 $ 200 Less: Fixed expenses 80,000 Net operating income $ - CM Ratio 100% 60% 40% LO 1 CVP Relationships in Graphic Form The relationship among revenue, cost, profit and volume can be expressed graphically by preparing a CVP graph. Racing developed contribution margin income statements at 300, 400, and 500 units sold. We will use this information to prepare the CVP graph. Income 300 units Sales $ 150,000 Less: variable expenses 90,000 Contribution margin $ 60,000 Less: fixed expenses 80,000 Net operating income $ (20,000) Income 400 units $ 200,000 120,000 $ 80,000 80,000 $ - Income 500 units $ 250,000 150,000 $ 100,000 80,000 $ 20,000 LO 2 CVP Graph Dollars Break-even point (400 units or $200,000 in sales) of i t Pr Total Expenses Total Sales r ea A Fixed Expenses oss L r ea A Units LO 2 Contribution Margin Ratio The contribution margin ratio is: Total CM CM Ratio = Total sales For Racing Bicycle Company the ratio is: $80,000 = 40% $200,000 Each $1.00 increase in sales results in a total contribution margin increase of 40¢. LO 3 Contribution Margin Ratio Or, in terms of units, the contribution margin ratio is...
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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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