Chapter 05s-1

50000 250000 break even sales 400 units actual sales

• Notes
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(\$50,000 ÷ \$250,000) Break-even sales 400 units Actual sales 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 \$

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5-50 The Margin of Safety The margin of safety can be expressed in terms of the number of units sold. The margin of safety at RBC is \$50,000, and each bike sells for \$500; hence, RBC’s margin of safety is 100 bikes. Margin of Safety in units = = 100 bikes \$50,000 \$500
5-51 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 margin of safety expressed in cups? a. 3,250 cups b. 950 cups c. 1,150 cups d. 2,100 cups

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5-52 Operating Leverage Operating leverage is a measure of how sensitive net operating income is to percentage changes in sales. It is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits. Contribution margin Net operating income Degree of operating leverage =
5-53 Operating Leverage Actual sales 500 Bikes Sales 250,000 \$ Less: variable expenses 150,000 Contribution margin 100,000 Less: fixed expenses 80,000 Net income 20,000 \$ \$100,000 \$20,000 = 5 Degree of Operating Leverage = To illustrate, let’s revisit the contribution income statement  for RBC.

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5-54 Operating Leverage With an operating leverage of 5 , if RBC increases its sales by 10% , net operating income would increase by 50% . Percent increase in sales 10% Degree of operating leverage × 5 Percent increase in profits 50% Here’s the verification!
5-55 Operating Leverage Actual sales (500) Increased sales (550) Sales 250,000 \$ 275,000 \$ Less variable expenses 150,000 165,000 Contribution margin 100,000 110,000 Less fixed expenses 80,000 80,000 Net operating income 20,000 \$ 30,000 \$ 10% increase in sales from \$250,000 to \$275,000 . . . . . . results in a 50% increase in income from \$20,000 to \$30,000.

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5-56 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 operating leverage? a. 2.21 b. 0.45 c. 0.34 d. 2.92
5-57 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? a. 30.0% b. 20.0% c. 22.1% d. 44.2%

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5-58 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. When a company sells more than one product, break-even analysis becomes more complex as the following example illustrates.
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• Fall '12
• StephenD.Joyce

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