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# Acct 226 Week 5 Notes ACCT 226 - 001

USC

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These notes cover the concept of CM, breakeven, etc
COURSE
Introduction to Managerial Accounting
PROF.
Debbie Huguley Brumbaugh (P)
TYPE
Class Notes
PAGES
3
WORDS
CONCEPTS
ACCT, Accounting, acct226
KARMA
25 ?

## Popular in Accounting

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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