Acct 226 Week 5 Notes
Acct 226 Week 5 Notes ACCT 226 - 001
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This 3 page Class Notes was uploaded by Madeline Lacman on Tuesday September 27, 2016. The Class Notes belongs to ACCT 226 - 001 at University of South Carolina taught by Debbie Huguley Brumbaugh (P) in Fall 2016. Since its upload, it has received 4 views. For similar materials see Introduction to Managerial Accounting in Accounting at University of South Carolina.
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Date Created: 09/27/16
Review: CM = Sales – Variable Expenses o Can be expressed in total $’s o Can be expressed in per unit o Can be expressed as a ratio CM Ratio = CM/Sales CM – Fixed Expenses = Net Operating Income (Sales – Variable Expenses) – Fixed Expenses = Profit Breakeven is where Total Revenue = Total Expenses Breakeven is a Target Profit = 0 Variable Expenses Ratio = Sales Ratio – CM ratio Application of CM Concept: Changes in Fixed Costs and Sales Volume What Is the profit impact if Racing Bicycle can increase unit sales from 500 to 540 by increasing the monthly advertising budget by $10,000? o $80,000 + $10,000 advertising = $90,000 o Sales increased by $20,000 but net operating income decreased by $2,000 o A shortcut solution using incremental analysis: Increase in CM (40 units x $200 $8,000 Increase in advertising expenses $10,000 Decrease in net operating income ($2,000) What if RBC cuts its selling price by $20 per unit? o 650 units x $480 = $312,000 o Sales increase by $62,000, fixed costs increase by $15,000, and net operating income increases by $2,000 Increases its advertising budget by $15,000 per month? o Increases sales from 500 to 650 units per month? 500 units 650 units Sales 250,000 312,000 Less: variable expenses 150,000 195,000 Contribution Margin 100,000 117,000 Less: Fixed Expenses 80,000 95,000 Net Operating Income 20,000 22,000 What if RBC pays a $15 sales commission per bike sold instead of paying salespersons flat salaries that currently total $6,000 per month? Increases unit sales from 500 to 575 bikes? 500 units 575 units Sales 250,000 287,500 Less: variable expenses 150,000 181,125 Contribution Margin 100,000 106,375 Less: Fixed Expenses 80,000 74,000 Net Operating Income 20,000 32,375 o Sales increase by $37,500, fixed expenses decrease by $6,000 and net operating income increases by $12,375 Break-Even Analysis The equation and formula methods can be used to determine the unit sales and dollar sales needed to achieve a target profit of 0 Break-even in Unit Sales: Equation Method o Profits = Unit CM x Q – Fixed expenses Suppose RBC wants to know how many bikes must be sold to break-even (earn a target profit of $0) o $0 = $200 x Q + $80,000 o Formula Method Unit sales to break even = Fixed Expenses/CM per unit Suppose RBC wants to compute the sales dollars required to break-even (earn a target profit of $0) o Profit = CM ratio x Sales – Fixed Expenses Solve for the unknown ‘Sales’ o Formula Method Dollar sales to break even = Fixed Expenses/CM Ratio Unit sales to attain the target profit = (target profit + fixed expenses)/CM per unit Dollar Sales to attain the target profit = (target profit + fixed expenses)/CM ratio The Margin of Safety in Dollars Cost Structure and Profit Stability Cost structure: the relative proportion of fixed and variable costs in an organization Managers often have some latitude in determining their organization’s cost structure There are advantages and disadvantages to high fixed costs (or low variable cost) and low fixed cost (or high variable cost) structures An advantage of a high fixed cost structure is that income will be higher in good years compared to companies with lower proportion of fixed costs Companies with low fixed cost structures enjoy greater stability in income Operating Leverage Measure of how sensitive net operating income is to percentage changes in sales A measure, at any given level of sales, of how a percentage change in sales volume will affect profits Degree of operating leverage = CM/net operating income With an operating leverage of 5, if RBC increases its sales by 10%, net operating income would increase by 50% Concept of Sales Mix Sales mix is the relative proportion in which a company’s products are sold Different products have different selling prices, cost structures, and contribution margins When a company sells more than one product, break-even analysis becomes more complex
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