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September 15th Notes

by: Callisa Ruschmeyer

September 15th Notes Acct 2210- 001

Callisa Ruschmeyer
GPA 4.0

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Chapter 5 Contribution Margin Contribution Margin Ratio Profit Analysis
Managerial Accounting
Mr. Fetsch
Class Notes
Managerial Accounting Notes, fetsch, contribution margin
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This 2 page Class Notes was uploaded by Callisa Ruschmeyer on Thursday September 15, 2016. The Class Notes belongs to Acct 2210- 001 at Auburn University taught by Mr. Fetsch in Fall 2016. Since its upload, it has received 7 views. For similar materials see Managerial Accounting in Accounting at Auburn University.

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Date Created: 09/15/16
Chapter 5 Basics of Cost-Volume-Profit Analysis  The contribution income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume o The emphasis is on cost behavior  Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted  CM is used first to cover fixed expenses --> any remaining CM contributes to net operating income The Contribution Approach  Sales, variable expenses, and contribution margin can also be expressed on a per unit basis o CM basically finds the value that will generate more profit per extra unit sold of a product (see slide 9 for visual)  We do not need to prepare an income statement to estimate profits at a particular sales volume o Breakeven = number of units sold above BE X contribution margin per unit CVP Relationships in Equation Form  The contribution format income statement can be expressed in the equation o Profit = (Sales - Variable expenses) - fixed expenses  Sales = quantity sold (Q) X selling price per unit (P) --> Q X P  Variable expenses = quantity sold (Q) X variable expenses per unit (V) --> Q X V o SO, Profit = [(P*Q) - (V*Q)] - fixed expenses  It is often useful to express the simple profit equation in terms of the unit contribution margin (Unit CM) o Unit CM = selling price per unit - variable expenses per unit --> P - V  Profit = [(P*Q) - (V*Q)] - fixed expenses  Profit = (P-V)*Q - fixed expenses  Profit = Unit CM X Q - fixed expenses  Variables o Q = quantity sold o P = selling price per unit o V = variable expenses per unit o Unit CM = P - V CVP Relationships in Graphic Form  The relationships among revenue, cost, profit, and volume can be expressed graphically by preparing a CVP graph  X axis is dollars; Y axis is units  Breakeven point is where sales and total expenses intercept  Profit area: Sales - Total expenses o The in-between spaces of these two lines, if the sales line is above the total expenses line  Loss area: Total expenses - sales o The in-between spaces of these two lines, if the sales line is below the total expenses line  There is another type of graph that compares profit (x axis) to number of units sold (y axis), but it is less known and harder to comprehend Contribution Margin Ratio (CM Ratio)  The CM ratio is calculated by dividing the total contribution margin by total sales o CM Ratio = CM / Total Sales  Total sales = quantity sold X selling price per unit  Or! CM Ratio can be found by dividing the contribution margin per unit by the selling price per unit o CM Ratio = CM per unit / SP per unit  CM per unit = unit SP - unit VC  Operating income/profit = CM - fixed expenses o Or (CM ratio X sales) - fixed expenses


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