MGA 202 1st Edition Lecture 15Outline of Last LectureThis was more of a question & answer class. NO new material was covered.Current Lecture- Cost-Volume-Profit Analysis focuses on how profits are affected by the following factors:o Selling Priceso Sales Volume o Unit Variable Costs o Total Fixed Cost- CVP Relationships are placed in Contribution Format Income Statement:o Sales-# of units (total & per unit)o Variable Expenses (total & per unit)o Contribution Margin (total & per unit)o Fixed Expenses o Net Operating Income - A CVP Relationship can be expressed in an equation:o Profit = Contribution Margin – Fixed Expenseso Profit = (Sales – Variable Expenses) –Fixed Expenses- Unit contribution margin is the contribution margin per unit:o Unit CM = Contribution Margin/ Quantity Sold (Q)o Unit CM = Selling price per unit (P) – Variable Expense per unit (V)o Profit = Q x (Unit CM) – Fixed Expenses - Contribution Margin Ratio is the Contribution Margin as a percentage of sales. o CM Ratio = Contribution Margin / Saleso CM Ratio = Unit CM / Po Contribution Margin = Sales x CM Ratio o Profit = Contribution Margin –Fixed Expenses- Variable Expense Ratio is the ratio of variable expenses to saleso Variable Expense Ratio = Variable Expenses / Sales 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.Exercise 1- Coffee Klatch Average Selling Price (per cup) = $1.49Average Variable Expense (per cup) = $0.36Average Fixed Expense (per month) = $1,3002,100 cups sold each month. CM Ratio =? CM Ratio = Unit CM / P = (P-V) / PCM Ratio = ($1.49 - $0.36) / ($1.49) = 0.758 Answer: BExercise 2-Jame’s Company Variable Expenses = 45% of sales CM Ratio =?Variable Expense Ratio = Variable Expenses / Sales CM Ratio = 1 – Variance Expense Ratio CM Ratio = 1 -.45 =.55Answer: CExercise 4- Cindy, Inc. *can only use the formula approach for this question!Average Selling Price (per unit) = $10Average Variable Expense (per unit) = $6Average Fixed Expense (per month) = $35,000 *doesn’t changeSales will increase by $40,000 *an increase in Sales is ALWAYS an increase in NOI if fixed expenses aren’t changingChange in NOI =? Change in NOI = Change in CM = Change in Sales x CM RatioCM Ratio = ($10 - $6)/ $10 = 0.4Change in NOI = $40,000 x 0.4 = increase of $16,000Exercise 3-AcousticProfit Impact if Acoustic can increase sales from 400 to 520 by increasing advertising by $10,000?Approach 1: Use contribution format income statement. (This is what I prefer)Current Sales Sales +Ad Budget Per Unit % of SalesSales $100,000 $130,000 $250 100%Var. Expenses -$60,000 - $78,000 $150 - 60%CM = $40,000 = $52,000 $100 = 40%Fixed Expenses - $35,000 -$45,000NOI = $5,00 = $7,000Answer: Profit will increase by $2,000.Approach 2: Use formulas Change in CM = Change in Sales x CM RatioChange in NOI = Change in CM –Change in Fixed ExpensesExercise 5- No Name Company (Chart from Exercise 3 must be used to solve this problem!)Current Sales After Changes Per UnitSales $210,000 Decreases by 25% ($52,500) =$157,500$70 (3,000 units)Var. Expenses - $150,000 Increases by 15%($22,500) =$127,500$50CM = $60,000 = $30,000 $70-$50 = $20Fixed Expenses - $25,000 -$25,000NOI = $35,00 = $5,000Answer: Decrease by about $30,000Next Lecture-3/25Continuation of Chapter 5- Target profit analysis- Break even