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UNT ACCT 2020 - Contribution Margin Cost Calculation
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I. FormulasII. Basics of Cost – Volume - Profit AnalysisIII. CVP relationships in graphic formIV. Variable expense RatioV. Determine Sales Levels to Meet Target ProfitVI. Determine the Breakeven PointACCT 2020 1st Edition Lecture 4Outline of Last Lecture I. Prepare income statementsII. Indirect/ Direct CostsIII. Cost classification for Decision MakingOutline of Current Lecture I. FormulasII. Basics of Cost – Volume - Profit AnalysisIII. CVP relationships in graphic formIV. Variable expense RatioV. Determine Sales Levels to Meet Target ProfitVI. Determine the Breakeven PointCurrent LectureI. Formulas Contribution margin($) = Sales($) – variable expenses($) CM Ratio (what percentage of sales revenue is retained as part of the contribution margin)CM Ratio($) = Unit CM($)Unit Selling Price($)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. Overall CM Ratio($) = Total CM($)Total Sales($) Margin of safety($) = Sales($) – breakeven Sales($)  Degree of Operating Leverage = CM($)Net operating income($) Profit($) = Unit CM($) x Sales Quantity- fixed expensesII. Basics of Cost – Volume - Profit Analysis The contribution income statement helps judge the impacts of profits of changes in selling price, cost, or volume. Contribution margin first covers our fixed expenses, and any remaining CM contributes to net operating income. Sales, Variable expenses, and CM, can be expressed on a per unit basis.  The breakeven point is when the fixed expenses = the contribution margin o Fixed (8$0,000)CM per unit($200) We don’t need to prepare this income statement every time, just need to look at the change in number of sales above break even and multiply that by the CM per unit. o Sell 430 units for 200 per unit, 400 is Breakeven, so 200 x 30 = $6000. $600 would be the increase to profit We can tell the total profit by using the formula: (sales –variable) – fixed expenses= Profit If a company only has 1 product, then we can break this formula down. In this case profitis still equal to the last equation. But the quantity sold selling price = sales and quantity sold x variable expenses per unit = variable expenses.  Profit= (price x quantity – Variable x quantity) – fixed expenses Profit = (p-v) x q –fixed expenses Profit = Unit CM x q – fixed expensesIII. CVP relationships in graphic form The relationships among revenue, cost, profit, and volume, can be expressed graphically by preparing a CVP graph. We set it up with Units on the Horizontal axis, and dollars on the vertical axis. The new draw line that’s parallel to the volume axis to represent total fixed expenses. o Choose a level of sales volume and plot that point taking into respect the (fixed expenses + variable expenses) representing total expenses. An increase in the contribution margin ratio determines how much the operating incomewill also increase assuming the fixed expenses stay the same.  Contribution margin ratio is the percent of sales that end up being part of the contribution margin. The relationship between profit and CM ratio can be expressed using the following equation:o Profit = (CM ratio x Sales) – fixed expenseso If using dollars, then you have to use UNT CM($) and sales quantity. If not using dollars in CM, you have to use CM ratio x sales($).IV. Variable expense Ratio The variable expense ratio is the variable expenses / total sales. If only dealing with one product we can divide the variable expense per unit by the unit-selling price. Sales CM ratio must be %100, so you are seeing what percent of this goes to variable expenses. V. Determine Sales Levels to Meet Target Profit We can compute the number of units that must be sold to attain a target profit using either 1. Equation methodo Profit= unit CM x q – fixed expenses. Our goal is to solve for the sales quantity.Suppose management wants to know how any bikes must be sold to earn a target profit of $100,000.o 100,000 = 200 x Q – 80,000100,000 + 80000 = 200 x QQ = (100,000 +80,000) / 200Q = 9002. Formula Method : we can calculate dollar sales needs to attain a target profit (net operating income) o Uses the following equation:o Target profit + fixed expenses / CM per unitVI. Determine the Breakeven Point Anytime we see target profit that means 0. Profit = zero.  Use the same equations as determining sales levels to meet target profits. o 0 = $200 x Q - $80,00080,000 = 200 x Q80,000/200 = Q400 = Qo To solve for the breakeven point in dollars, then use the same equations once again, and set the profit equal to


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UNT ACCT 2020 - Contribution Margin Cost Calculation

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