ACCTG 231 – 1st Edition Lecture 10 Outline of Last Lecture I. Overhead RatesII. Activity-Based CostingOutline of Current Lecture I. EquationsII. Cost Structure/Profit Stability/Operating LeverageCurrent Lecture- STARTING ON LEARNING OBJECTIVE 5 Equation Method: Units-Profit=Unit CM ×Q−¿ Expenses-Unit CM ×Q=Profit+¿ Expenses-Q=(Profit +¿ Expenses)Unit CMEquation Method: Sales-Profit=CM Ratio× Sales−¿Expenses-CM Ratio× Sales=Profit +¿ Expenses-Sales=(Profit+¿ Expenses)CM RatioBreak-Even Sales:-Fixe d ExpensesContribution MarginRatioBreak-Even Units:-¿ ExpensesUnit CMComputing the Margin of Safety:These 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. (Formula Method)(Formula Method)- The margin of safety in dollars is the excess of budgeted (or actual) sales over the break-even volume of sales.-Marginof Safety =Total Sales−BreakEven Sales- The margin of safety can also be expressed in terms of the number of units sold.-Marginof Safety : Units=Marginof Safety ∈DollarsPrice per UnitCost Structure and Profit Stability:- Cost structure refers to the relative proportion of fixed and variable costs in an organization. o Managers often have some latitude in determining their organizations cost structure.- There are advantages and disadvantages to high fixed cost (or low variable cost) and low fixed cost (or high variable cost) structures.o An advantage of high fixed cost structure is that income will be higher in good years compared to companies with lower proportion of fixed costs.o A disadvantage of high fixed cost structure is that income will be lower in bad years compared to companies with lower proportion of fixed costs.- Companies with low fixed cost structures enjoy greater stability in income across good and bad years.Operating Leverage:- Operating leverage is a measure of how sensitive net operating income is to percentage changes in sales. It is a measure at any given level of sales, of how a percentage change in sales volume will affect profits.-Degreeof Operating Leverage=Contribution MarginNet Operating IncomeStructuring Sales Commissions:- Companies generally compensate salespeople by paying them either a commission based on sales, or a salary plus a sales commission.- Commissions based on sales dollars can lead to lower profits in a company.What is a 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