ACCT 2020 1st Edition Lecture 4 Outline of Last Lecture I Prepare income statements II Indirect Direct Costs III Cost classification for Decision Making Outline of Current Lecture I Formulas II Basics of Cost Volume Profit Analysis III CVP relationships in graphic form IV Variable expense Ratio V Determine Sales Levels to Meet Target Profit VI Determine the Breakeven Point Current Lecture I 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 Profit Unit CM x Sales Quantity fixed expenses II Degree of Operating Leverage CM Net operating income 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 profit is 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 expenses III 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 income will 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 expenses o 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 V 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 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 method o 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 80 000 100 000 80000 200 x Q Q 100 000 80 000 200 Q 900 2 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 unit VI 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 80 000 80 000 200 x Q 80 000 200 Q 400 Q o To solve for the breakeven point in dollars then use the same equations once again and set the profit equal to zero