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ACC 406 Lecture Notes - Lecture 3: Contribution Margin, Earnings Before Interest And Taxes, Fixed Cost

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azurelouse708
16 Mar 2016
School
Ryerson University
Department
Accounting
Course
ACC 406
Professor
Anthony Chan

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Document Summary

Break-even point (bep) is where profits are zero (tr = tc) Bep is when operating income is 0. Operating income = contribution margin fixed costs. Whittier co. plans to sell 1,000 mowers at each in the coming year. Variable selling expense (commission), per mower. Fixed selling and administrative expense, ,000: calculate total variable cost per unit. Variable cost per unit = direct materials + direct labour + Variable cost per unit = + + + . Variable cost per unit = : calculate the total fixed expense for the year. Total fixed expenses = fixed overhead + fixed selling and. Total fixed expenses = ,000: prepare a contribution margin income statement for the coming year. Managers may prefer to use sales revenue as the measure of sales activity instead of units sold. Calculate the sales revenue that whittier company must make to break even by using the break-even point in sales dollars equation.

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Related Questions

The Hampshire Company manufactures umbrellas that sell for$12.50 each. In 2014, the company made and sold 60,000 umbrellas.The company had fixed manufacturing costs of $216,000. It also hadfixed costs for administration of $79,525. The per-unit costs ofeach umbrella are as follows:

Direct Materials: $3.00

Direct Labor: $1.50

Variable Manufacturing Overhead: $0.40

Variable Selling Expenses: $1.10

Using the information above, perform a cost-volume-profit (CVP)analysis by completing the steps below.

1. Compute net income before tax.

2. Compute the unit contribution margin in dollars and thecontribution margin ratio for one umbrella.

3. Calculate the break-even point in units and dollars ofrevenue.

4. Calculate the margin of safety:

In units

In sales dollars

As a percentage

5. Calculate the degree of operating leverage.

6. Assume that sales will increase by 20% in 2015. Calculate thepercentage of before-tax income for this increase. Providecalculations to prove that your percentage increase is correctbased on the operating leverage calculated in step 5.

7. Compute the number of umbrellas that Hampshire is required tosell if it plans to earn $150,000 in income before taxes by usingthe target income formula. Proof your calculation.

8. A company that specializes in tours in England has offered topurchase 5,000 umbrellas at $11 each from Hampshire. The variableselling costs of these additional units will be $1.30 as opposed to$1.10 per unit. Also, this production activity will incur another$15,000 of fixed administrative costs. Should Hampshire agree tosell these additional 5,000 umbrellas to the touring business?Provide calculations to support your decision.

Requirement 1
Units Price Totals
Sales X $ $
Variable Costs X $ $
Fixed Costs $
Net Income $
Requirement 2
Contribution Margin per Unitin Dollars = Selling Price – Variable Costs
Selling Price Variable Costs Contribution Margin per Unit
Contribution Margin Ratio =Contribution Margin/Selling Price
Contribution Margin Selling Price Contribution Margin Ratio
Requirement 3
Break-Even Point = Fixed Costs/ Contribution Margin
Fixed Costs Contribution Margin Break-Even Point in Units (Rounded)
Break-Even Point in Units XSelling Price per Unit = Break-Even Point Sales
Break-Even Point in Units Selling Price per Unit Break-Even Point in Sales (Rounded)
Requirement 4A
Margin of Safety in Units =Current Unit Sales – Break-Even Point in Unit Sales
Current Unit Sales Break-Even Point in Sales Margin of Safety in Units
Requirement 4B
Margin of Safety in Dollars =Current Sales in Dollars – Break-Even Point Sales in Dollars
Current Sales in Dollars Break-Even Point in Dollars Margin of Safety in Dollars
Requirement 4C
Margin of Safety as aPercentage = Margin of Sales in Units / Current Unit Sales
Margin of Safety in Units Current Unit Sales Margin of Safety Percentage
Requirement 5
Degree of Operating Leverage =Contribution Margin / Operating Income
Contribution Margin Operating Income Operating Leverage
Requirement 6
Units $ Per Unit Totals
Sales X $ $
Variable Costs X $ $
Fixed Costs $
Net Income $
Operating Leverage Times % Increase Increase would be XX%
Prior Income $ From Part 1
Increase $ Prior Income X XX% Above
Total $
Requirement 7
Targeted Income = (Fixed Costs+ Target Income) / Contribution Margin
Fixed Costs + Target Income Divided by Contribution Margin # of Units (Rounded)
Fixed Costs $
Target Income $
Total $ $ X
# of Units Above X $ Per Unit
Proof Revenue XX,XXX X $XX.XX $
Variable Costs XX,XXX X $X.XX $
Contribution Margin $
Fixed Costs $
Net Income $
Requirement 8
Sales Mix
Current Specialty Total
Expected Sales Units X X
Revenue = Sales X Price $ $ $
Variable Costs X Units $ $ $
Contribution Margin $ $ $
Fixed Costs $ $ $
Operating Income $
Prior Net Income FromRequirement 1 $
Additional Operating Income (Operating Income Above Less Prior Income) $
Decision With Explanation

PROBLEM 6-22 Prepare and Reconcile Variable Costing Statements (L06-1, L06-2, L06-3] Denton Company manufactures and sells a single product. Cost data for the product are given below: Variable costs per unit: Direct materials ..., Direct labor ...... Variable manufacturing overhead .......... Variable selling and administrative ........ Total variable cost per unit .............. Fixed costs per month: Fixed manufacturing overhead ............ Fixed selling and administrative ... Total fixed cost per month ............... ""31 $315,000 245,000 $560,000 The product sells for $60 per unit. Production and sales data for July and August, the first two months of operations, follow: Units Produced Units Sold July ....... ..... August ....... 17,500 17,500 15,000 20,000 The company's Accounting Department has prepared absorption costing income statements for July and August as presented below: ........ Sales ...... Cost of goods sold .... Gross margin Selling and administrative expenses . . . . . . . . . . Net operating income .......... ......... July $900,000 600,000 300,000 290,000 $ 10,000 August $1,200,000 800,000 400,000 305,000 $ 95,000 Required: 1. Determine the unit product cost under: a. Absorption costing. b. Variable costing. 2. Prepare contribution format variable costing income statements for July and August 3. Reconcile the variable costing and absorption costing net operating income figures. 4. The company's Accounting Department has determined the company's break-even point to be 16,000 units per month, computed as follows: Fixed cost per month $560,000 16,000 units Unit contribution margin $35 per unit "I'm confused," said the president. "The accounting people say that our break-even point is 16,000 units per month, but we sold only 15,000 units in July, and the income statement they prepared shows a $10,000 profit for that month. Either the income statement is wrong or the break-even point is wrong." Prepare a brief memo for the president, explaining what happened on the July absorption costing income statement.

Poole Corporation has collected the following information after itsfirst year of sales. Net sales were $1,706,800 on 100,400 units;selling expenses $237,000 (40% variable and 60% fixed); directmaterials $511,000; direct labor $280,000; administrative expenses$281,000 (20% variable and 80% fixed); manufacturing overhead$361,000 (69% variable and 31% fixed). Top management has asked youto do a CVP analysis so that it can make plans for the coming year.It has projected that unit sales will increase by 10% nextyear.

Compute (1) the contribution margin for the current year and theprojected year, and (2) the fixed costs for the current year.(Assume that fixed costs will remain the same in the projectedyear.)

Compute the break-even point in units and sales dollars for thecurrent year.

he company is considering a purchase of equipment that would reduceits direct labor costs by $104,700 and would change itsmanufacturing overhead costs to 31% variable and 69% fixed (assumetotal manufacturing overhead cost is $361,000, as above). It isalso considering switching to a pure commission basis for its salesstaff. This would change selling expenses to 90% variable and 10%fixed (assume total selling expense is $237,000, as above).Assuming that net sales remain at first-year levels, compute (1)the contribution margin and (2) the contribution margin ratio, andrecompute (3) the break-even point in sales dollars.