Managerial Accounting ACCT 2301
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This 22 page Class Notes was uploaded by Morris Beer II on Thursday October 22, 2015. The Class Notes belongs to ACCT 2301 at Texas Tech University taught by Bigbee in Fall. Since its upload, it has received 35 views. For similar materials see /class/226438/acct-2301-texas-tech-university in Accounting at Texas Tech University.
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Date Created: 10/22/15
Chapter Three Cost Volume Profit Analysis Contribution Margin CM Revenue Variable Costs CM represents the amount available to cover fixed expenses and thereafter provides profits CM can be calculated in total or per unit Contribution Margin Income Statement Sales Revenue Variable Costs Contribution Margin Fixed Costs Operating Income When using this format costs include product as well as period costs Sharon Virgil owns a delivery service company She charges customers 10 per delivery The company s variable expenses average 2 per delivery and fixed costs are 600 per month Sharon provided 100 deliveries during January Con rribu rion Margin Income S ra remen r Revenue 1000 Variable Costs 200 Contribution Margin 800 Fixed Costs 600 Net Income 200 Measuring Operating Leverage Using Contribution Margin Operating Leverage Contribution Marqin Net Income OL 800 200 4 What does this 4 tell us If you take the 0L and multiply it by the increase in sales it gives you the increase in net income Let s say deliveries increase 10 for February 4 10 40 in net income Let s test our theory In February sales increased by 10 100 deliveries 110 110 deliveries Revenue 1100 Variable Costs 220 Contribution Margin 880 Fixed Costs 600 Net Income 280 Sharon made 10 more deliveries in February Sales rose from 1000 to 1100 This is a 10 increase Net income rose from 200 to 280 This is a 40 increase change 280 200 80 80 200 40 BreakEven Point j v Use CM income statement to calculate the Breakeven pomt Point where Total Revenue Total Costs Once fixed costs havebeen covered net income Nill Increase per unIt contribution margin for each addItIonal unit sold Example Green Company plans to sell 1000 mowers at 400 each in the coming year Product costs include 0 Direct materials per mower 180 0 Direct labor per mower 100 0 Variable overhead per mower 25 0 Total fixed factory overhead 15000 Variable selling expense is a commission of 20 per mower fixed selling and administrative expense totals 30000 CVP Analysis What happens to the breakeven point if Green Company lowers fixed costs to 35000 What happens to the breakeven point if Green Company lowers variable costs to 275 per mower Variable Cost Ratio amp Contribution Margin Ratio VC Ratio VC expressed as of sales dollars CM Ratio CM expressed as of sales dollars VC Ratio CM Ratio 100 Variable Cost Ratio Variable Cost Variable Cost Ratio Sales Variable Cost 325 Ratio 400 Variable Cost 8125 Ratio Contribution Margin Ratio Contribution Margin permit Sales 39 Variable Cost 400 325 Contribution Margin per unit 75 per unit Contribution Contribution Margin Margin Ratio Sales Contribution Mar in Ratio 18750 9 400 Ratios can be used to calculate Breakeven Point Example CM Ratio 1875 Sales VC CM FC Operating Income 1875X 45000 0 1875X 45000 X 450001875 X 240000 Margin of Safety The units sold or revenue earned above the breakeven volume Wiggle room Actual or Target Sales Breakeven Sales Example Green Company Breakeven Point 600 units or 240000 sales dollars Target Point 1000 units or 400000 sales dollars Margin of Safety Units 1000 600 400 units Sales dollars 400000 240000 160000 What happens if a company sells more than one product Green Company Decides to offer two models of lawn mowers mulching mower SP 400 amp riding lawn mower SP 800 Mulching Riding Mower Total Mower 800 units 1200 units Sales 480000 640000 1120000 Less Variable Expenses 390000 480000 870000 Contribution Margin 90000 160000 250000 Less Fixed expenses 30000 40000 70000 Product Margin 60000 120000 180000 Less Common fixed 26250 expenses Operating Income 153750 WeightedAverage ContribUtiOh Margin per Unit In the real world a company is selling more than one product Have to find weightaverage contribution margin Step 1 Find the CM per unit for each Mulching Mower 400 325 75 Riding Mower 800 600 200 Step 2 Find sales mix for each Sales Mix sold total sold Mulching Mower 1200 2000 60 Riding Mower 800 2000 40 Step 3 Multiply CM by sales mix Mulching Mower 75 60 45 Riding Mower 200 40 80 Step 4 Add weighted CMs together for total weightedaverage CM 45 80 125 Use 125 to find breakeven point for company 125X 70000 26250 0 125X 96250 X 770 units How many mulching mowers 770 60 462 How many riding mowers 770 40 308
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