Chapter 5 Accounting 212 Notes
Chapter 5 Accounting 212 Notes 212
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This 1 page Class Notes was uploaded by Erin Morris on Thursday March 3, 2016. The Class Notes belongs to 212 at Radford University taught by Dr. Helen Roybark in Spring 2016. Since its upload, it has received 14 views. For similar materials see Fundamentals of Managerial Accounting in Accounting at Radford University.
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Date Created: 03/03/16
Accounting 212 Chapter 5 Notes CostVolumeProfit Relationships This chapter mostly consists of equations and computations. Some abbreviations that will be used throughout these notes are: o Contribution Margin will be CM o Fixed Costs/Expenses will be FC o Variable Costs/Expenses will be VC o BreakEven will be BE o Net Operating Income will be NoI Following is a list of the equations used: o CM = Sales Price per unit – VC per unit Ex. $20 $12 = $8 o CM Ratio = CM/Sales Price per units Ex. $8/$20 = .4 = 40% o # of Units to BE = FC/CM Ex. $6,000/$8 = 750 Units o Units to Achieve Target Income = (FC + Target Income)/CM Ex. ($6,000 + $5,000)/$8 = 1,375 units o Sales to BE = FC/CM Ratio Ex. $6,000/.4 = $15,000 o Sales to Achieve Target Income = (FC + Target Income)/CM Ratio Ex. ($6,000 + $5,000)/.4 = $27,500 o Margin of Safety = Sales – BE Sales Ex. $27,000 $15,000 = $12,000 o Margin of Safety Percentage = Margin of Safety/Sales Ex. $12,000/$27,000 = .44 = 44% o Degree of Operating Leverage = CM/NoI Ex. $54,000/$24,000 = 2.25 o Percent Increase in NoI = Degree of Operating Leverage x Percent Increase in Sales Ex. 2.25 x 5% = .1125 = 11.25% o NoI = CM – FC Ex. $8,000 $6,000 = $2,000 The degree of operating leverage is a measure, at a given level of sales, of how a percentage change in sales volume will affect profits, for example if the degree of operating leverage is 2, then net operating income will grow two times as fast as the sales It is important to understand that the cost structure matters. For example, sales minus variable cost equals the contribution margin, contribution margin minus fixed costs equals net operating income. You can change different numbers in this and still get the same NoI. However, the changes would also change the contribution margin ratio and the number of break even units