ACTG 3020 Chapter 6 - Cost-Volume-Profit Relationships.
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Transcript of ACTG 3020 Chapter 6 - Cost-Volume-Profit Relationships.
ACTG 3020
Chapter 6 - Cost-Volume-Profit Relationships
Contribution Margin
• Sales - Variable Costs
• Per unit – Sales Price per unit - var. costs per unit– Tells us how much in $ is contributed to firm
• Ratio– CM per unit/Sales price per unit– Tells us what % of each dollar is contributed to
the firm
Example of Contribution Margin
• Racer Rick’s Bicycles (Sales of 200 bikes)
• Sales Revenues $100,000
• Var. Costs 40,000
• Contr. Margin 60,000
• Less Fixed costs 30,000
• Net Income $30,000
Contribution Margin
• CM in total = $60,000
• CM per unit = – $100,000/200 bikes = $500 sales price per bike– $ 40,000/200 bikes = $200 var.costs per bike– $ 60,000/200 bikes = $300 CM per bike
• CM Ratio =– $300/$500 = 60% OR– $60,000/$100,000 = 60%
Net Income if 1 more bike sold
• Sale of 201 bikes
• Sales Revenues $100,500 (201 x $500)
• Var. Costs 40,200 (201 x $200)
• Contribution Margin 60,300
• Less fixed costs 30,000
• Net income $30,300
• Sales of one more unit = $300 increase in Net Income (due to contribution margin)
How Changes Affect CM
• Changes in sales price– Increase, CM increases– Decrease, CM decreases
• Changes in variable costs– Increase, CM decreases– Decrease, CM increases
• Changes in fixed costs– Increase or decrease, no change in CM
Break-Even Analysis
• Break-even (Point where Net Income = 0)
• Sales = Variable costs + Fixed costs
• How many bikes do we need to sell in order to break-even?
• 2 methods – Equation method– Contribution margin method
Break-even Analysis
• Equation Method• Sales = Var. Costs +
Fixed Costs• $500x = $200x +
$30,000• $300x = $30,000• x = 100 bikes
• Check• Sales $50,000 (100
x $500) • Var. Costs 20,000
(100 x $200)• CM $30,000• - Fixed 30,000 • Net Income -0-
Break-even Analysis
• Contribution Margin Method
• 1) Determine the CM per unit
• $500 - $200 = $300
• 2) Calculate how many units must be sold to break even by the following formula:
• Fixed costs $30,000 = 100 bikes
• CM per unit $300
Break-even Analysis
• In Sales Dollars
• B.E. in units x Sales price per unit
• 100 units X $500 = $50,000
• OR
• Fixed Costs
• CM ratio = $30,000/60% = $50,000
How Changes Affect Break-even Point
• Changes in sales price– Increase, BEP decreases– Decrease, BEP increases
• Changes in variable costs– Increase, BEP increases– Decrease, BEP decreases
• Changes in fixed costs– Increase , BEP increases– Decrease, BEP decreases
Who wants to break even?
• Target Profit Analysis
• Add Profit to previous equations
• Profit is treated just like a fixed cost
Target Profit AnalysisAdd desired profit to fixed costs
• Equation Method• $500x = $200x +
$30,000 fixed + $60,000 Desired profit
• $300x = $90,000• x = 300 bikes
• Contribution Margin Approach
• $30,000 + $60,000• $300 • = $90,000/300 =• 300 bikes
Margin of Safety
• Current sales
• - Break-even sales
• = Margin of safety
• Tells you how far sales can drop before you have no net income. Indicates a safety cushion.
Cost Structure- what portions of costs are fixed or variable
• Company 1 - Pizza Pizza
• Sales $200,000• -Var. costs 150,000• CM 50,000• -Fixed costs 20,000• Net income 30,000
• Company 2 - Pizza oven manufacturers
• Sales $200,000• -Var. costs 50,000• CM 150,000• -Fix. costs 120,000• Net income 30,000
Cost Structure
• What is CM ratio for each company?
• Company 1 = 50,000/200,000
• Company 2 = 150,000/200,000
• Which company is riskier?
• Operating Leverage = Contribution Margin Net Income
• Higher operating leverage, more risky company
Sales Mix
• Sales Mix– Sell more than one product– Compute contribution ratio for entire company– Break-even analysis is then computed using the
regular equations– If actual sales mix is different than predicted,
break-even analysis and profit calculations will be different than predicted.