ACCT 2102 1st Edition Exam 3 Study Guide Lectures 9 14 Lectures 9 and 10 Chapter 7 What are three things that affect Operating Income Sales Price Costs Volume What is the Contribution Margin CM is the excess amount of sales revenue over the total variable costs SR VC It is the amount available to cover fixed costs and is the amount remaining to generate or provide operating income Where can a CM Income Statement be used It can be used everywhere because it is used for planning purposes decision making and controlling This is important because it readily gives cost behavior information The Contribution Margin income statement formula is Sales Revenue Variable Costs Fixed Costs Operating Income Keep in mind that Variable costs should be units times the variable cost per unit and fixed costs should be in total What is Unit CM Unit CM is the sales revenue minus the variable cost per unit It provides management with quick means of predicting operating income What is CM Percentage CM percentage is another way to express a contribution margin It comes in handy for companies with multiple products The formula is unit cm divided by the sales price Also 100 minus the CM gives you the Variable Cost Therefore CM plus VC equals 100 Breakeven Point Contribution Margins can also be used to find the target profit or breakeven point The formula for the breakeven point is operating income plus fixed costs all divided by unit CM equals units If you want to try to find the amount of units to create a target profit then enter that profit into the operating income If you are trying to find the amount of units to breakeven then insert 0 for operating income You can also use a shortcut formula which is simply operating income plus fixed costs all divided by the SM to find the sales revenue How does a multiproduct firm calculate Breakeven 1 Find the weighted average CM per unit Take the unit cm for product A and then multiply it by the sales mix of that product Do the same for product B then add the totals Next divide that sum by the total sales mix to receive the weighted average CM per unit 2 Next apply the breakeven or target profit formula using the answer found in step one This is where you apply the operating income plus fixed costs divided by the weighted average cm per unit formula This will give you the amount of units 3 Next split the answer apart into separate products using the assumed sales mix For product A take the units from step 2 and multiply it by the sales mix of product A Then divide it by the total sales mix to find the amount of units needed for this product alone Repeat for product B Changes in Costs If variable costs increase then the breakeven point increases and the unit cm decreases If variable costs decrease then the breakeven point decreases and the unit cm increases If fixed costs increase then the breakeven point increases If fixed costs decrease then the breakeven point decreases If sales price increases then the breakeven point decreases If sales price decreases then the breakeven point increases What is the Indifference Point The indifference point is the point at which a company wouldn t care between two options because its operating income would be the same The formula is Sales revenue minus variable costs fixed costs is equal to sales revenue minus variable costs fixed costs Lectures 11 and 12 Chapter 8 There are 6 important business decisions discusses in this chapter located below Special Order Decisions 1 First your must figure out whether there is enough capacity to take on the special order Do this by taking the full operating capacity minus the current operating capacity to fund the excess capacity If the special order can be made within this amount of capacity then there is no give up situation and the special order will increase your operating income 2 Then take the New Sales Price minus the Old variable Cost times the number of units Then subtract the Added Fixed Costs to find the amount of operating income that would appear due to this special order 3 If the special order amount of units was greater than the excess capacity then you must apply the formula in the give up section as well This time you take the Old Sales Price minus the Old Variable Cost then multiply it by the amount of units you have to give up in order to make this special order Do this by taking the special order units minus the excess capacity Then subtract any added fixed costs to find the amount of operating income you would give up Compare this with the total in step 2 to see if the decision to take the special order is efficient or not Pricing Decisions For pricing decisions the formula is sales revenue minus variable costs minus fixed costs equal operating income For these problems you insert the information to solve for the unknown Most questions involve target total costs Which means you would leave variable costs and fixed cost unknown Remember though that variable costs should be per unit and will have to be multiplied by units unlike fixed costs Other questions though are total variable costs and target profit Decisions to Discontinue The goal is to calculate the operating income however in these questions there are two types of fixed costs traceable and common Traceable fixed costs are subtracted per each department Common fixed costs are subtracted once you add the operating incomes of all departments The operating income formula is the same used in previous chapters Sales Revenue minus variable costs minus fixed costs Product Mix Decisions 1 The first step is to calculate the contribution margins per unit Sales Revenue minus Variable Cost per Unit 2 Next you must divide this Unit CM by the ratio in order to find the correct profitable resource This is known as the CM per constraint You then want to label the products from highest CM per constraint to lowest 3 Next you want to take the demand of units and multiply it by the input ratio for the most profitable CM constraint item This will give you the amount of hours used Subtract this number from the amount of hours that Is limited Continue this process for all products until there are no more hours left 4 If there are less hours than are needed to fill all units of demand then divide the input ratio by the number of hours left in order to determine the amount of units you can make Make sure you round down because you can t make 66 of a unit Multiply this number back by the input ratio to see the amount of hours used