I. Rules/Guidelines Exam ReviewII. Margin of SafetyIII. Cost structure and Profit StabilityIV. Structuring Sales CommissionsV. Compute Break-even point (sales mix)ACCT 2020 1st Edition Lecture 5Outline of Last 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 PointOutline of Current Lecture I. Rules/Guidelines Exam ReviewII. Margin of SafetyIII. Cost structure and Profit StabilityIV. Structuring Sales CommissionsV. Compute Break-even point (sales mix)Current LectureI. Rules/Guidelines Exam Review- Know student I.D. number, bring pencil, etc.- Calculator (no graphing, only simple)- Go over problems in the back of the chapters and extra problems on MHConnectThese 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.II. Margin of Safety - The difference between the break-even point and the current sales level. How much could our sales decrease and we would still break even?o Margin of safety (MOS) = total sales-break even saleso Can also be expressed as a percentage; %MOS= margin of safety / Actual saleso Can also be expressed in terms of units sold. The margin of safety/unit selling priceIII. Cost structure and Profit Stability- Cost structure refers to the relative proportion of fixed costs in an organization. Managers often have some latitude in determining their organization’s cost structure. o An advantage of heavy fixed costs structure is that in good income years, these fixed costs don’t change with the production (like commission) so operating income high, this is also a negative. If you do really well, then your income goes high and vice versa.o A company with a variable costs structure does not go up as much in good years as it would if they had a high cost structure. Variable is pretty steady over time and doesn’t change as much as a fixed costs structure. - Operating leverage is a measure of how sensitive net operating income is to percentage changes in sales. Is a measure, at any given level of sales, of how a percentage in sales volume will affect profits?o Degree of operating leverage= contribution margin/net operating incomeo We can multiply this degree of leverage by any change in percentage of sales to understand how much volume will affect operating income. o 3129-756=2373-1300=1073 2373/1073=2.211  operating leverageo 2.21 x %20 = 44.2%  change in net operating incomeIV. Structuring Sales Commissions- The salesperson will generally sell the most expensive item if paid on commission. In the case of selling two products and the less expensive product produces has a higher contribution margin, then the company would want to motivate employees by paying higher commission for the product with the higher contribution margin.V. Compute Break-even point (sales mix)- Sales mix is the percent of revenue that come from different products sold. The break-even analysis assumes that sales mix stays constant, if we changed that then the analysisis wrong. We compute the break-even point with sales dollars by using the contribution margin ratio. With many products we need to use the CM ratio as a whole. If the sales mix were to change, then we would also have to change the CM ratio. o DOLLAR SALES TO BREAK EVEN = FIXED EXPENSES/CM RATIOo PROFIT= CMRATIO X SALES DOLLARS – FIXED EXPENSES- Key assumptions of CVP analysiso Selling price constanto Costs are linear and can be accurately divided into variable and fixed elementso Sales mix is constanto In manufacturing companies, inventories do not