ACC 202 Chapter 5
ACC 202 Chapter 5 ACC 202
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This 3 page Class Notes was uploaded by Marissa Sarlls on Sunday January 10, 2016. The Class Notes belongs to ACC 202 at University of Kentucky taught by Jana Wilhelm in Spring 2016. Since its upload, it has received 12 views. For similar materials see Managerial Accounting (202, Wilhelm) in Accounting at University of Kentucky.
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Date Created: 01/10/16
Chapter 5: Cost-Volume-Profit (CVP) CVP Primary purpose is to estimate how profits are affected by: o Selling prices o Sales volume o Unit variable costs o Total fixed costs o Mix of products sold Managers adopt these assumptions: o Selling price is constant… won’t change as volume changes o Costs are linear and can be accurately divided into variable and fixed elements. Variable element is constant per unit and fixed is constant in total over the entire relevant range o In multiproduct companies, the mix of products sold remains constant Sales = variable costs + fixed costs + profit The Basics of CVP Analysis Contribution income statement emphasizes behavior of cost Contribution margin—the amount remaining from sales revenue after variable expenses have been deducted…covers fixed expenses first and then provide profits o CM = sales – var. costs Sales−VariableExpenses o CM per unit = Number of unitssold Remember, commission is a variable cost and must subtract that, too o Break-even point—the level of sales at which profit is zero Once the break-even point has been reached, net operating income will increase by the amount of the unit contribution margin for each additional unit sold To estimate profit at any sales volume above break-even point, multiply number of units sold in excess by unit contribution margin ¿Expenses Break-even point = UnitCM CVP Relationships in Equation Form o Profit = (Sales – Variable expenses) – Fixed expenses Profit is net operating income in equations Sales = Selling price per unit x Quantity sold = P x Q Variable expenses = V.exps(per unit) x Q o Profit = (P x Q – V x Q) – Fixed expenses o Profit = Unit CM x Q – Fixed expenses CVP Relationships in Graphic Form o Cost-volume-profit (CVP) graph—illustrates the relationships among revenue, cost, profit, and volume; AKA break-even chart (pg. 193) Unit volume is represented on X-axis and dollars on Y-axis Anticipated profit or loss at any given level of sales is measured by the vertical distance between the total revenue line (sales) and the total expense line (variable expense + fixed expense) Break-even point where total revenue & total expense line cross CM Ratio—the contribution as a percentage of sales; shows how CM will be affected by change in total sales. It’s a per unit measure of a product’s gross operating margin ComtributionMargin Sales−Variableexpenses o CM ratio = = Sales Sales o Change in CM = CM ratio x Change in sales o Increase in NOI = Increase in sales (in units) x CM per unit o The impact on net operating income of any given dollar change in total sales can be computed by applying the CM ratio to the dollar change o Profit = CM ratio x Sales – Fixed expenses o Change in profit = CM ratio x Change in sales – Change in fixed expenses Variableexpenses Variable expense ratio = Sales o In single product analysis, computed by dividing variable expenses/unit by unit selling price o CM ratio = 1 – variable expense ratio Incremental analysis—consider only the costs and revenues that will change if the new program is implemented Break Even Analysis o Formula methodcenters on the idea that each unit sold provides a certain amount of contribution margin that goes toward covering fixed expenses ¿expenses In single product situation: Units sales to break-even = UnitCM Can also use dollar sales to break even Target Profit Analysis—we estimate what sales volume is needed to achieve a specific target profit Target Profit+¿expenses o Unit sales to attain the target profit = UnitCM Margin of Safety—the excess of budgeted or actual sales dollars over the break- even volume of sales dollars o The higher the margin of safety, the lower the risk of not breaking even and incurring a loss o Margin of safety in dollars = Total budgeted (or actual) sales – Break-even sales o Margin of safety% = Marginof safety∈dollars Total budget(d ¿actu)l sales∈dollars o Can be calculate via units, too CVP Considerations in Choosing a Cost Structure Cost structure refers to the relative proportion of fixed and variable costs in an organization A higher CM Ratio means that sales will increase more rapidly but the same goes for losing sales o This is with higher fixed costs and lower variable costs Operating leverage (OL)—a measure of how sensitive net operating income is to a given percentage change in dollar sales o If operating leverage is high, a small percentage increase in sales can produce a much larger percentage increase in NOI Contribution Margin o Degree of operating leverage = NOI Measures how a percentage change in sales volume will affect profits (EX: will grow 4 times as fast) o % change in NOI = (degree of OL) x (% change in sales) o If a company is near its break-even point, then even small percentage increases in sales can yield large percentage increases in profits Sales Mix Sales mix—refers to the relative proportions in which a company’s products are sold; combinations If sales mix changes, break-even point changes usually https://mgmt027.files.wordpress.com/2015/03/mgmt-027-connect-05-pt.pdf
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