1. If Winaton increases the selling price from $1.50 to $1.60 per unit and original variable costs per unit are unchanged at $1.20 per unit, find out the monthly break-even point in number of units and in dollar sales 2. If winston reduces variable costs per unit by $.10 per unit and the selling price remains unchanged at $1.50 per unit, find the monthly break-even point in number of units and in dollar sales.
Changes in unit contribution margin Option 2 Units Percentage $1.50 100 $1.10 73.33 $.40 26.67 $18000 $18000 Fixed Exp /Cont.unit Fixed Exp /Cont.perc $18000 / $.40 $18000 / .26 45000 units $67500 Existing Units Percentage Sales $1.50 100 Variable costs $1.20 80 Contribution $.30 20 Fixed Exp $18000 $18000 Formula Fixed Exp /Cont.unit Fixed Exp /Cont.perc Calculation $18000 / $.30 $18000 / .20 BEP units / dollar 60000 units $90000 Option 1 Units Percentage $1.60 100 $1.20 75 $.40 25 $18000 $18000 Fixed Exp /Cont.unit Fixed Exp /Cont.perc $18000 / $.40 $81000 / .25 45000 units $72000
Making Managerial Decision Managers use CVP analysis to predict the effect of changes in sales or costs on the break-even point. Using shortcut formulas (2) and (3), answer the following questions. Remember that the contribution margin per unit equals the sales price per unit minus the variable costs per unit.
Making Managerial Decision 1. What would be the effect on the unit and dollar break-even level if fixed costs increase (and there are no changes)? 2 . What would be the effect on the unit and dollar break-even level if variable cost per unit decreases (and there are no changes)? 3. What would be the effect on the unit and dollar break-even level if sales volume increases?
Objective 6 Calculate sales volume in total dollars and total units to reach target profit
sales volume in total dollars and total units to reach target profit CVP analysis can be used to determine the target sales, in units and dollars, needed to earn a target profit. Using either the contribution margin or equation techniques results in the following shortcut equations. target sales volume in units = fixed expenses + target net income CM per unit target sales volume in dollars = fixed expenses + target net income CM ratio
Sales volume in total dollars and total units to reach target profit Eg: Suppose Wiston considers $1440 per month the minimum acceptable net income. How many units will she have to sell to justify the adoption of the vending machine plan? How does the number of units “translate” into dollar sales Target sales volume in units = (Fixed expenses + Target net income) ÷ Contribution margin per unit
Sales volume in total dollars and total units to reach target profit Selling price $1.50 Variable costs 1.20 Contribution margin per unit $ .30 ($18,000 + $1,440) ÷ $.30 = 64,800 units Target sales dollars = sales price X sales volume in units Target sales dollars = $1.50 X 64,800 units = $97,200.
Sales volume in total dollars and total units to reach target profit Contribution margin ratio Per Unit % Selling price 100 Variable costs 80 Contribution margin 20 Target sales volume in dollars = Fixed expenses + target net income contribution margin ratio Sales volume in dollars = 18,000 + $1,440 = $97,200 .20
Incremental effect It refers to the change in total results ( Such as revenue, expenses or income) under a new condition in comparison with some given or unknown Winston considers $ 1,440 per month the minimum acceptable net income
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