Actual or budgeted sales Break even sales 438750 199800 238950 Margin of safety

Actual or budgeted sales break even sales 438750

This preview shows page 15 - 20 out of 50 pages.

6-15
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Chapter 06 - Cost-Volume-Profit Analysis Req. 3 1.Buffer zone that identifies how much sales can drop before the business suffers a loss. 2.Increases the break-even point because fixed costs are higher, but each unit adds more profit because of the lower variable cost per unit.  3. (Total fixed costs + Target profit) / Contribution margin ratio. 4.How a company uses variable costs versus fixed costs to perform its operation. 5.The extent to which fixed costs can be used to magnify a given change in sales volume into a larger change in profit.  6.Two alternatives yield the same profit. 7. Actual or budgeted sales minus break-even sales. B Margin of safety 8. Total fixed costs plus target profit.  F Total contribution margin 9. Contribution margin / Profit.  H Degree of operating leverage 10. (Total fixed costs + Target profit)/Contribution margin per unit. J Target Units E6−8 Req. 1 Break-even units = Total fixed cost / Unit contribution margin Unit contribution margin = Sales price – variable cost per unit 6-16
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Chapter 06 - Cost-Volume-Profit Analysis = $0.50 $0.20 = $0.30 per mile driven Break-even units = Total fixed cost / Unit contribution margin = $215 / $0.30 = 717 miles (rounded up from 716.67) 6-17
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Chapter 06 - Cost-Volume-Profit Analysis Req. 2 Contribution Margin Income Statement For 4,200 Miles Sales revenue (4,200 x $0.50) $2,100 Less: Variable costs (4,200 x $0.20) 840 Contribution margin (4,200 x 0.30) 1,260 Less: Fixed costs 215 Income from Operations $1,045 Degree of Operating Leverage = Contribution Margin / Profit = $1,260/$1,045 = 1.2057 Req. 3 Effect on Profit = Change in Sales x Degree of Operating Leverage = 25% x 1.2057 = 30.1425% Thus, a 25% decrease in sales will result in a 30.1425% decrease in Joyce’s profit. E6-9 Req. 1 Unit contribution margin = Sales price – Variable cost per unit = $25.00 - $9.00 = $16.00 Contribution margin ratio = Unit contribution margin / Sales price = $16.00/$25.00 = 64% Req. 2 Break-even units = Total fixed costs / Unit contribution margin = $2,520 / $16.00 = 158 units (rounded from 157.5) Break-even sales dollars = Break-even units x Sales price = 158 x $25.00 = $3,950.00 Alternatively, Break-even sales dollars = Fixed costs / Contribution margin ratio = $2,520 / .64 = $3,937.50 (difference due to rounding # of units) 6-18
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Chapter 06 - Cost-Volume-Profit Analysis Req. 3 6-19
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