ACCT 2102 1st Edition Lecture 19 Outline of Last Lecture I Review for Test Outline of Current Lecture II Increasing Operating Income III Contribution Margin IV Calculating Break Even and Target Profit Current Lecture Cost Volume Profit Analysis Chapter 7 I You have three options to increase operating income 1 Decrease cost of sales 2 Increase price 3 Increase sales volume A traditional income statement reads Sales Revenue COGS Product Costs Gross Profit Gross Profit Selling General and Administrative Expenses Period Costs Operating Income In order to make informed decisions function is not as important to managers as cost behavior The Contribution Margin Income Statement reads Sales Revenue Variable Expenses Contribution Margin Variable Expenses include both product DM and DL and period sales commission costs Contribution Margin Fixed Expenses Operating Income Fixed Expenses include both product factory rent factory supervisor salary factory depreciation and period sales salaries office rent office equipment depreciation costs This equation does not change the purpose of the income statement equation but rather arranges it by cost behavior rather than function Sales Revenue Sales Price x Number of Units Sold Total Variable Cost Unit Variable Cost x Number of Units Sold 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 Contribution Margin Unit Contribution Margin x Number of Units Sold II The contribution margin tells us The amount by which sales revenue exceeds variable costs The amount available to cover fixed cost and provide operating income This information is important to a manager because It allows for calculation of a break even point operating income 0 It allows us to calculate a target profit operating income 0 What is the amount available to cover fixed cost and provide operating income Contribution Margin III Calculating Break Even and Target Profit through the Units Formula This formula tells us how much units we need to sell to break even or make a target profit Sales Revenue Expenses Operating Income Sales Revenue Variable Costs Fixed Costs Operating Income Contribution Margin Fixed Expenses Operating Income Number of Units x Unit Contribution Margin Fixed Costs Operating Income Number of Units x Unit Contribution Margin Operating Income Fixed Costs Number of Units Operating Income Fixed Costs Unit Margin Contribution Number of Units Operating Income Fixed Costs Sales Price Unit Variable Cost When you are looking for the break even point Operating Income 0 When you are looking for a target income of 100 Operating income 100
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