ACCTG 211 1st Edition Lecture 21 Outline of Last Lecture I Important things to know for Block 2 Exam Outline of Current Lecture II Methods for Splitting mixed costs a Visual Fit Method b High low Method c Least Squares Regression Method III Contribution Margin IV CVP Analysis Current Lecture Methods for splitting mixed costs Visual Fit Method First graph various data points based on the association between total mixed cost and volume X axis volume independent variable Y axis total cost dependent variable Line formula y ax b y total cost a slope of line x volume b total fixed costs the connecting line is the trend High Low Method First find the highest level of activity in terms of units Second find the lowest level of activity in terms of units Important you must use both the x and y from each of the highest and lowest levels of activity Third plug into the following formula to find the variable cost per unit or the slope of the trend line 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 Variable Cost Per Unit Total Cost of Highest Level of Activity Total Cost of Lowest Level of Activity Units of Highest Level of Activity Units of Lowest Level of Activity Equations TC FC VC TC VC per Unit X of Units Total FC formula for a line y ax b y total cost x volume a slope of the line b y intercept Slope of the line variable costs per unit Y intercept total fixed costs Least Squares Regression Method Contribution Margin Sales Variable Costs Contribution Margin CM ratio CM Sales in total per unit by percentage Think of contribution margin CM as the amount contributed to covering fixed costs Once fixed costs are covered by CM entirety of additional CM goes straight to profit Traditional Income Statement Sales COGS Gross Profit Expenses Net Income Contribution Margin Income Statement Sales VC CM Fixed Costs Net Income Cost Volume Profit Analysis CVP Goal project profits P for profit for different production levels V for volume assuming different cost structures C for cost Assumptions Costs included in calculation are either fixed or variable i e mixed costs are split Revenue per unit is held constant over relevant range of production Sales mix is held constant for multi product firms Units produced units sold i e no inventory build up allowed Profit Total Revenue Total Costs Kitchen Sink CVP Formula Total Fixed Costs Any Desired Profit Contribution Margin Per Unit Units Required to Cover Fixed Costs and Desired Profit Break even calculation is when no profit is desired To calculate revenue needed Multiply units required by the revenue each unit produces
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