Profit sales variable expenses fixed expenses

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Profit = (Sales – Variable expenses) – Fixed expenses Quantity sold (Q) × Selling price per unit (P) = Sales (Q × P) Quantity sold (Q) × Variable expenses per unit (V) = Variable expenses (Q × V) Profit = (P  ×  Q – V  ×  Q) – Fixed expenses
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5-10 CVP Relationships in Equation Form This equation can also be used to show the $200 profit  RBC earns if it sells 401 bikes. Profit = (Sales – Variable expenses) – Fixed expenses Profit = (P  ×  Q – V  ×  Q) – Fixed expenses Profit = ($500  ×  401 – $300  ×  401) –  $80,000 $200  = ($500  ×  401 – $300  ×  401) –  $80,000
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5-11 CVP Relationships in Equation Form Unit CM  = Selling price per unit – Variable expenses per unit It is often useful to express the simple profit equation in  terms of the unit contribution margin (Unit CM) as follows: Profit = (P  ×  Q – V  ×  Q) – Fixed expenses Profit = (P – V)  ×  Q – Fixed expenses Profit =  Unit CM  ×  Q – Fixed expenses Unit CM  = P – V
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5-12 CVP Relationships in Equation Form Profit = (P  ×  Q – V  ×  Q) – Fixed expenses Profit = (P – V)  ×  Q – Fixed expenses Profit =  Unit CM  ×  Q – Fixed expenses Profit = ($500 – $300)  ×  401 – $80,000 Profit = $200  ×  401 – $80,000 Profit = $80,200 – $80,000 Profit =  $200 This equation can  also be  used to  compute RBC’s  $200 profit if it  sells 401 bikes.
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5-13 Contribution Margin Ratio (CM Ratio) Total Per Unit CM Ratio Sales (500 bicycles) 250,000 $ 500 $ 100% Less: Variable expenses 150,000 300 60% Contribution margin 100,000 200 $ 40% Less: Fixed expenses 80,000 Net operating income 20,000 $ Racing Bicycle Company Contribution Income Statement For the Month of June $100,000  ÷  $250,000 = 40% The CM ratio is calculated by dividing the total  contribution margin by total sales.
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5-14 400 Units 500 Units Sales 200,000 $ 250,000 $ Less: variable expenses 120,000 150,000 Contribution margin 80,000 100,000 Less: fixed expenses 80,000 80,000 Net operating income - $ 20,000 $ Contribution Margin Ratio (CM Ratio) A $50,000 increase in sales revenue results in a $20,000 increase in CM ($50,000 × 40% = $20,000). 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:
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5-15 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. An average of 2,100 cups are sold each month. What is the CM Ratio for Coffee Klatch? a. 1.319 b. 0.758 c. 0.242 d. 4.139
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5-16 Contribution Margin Ratio (CM Ratio) The relationship between profit and the CM ratio  can be expressed using the following equation: Profit = (CM ratio  ×  Sales) – Fixed expenses Profit = (40%  ×   $250,000)  – $80,000 Profit = $100,000 – $80,000 Profit =  $20,000 If Racing Bicycle increased its sales volume to 500 bikes, what would management expect profit or net operating income to be?
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5-17 Changes in Fixed Costs and Sales Volume What is the profit impact if Racing Bicycle can increase unit sales from 500 to 540 by increasing the monthly advertising budget by $10,000?
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