Contribution margin and contribution margin ratioBreak-even pointWeek 4 DQ’s - ACC206 - Principles of Accounting II Tutorial - Ashford UniversityRequired Readings1. Chapter 18: Activity-Based Costing and Other Cost Management Tools2. Chapter 19: Cost Volume-Profit AnalysisDiscussionsActivity-Based Costing and Other Cost Management Tools. Fraud Case 18-1. Fraud Case 18-1Solution:1. ABC data can be used to highlight areas where costs are out of control, where cost savings should beconsidered, or more efficient operations should be looked into. They also can be used for budgeting, analyzing profitability of various products, and for pricing decisions.2. If a company has an audit committee, an employee can usually contact them anonymously. If, however, upper management is in on the scheme, the employeeis in a very weak position, and should consider, like the case above, getting out. Alternatively, an employee could tip off either the outside auditors, or law enforcement.Cost-Volume-Profit Analysis. Discuss how the following affect the break-even point: increase or decrease in unit sales price, increase or decrease in variable cost per unit, increase or decrease in fixed costs.Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating income and net income. In performing this analysis, there are several assumptions made, including: - Sales price per unit is constant.- Variable costs per unit are constant.- Total fixed costs are constant.- Everything produced is sold.- Costs are only affected because activity changes.- If a company sells more than one product, they are sold in the same mix.Contribution margin and contribution margin ratioKey calculations when using CVP analysis are the contribution margin and the contribution margin ratio. The contribution margin represents the amount of income or profit the company made before deducting its fixed costs. Said another way, it is the amount of sales dollars available to cover (or contribute to) fixed costs. When calculated as a ratio, it is the percent of sales dollars available to cover fixed costs. Once fixed costs are covered, the next dollar of sales results in the company having income. The contribution margin is sales revenue minus all variable costs. It may be calculated using dollars or on a per unit basis. If The Three M's, Inc., has sales of $750,000 and total variablecosts of $450,000, its contribution margin is $300,000. Assuming the company sold 250,000 units during the year, the per unit sales price is $3 and the total variable cost per unit is $1.80. The contribution margin per unit is $1.20. The contribution margin ratio is 40%. It can be calculated using either the contribution margin in dollars or the contribution margin per unit. To calculate the contribution margin ratio, the contribution margin is divided by the sales or revenues amount. Break-even pointThe break-even point represents the level of sales where net income equals zero. In other words, the point where sales revenue equals total variable costs plus total fixed costs, and contribution margin equals fixed costs. Using the previous information and given that the company has fixed costs of $300,000, the break-even income statement shows zero net income.The Three M's, Inc. Break-Even Income Statement Revenues (250,000 units × $3) $750,000Variable Costs (250,000 units × $1.80) 450,000 Contribution Margin 300,000Fixed Costs 300,000 Net Income $ 0 - This income statement format is known as the contribution margin income statement and is used for internal reporting only. - The $1.80 per unit or $450,000 of variable costs represent all variable costs including costs classified as manufacturing costs, selling expenses, and administrative expenses.Similarly, the fixed costs represent total manufacturing, selling, and administrative fixed costs.- Break-even point in dollars. The break-even point in sales dollars of $750,000 is calculated by dividing total fixed costs of $300,000 by the contribution margin ratio of 40%. - Another way to calculate break-even sales dollars is to use the mathematical equation. - In this equation, the variable costs are stated as a percent of sales. If a unit has a $3.00 selling price and variable costs of $1.80, variable costs as a percent of sales is 60% ($1.80÷ $3.00). Using fixed costs of $300,000, the break-even equation is shown below. - The last calculation using the mathematical equation is the same as the break-even sales formula using the fixed costs and the contribution margin ratio previously discussed in this chapter.- Break-even point in units. The break-even point in units of 250,000 is calculated by dividing fixed costs of $300,000 by contribution margin per unit of $1.20.- The break-even point in units may also be calculated using the mathematical equation where “X” equals break-even units. Again it should be noted that the last portion of the calculation using the mathematical equation is the same as the first calculation of break-even units that used the contribution margin per unit. Once the break-even point in units has been calculated, the break-even point in sales dollars may be calculated by multiplying the number of break-even units bythe selling price per unit. This also works in reverse. If the break-even point in sales dollars is known, it can be divided by the selling price per unit to determine the break-even point in