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Unformatted text preview: $100,000 = 40% × Sales – $80,000 40% × Sales = $100,000 + $80,000 Sales = ($100,000 + $80,000) ÷ 40% Sales = $450,000 535 Formula Method We can calculate the dollar sales needed to attain a target profit (net operating profit) of $100,000 at Racing Bicycle. Target profit + Fixed expenses CM ratio = Dollar sales to attain the target profit Dollar sales = $450,000 $100,000 + $80,000 40% Dollar sales = 536 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. Use the formula method to determine how many cups of coffee would have to be sold to attain target profits of $2,500 per month. a. 3,363 cups b. 2,212 cups c. 1,150 cups d. 4,200 cups 537 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. Use the formula method to determine the sales dollars that must be generated to attain target profits of $2,500 per month. a. $2,550 b. $5,013 c. $8,458 d. $10,555 538 Breakeven Analysis The equation and formula methods can be used to determine the unit sales and dollar sales needed to achieve a target profit of zero. Let’s use the RBC information to complete the breakeven analysis. 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 539 Breakeven in Unit Sales: Equation Method $0 = $200 × Q + $80,000 Profits = Unit CM × Q – Fixed expenses Suppose RBC wants to know how many bikes must be sold to breakeven (earn a target profit of $0). Profits are zero at the breakeven point. 540 Breakeven in Unit Sales: Equation Method $0 = $200 × Q + $80,000 $200 × Q = $80,000 Q = 400 bikes Profits = Unit CM × Q – Fixed expenses 541 Breakeven in Unit Sales: Formula Method Let’s apply the formula method to solve for the breakeven point. Unit sales = 400 $80,000 $200 Unit sales = Fixed expenses CM per unit = Unit sales to break even 542 Breakeven in Dollar Sales: Equation Method Suppose Racing Bicycle wants to compute the sales dollars required to breakeven (earn a target profit of $0). Let’s use the equation method to solve this problem. Profit = CM ratio × Sales – Fixed expenses Solve for the unknown “Sales.” 543 Breakeven in Dollar Sales: Equation Method Profit = CM ratio × Sales – Fixed expenses $ 0 = 40% × Sales – $80,000 40% × Sales = $80,000 Sales = $80,000 ÷ 40% Sales = $200,000 544 Breakeven in Dollar Sales: Formula Method Now, let’s use the formula method to calculate the...
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 Fall '12
 StephenD.Joyce
 Contribution Margin, Sales

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