COB 242 1st Edition Lecture 13 Outline of Current Lecture I. Cost-Volume-Profit Relationships ContinuedII. Break-even and Target Profit Analysisa. Break-even Analysisi. Equation Methodii. Formula Methodb. Target Profit Analysisi. Equation Methodii. Formula Methodc. The Margin of SafetyIII. CVP Considerations in Choosing a Cost Structurea. Cost Structure and Profit Stabilityb. Operating LeverageIV. Structuring Sales Commissionsa. The solutionV. Sales Mixa. Sales Mix and Break-even AnalysisCurrent LectureI. Cost-Volume-Profit Relationships ContinuedII. Break-even and Target Profit Analysisa. Break-even Analysisi. Equation Method- set profit equal to zero1. Profit = unit cm X Q – fixed expensesii. Formula Method1. Unit Sales to Break-even = fixed expenses / unit CMiii. Break-even in Dollar Sales- set profit equal to zero1. Dollar Sales to Breakeven = fixed expenses / CM Ratiob. Target Profit Analysis- estimates what sales volume is needed to achieve a specific target profiti. Equation Method1. Target Profit = unit cm X Q – fixed expensesii. Formula Method1. Unit sales to attain the target profit = (target profit + fixed expenses) / unit CMiii. Target Profit in Dollar SalesThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.1. Dollar sales to attain a target profit = (target profit + fixed expenses) / CM Ratioc. The Margin of Safety- the amount by which sales can drop before losses are incurred i. Higher = lower risk of not breaking evenii. Margin of safety in dollars = total budgeted (or actual) sales – breakevensalesiii. Margin of safety Percentage = margin of safety in dollars / total budgeted (or actual) sales in dollars = %III. CVP Considerations in Choosing a Cost Structurei. Cost structure- relative proportion of fixed and variable costsa. Cost Structure and Profit Stabilitya. Two types of cost structures: (each have advantages)i. High variable costs and low fixed costsii. Low variable costs and high fixed costsb. Operating Leverage- a measure of how sensitive net operating income is to a given percentage change in dollar salesa. If high, then a small % increase in sales can produce a much larger % increase in net operating incomeb. Degree of operating leverage- a measure at a given level of sales, of how a percentage change in sales volume will affect profitsi. Degree of operating leverage = contribution margin / net operating income = Xii. Net operating income grows X times as fast as its salesiii. Percentage change in net operating income = degree of operating leverage X percentage change in salesIV. Structuring Sales Commissionsa. Sales people will try to sell a product with a higher selling price because they get a larger commissionb. The company wants the product with lower contribution margin to be sold more because it will have greater profitsc. The solution:i. Base commission of the contribution margin instead of sales price V. Sales Mix- the relative proportions in which a company’s products are solda. Ideal: achieve a combination, or mix, of products sold that will yield the greatest profitsb. Sales Mix and Break-even Analysisi. If a company sells more than one product, breakeven analysis is more complex than what we have learnedii. If the sales mix changes, then the breakeven point will usually change as