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# Managerial Accounting Chapter 5 Notes ACC 212

UM

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This 4 page Class Notes was uploaded by Dalia Szkolnik on Monday February 15, 2016. The Class Notes belongs to ACC 212 at University of Miami taught by Quintana in Spring 2016. Since its upload, it has received 15 views.

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Date Created: 02/15/16

Chapter 5 Notes Cost-Volume-Profit Relationships The Basic Cost-Volume-Profit (CPV) Analysis • Contribution margin o Amount remaining from sales revenue after variable expenses are deducted (CM=sales-variable expenses) o It is the amount available to cover fixed expense and whatever remains from it, goes toward profit • Break-even point o Level of sales at which profit is zero o Once this point is reached, net operating income will increased by the amount of the unit contribution margin for each additional unit sold Equations Profit = (sales – variable expenses) – fixed expenses Profit is the net operating income If the company has a single product: • Sales = selling price per unit X quantity sold = P x Q • Variable expenses = variable expenses per unit X quantity sold = V x Q Profit = (P x Q – V x Q) – Fixed Expenses In terms of contribution margin: • Unit CM = selling price per unit – variable expenses per unit = P – V • Profit = (P – V) x Q – Fixed Expenses Profit = Unit CM x Q – Fixed Expenses Contribution Margin Ratio (CM Ratio) • CM ratio is the contribution margin as a percentage of sales CM ratio = Contribution Margin / Sales Change in contribution margin = CM ratio X Change in Sales Profit = CM ratio x Sales – Fixed Expenses^2 Change in profit = CM ratio x Change in sales – Fixed Expenses Variable Expense Ratio • This is the ratio of variable expenses to sales Variable expense ratio = Variable expenses / Sales • Because: CM ratio = Contribution Margin / sales • Then: CM ratio = Sales – Variable expenses / Sales • So: CM ratio = 1 – Variable Expense Ratio Incremental Analysis?? • The costs and revenues that are considered are those that will change if a new program is implemented Break-Even Analysis • There are two different approaches that could be used • Both will always result in the same number of units needed to break-even 1. Equation Method • Profit = Unit CM x Q – Fixed Expenses • Where: o Unit CM: unit contribution margin o Q: number of units 2. Formula Method • Unit sales to break even = Fixed expenses^3 / Unit CM Break-Even in Dollar Sales • There are three different methods 1. Use the equation method or formula method to find the break-even point in unit sales and then multiply the result by the selling price 2. Use the equation method to compute break-even point in dollar sales Profit = CM ratio x Sales – Fixed Expenses Where you would place a 0 for profit and then solve for sales 3. Use the formula method to compute dollar sales need to break even Dollar sales to break even = Fixed expenses^4 / CM Ratio Target Profit Analysis • Estimating the sales volume needed to achieve a specific target profit • There are two different approaches 1. Equation method • Using the equation: Profit = Unit CM x Q – Fixed Expenses • When given a target profit, plug it in and find the number of units (Q) needed to reach that target profit 2. Formula Method • Unit sales to attain a target profit = (Target profit + Fixed Expenses) / Unit CM In terms of dollar sales, use the same equation as the one above using the formula method • Dollar sales to attain a target profit = (Target profit + Fixed Expenses) / CM Ratio Margin of Safety • It is the excess of budgeted or actual sales dollars over the break-even volume of sales dollars • In other words, it is the amount by which sales can drop before losses are incurred • Higher margin of safety lower risk of not breaking-even and incurring a loss Margin of safety in dollars = (total budgeted sales) – (Break-even sales) Margin of safety percentage = margin of safety in dollars / total budgeted sales Operating Leverage • A level is a tool for multiplying force • Operating leverage: a measure of how sensitive net operating income is to a given percentage change in dollar sales • High operating leverage smaller percentage increase in sales can product a much large percentage increase in net operating income Degrees of operating system = contribution margin / net operating income Sales Mix • The relative proportions in which a company’s products are sold • The goal is to reach a mix that will generated the greatest profits • Shift from high-margin items to low-margin items total profits may decrease and total sales may increase • Shift from low-margin items to high-margin items total profits may increase and total sales may decrease

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