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by: Rachel Moore

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# Chapter 7 and Chapter 8 (Part 1) Notes ACCT 2102

Marketplace > University of Georgia > Accounting > ACCT 2102 > Chapter 7 and Chapter 8 Part 1 Notes
Rachel Moore
UGA
GPA 3.33

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This set of notes includes Chapter 7, which was discussed the week before spring break, as well as Part 1 of the Chapter 8 notes. Chapter 8 will continue to be discussed in class next week.
COURSE
Principles of Accounting II
PROF.
Farmer
TYPE
Class Notes
PAGES
9
WORDS
CONCEPTS
ACCT 2102, Farmer, Accounting, Managerial, uga, chapter 7, Chapter 8
KARMA
25 ?

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This 9 page Class Notes was uploaded by Rachel Moore on Friday March 18, 2016. The Class Notes belongs to ACCT 2102 at University of Georgia taught by Farmer in Spring 2016. Since its upload, it has received 80 views. For similar materials see Principles of Accounting II in Accounting at University of Georgia.

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Date Created: 03/18/16
ACCT 2102 February 29, 2016 – March 4, 2016 Chapter 7 Notes Cost-Volume-Profit Analysis Profit = Revenue – Costs Ways to increase profit… • Increase revenue • Decrease costs Product VC \$340/set Product VC \$10/set Period FC \$60/set Period VC \$50/set Create a traditional income statement for Tee Time’s first year of operations. How is it organized? By cost function. SR \$500×900=\$450,000 <COGS> <\$350×900> = <\$315,000> GP \$135,000 <SG&A> <\$50×900+\$60K> = <\$105,000> OPY \$30,000 Where can a CM income statement be used? Why do managers like them? Planning, directing, controlling; BEHAVIOR What is the definition of the Contribution Margin (CM)? What does it tell us? Excess of sales revenue over variable cost… how much is available to cover fixed cost and generate operating income. Created By: Rachel Moore Not for redistribution. What does a CM income statement look like? How is it arranged? SP – unit VC = unit CM* SR = sales price x # units <VC> = <unit VC x # units> CM = unit CM x # units <FC> OPY How is the unit CM calculated? Why is this different from the unit GP? SP – unit VC = unit CM* SP – unit product cost = unit GP** *Unit CM includes variable period; excludes fixed product **Unit product cost includes fixed product; excludes var able period How is the CM% calculated? What does it tell us? SP \$1 ????????% = ???????? (???????????????? ???????? × # ????????????????????) ???????? (???????? × # ????????????????????) Unit VC <0.4> VC% = 40% Unit CM \$0.60 CM% = 60% SP – unit VC = \$500 - \$400 = \$100 unit CM unit CM/SP = \$100/\$500 = 20% CM% SR – VC = CM – FC = OPY \$450,000 - \$360,000 = \$90,000 – \$60K = \$30K (500*990) – (400*990) = (100*990) – 60,000 = \$39,000 (\$100 x 1,200) - \$60K = \$60K CM – FC = OPY (\$500,000 x 20%) - \$60K = \$40K CM – FC = OPY What is breakeven? OPY = 0 What is a target profit? OPY > 0 Created By: Rachel Moore Not for redistribution. What is the formula used to solve for the number of units needed to either breakeven or generate a certain target profit? ???????? − ???????? − ???????? = ???????????? ???????? − ???????? = ???????????? ???????? = ???????? + ???????????? # ???????????????????? ???????????????? ???????? = ???????? + ???????????? ???????? + ???????????? ???????????????????? = ???????????????? ???????? What is the formula used to solve for the sales revenue needed to either breakeven or generate a certain target profit? ???????? = ???????? + ???????????? ???????? ????????% = ???????? + ???????????? ???????? + ???????????? ???????? = ????????% Calculate the breakeven point in units for Tee Times… ???? \$100 = \$60,000 + 0 \$60,000 ???? = \$100 ???? = 600 ???????????????????? ???????????? ???????????????? What level of sales revenue would Tee Times need to achieve to generate \$50,000 in operating income? ???????? = \$60,000 + \$50,000 20% \$110,000 ???????? = 20% ???????? = \$550,000 Yes; OPY increases by \$2,000 CM (70X\$100) = \$7,000 <FC> <\$5,000) Increase in OPY \$2,000 Created By: Rachel Moore Not for redistribution. \$5,000 / \$100 = 50 sets Yes; OPY increase of \$27,450 Created By: Rachel Moore Not for redistribution. ACCT 2102 March 16, 2016 – March 18, 2016 Chapter 8 (Part 1) Notes Relevant Costs for Short-Term Decisions When making a business decision:  Identify and focus on relevant information o Future o Differs  Consider qualitative factors  Analyze variable costs and fixed costs separately using a contribution margin approach o Be careful about using unit cost data, unless it is purely a variable cost per unit  SR−VC=CM−FC=OPY Special Order Decisions  Do we have excess capacity available to fill this order? FullCapacity−Current=ExcessCapacity  Will the reduced sales price be high enough to cover the incremental costs of filing the order (the variable costs of filling the order and any additional fixed costs)? (Special SP−SpecialUnitVC ¿× ¿of units −Added FC=AdditionalOPY *Special order VC can be the same materials as other orders, or can be higher/lower quality and can affect the VC.  Will the special order affect regular sales in the long run? o Qualitative o Will we lose customers? Created By: Rachel Moore Not for redistribution. Current *No change in VC or FC* 80,000 Excess 20,000 (SpecialSP−SpecialUnitVC ¿)× SP = \$2.50 ¿of units −Add FC=AddOPY Unit VC = [\$1.75−\$1.30 ×18,000 ]\$0=\$8,100 \$1.30 Unit CM = Nothing has to be given up because the extra orders \$1.20 fall within the excess capacity. FC = \$48,000 Increase in OPY by \$8,100. GET GIVE UP [\$1.75−\$1.30 )×25,000 ]\$0=\$11,250 \$1.20×5,000=\$6,000 Net Increase OPY \$5,250 Created By: Rachel Moore Not for redistribution. SP = \$1.60 Unit VC = ¿ (Special SP−SpecialUnitVC × \$1.05 [¿of units −Add FC=Ad d OPY Unit CM = [\$1.60−\$1.05 ×18,000 ]\$2000=\$7,900 \$0.55 Add FC = \$2,000 Nothing has to be given up because the extra orders fall within the excess capacity. Increase in OPY by \$7,900. Pricing Decisions  What is our taret profit? Affects OPY; owners  How much will customers pay? Affects SR; market  Are we a price-taker or a price-setter for this product? o Price-taker (competition; generic brand)  How do we gain control over pricing? No control over pricing.  Target costing SR and OPY are given; decrease costs. o Price-setter (differentiate yourself from the compeition; unique; brand name)  Cost-plus pricing VC and FC are given; determine target OPY and solve for SR SP = \$0.75 VC = \$0.25 CM = \$0.50 Created By: Rachel Moore Not for redistribution. FC = \$12 million Vol = 30 million OPY = \$50million∗10 =\$5million Which pricing approach will Willow use? Why? Target costing  price-taker  generic What is Willow’s target total cost? SR−VC−FC=OPY \$0.75)(30million)−x=\$5million x=\$17,500,000 Given Willow’s current costs, will its owners achieve their target profit? (\$0.25)(30million)+\$12million=\$19,500,000 No, they are \$2 million off. Willow has identified ways to cut its fixed costs by \$500,000. What is its new target variable cost per unit? Will Willow be able to reach its target profit? 30millionx +\$ 11,500,000=\$17,500,000 x=\$0.20 SR−VC−FC=OPY 30million(x)−(\$ 0.25)(30million)−\$14,500,000=\$ 5million x=\$0.90 Decisions to Discontinue Products, Departments, or Stores (Keep or Drop)  Does the product provide a positive contribution margin? Calculate CM.  Are there any fixed costs that can be avoided if we discontinue the product? What fixed costs are directly attributed to the segment; subtract traceable fixed costs.  Will discontinuing the product affect sales of the company’s other products? Created By: Rachel Moore Not for redistribution.  What could we do with the freed capacity? Segmented income statement What will happen to operating income if Giant Eagle drops its produce line and makes no other changes to its operations? For now, assume this decision will not affect the sales of the other departments. CONTINUE CHAPTER 8 ON MONDAY Created By: Rachel Moore Not for redistribution.

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