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Acct 226 Week 5 Notes

by: Madeline Lacman

Acct 226 Week 5 Notes ACCT 226 - 001

Madeline Lacman

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About this Document

These notes cover the concept of CM, breakeven, etc
Introduction to Managerial Accounting
Debbie Huguley Brumbaugh (P)
Class Notes
ACCT, Accounting, acct226
25 ?




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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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