ACCT 2102 1st Edition Lecture 19 Outline of Last LectureI. Review for TestOutline of Current Lecture:II. Increasing Operating IncomeIII. Contribution MarginIV. Calculating Break-Even and Target ProfitCurrent Lecture: Cost-Volume-Profit Analysis (Chapter 7)I. You have three options to increase operating income:1. Decrease cost of sales2. Increase price3. Increase sales volumeA traditional income statement reads:Sales Revenue – COGS (Product Costs) = Gross ProfitGross Profit – Selling, General, and Administrative Expenses (Period Costs) = Operating IncomeIn 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 SoldTotal Variable Cost = Unit Variable Cost x Number of Units SoldThese 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 SoldII. The contribution margin tells us:- The amount by which sales revenue exceeds variable costs- The amount available to cover fixed cost and provide operating incomeThis 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 MarginIII. 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 IncomeContribution Margin – Fixed Expenses = Operating IncomeNumber of Units x Unit Contribution Margin – Fixed Costs = Operating Income(Number of Units x Unit Contribution Margin) = Operating Income + Fixed CostsNumber of Units = Operating Income + Fixed CostsUnit Margin ContributionNumber 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 =
View Full Document
Unlocking...