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ACC 202 Study Guide - Fixed Cost, Operating Leverage, Contribution Margin

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MSU
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Accounting
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ACC 202
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Document Summary

Basic cost-volume-profit relationship sales = variable costs + fixed costs + profit. Contribution margin ratio sales variable costs/ sales. Break even in sales = fixed costs/contribution margin. Break even in units sold = fixed costs/contribution margin per unit or you can use the basic cvp equation. Sales to reach a targeted profit = fixed costs + targeted profit/contribution margin ratio or use basic cvp formula and set profit to targeted profit. Margin of safety = excess of budgeted (or actual) sales dollars over the break even volume sales dollars = total sales break even in sales. Operating leverage = contribution margin/ net operating income. A measure of how a percentage change in sales volume will affect profits. In may, small had sales of ,000 and variable expenses of ,400 for one product and sales of ,000 and variable expenses of ,170 for the other product. Fixed expenses for the entire company were ,160.

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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

You have two product lines, Basic and Premium. You currentlysell 500 units of Basic at a price of $25/unit, and 250 units ofPremium at a price of $50/unit. Basic requires $2.5 of directmaterials per unit and $5 of direct labor per unit. Premiumrequires $5 of direct materials per unit and $15 of direct laborper unit. There is no variable overhead, for simplicity. The totalfixed costs (shared by Basic and Premium) are $12,500.

Required:

a) allocate the shared fixed costs ($12,500) among Basic andPremium, using direct labor dollars as the allocation basis (hint:notice that the direct labor numbers above are per unit. To do theallocation, you will have to compute the total amounts of directlabor $ used by each product line).
allocation rate = $ _____ per DL$
FC allocated to Basic = $ _____ (total, not per unit)
FC allocated to Premium = $ _____ (total, not per unit)

b) using the allocated costs from (a), compute the profit marginfor each product line.
profit margin for Basic = $ _____
profit margin for Premium = $ _____

Additional information for c)-d) below: You are thinking ofchanging the product mix to 250 units of Basic, 500 units ofPremium. This is a long-term change.

c) Estimate the fixed costs (capacity costs) for the new productmix. Use direct labor $ as the allocation basis.
(hint: Compute the allocation rate using the original product mix.After that, multiply by the new amounts of the cost driver.)
allocation rate = $ _____ per DL$
FC allocated to Basic = $ _____
FC allocated to Premium = $ _____

d) Compute the profit margin for Basic and Premium for the newproduct mix.
profit margin for Basic = $ _____
profit margin for Premium = $ _____
Is it a good idea to change the product mix? (enter 1=yes, 2=no)_____

I just need to reference numbers for the calculations

how to send my question with excel attachment ?

Use with Excel

The TV Corporation manufactures 2 types of TVs. The Basic TV

and the Deluxe TV. Budgeted and actual annual operating data areas follows:

Static Budget

Basic

Deluxe

Total

Number units Sold

60,000

40,000

100,000

Total Contribution Margin

$3,480,000

$3,444,000

$6,924,000

Budgeted CM per unit

$58.00

$86.10

Actual Results

Number units sold

59,850

45,150

105,000

Total Contribution Margin

$3,650,850

$3,612,000

$7,262,850

But, the actual industry volume was

300,000

Units

Prior to the beginning of the year, a consulting firm estimatedthe total volume

for volume of the Basic and Deluxe industry category to be

310,000

Units

Required:

Calculate the following information and variances on theworksheet entitled analysis. I have tried to give some helpfulhints.

Use the contribution margin approach in the following salesvariance analysis that follows.

a. Calculate the Static-budget variance.

I have tried to set up a model to use on the analysisworksheet.

Look at Exhibit 14-11 p.571

b. Calculate the contribution margin for the flexiblebudget.

c. Calculate the flexible budget variance.

d. Calculate the sales-volume variance.

e. Compute the actual sales-mix

f. Compute the budgeted sales-mix

g . Compute the sales-mix variance for each product andthen the total sales-mix variance like the table shown onpage 572. I have set up the table for you to fill in.

h. Compute the sales-quantity variance by type of machine andtotal

if total actual quantity is greater than total budgeted unitsthe sales-quantity will always be F and the opposite will occurwhen actual is less than budgeted).

i. Compute the market-share variance

j. Compute the market-size variance.

4

k. Comment on the results of the above variance analysis. Makesure your comments identify specific variances and

the impact of these variances on income.

Do not forget to use the IF function to determine if thevariance is favorable or unfavorable.

I used a formula approach like the author did and I expecteveryone to use cell references and use the Problem 2 worksheet asyour data for cell references.

I will take off 5 pts. if you have not used cell references fromthe problem 2 worksheet as your reference for the calculations. Iwill take off 3 pts. for not using IF statements or 1/2 each.

When you are adding multiple variances, either use the SUMIFfunction or a nested IF.

Also, make sure you are using ABS function, since variancesshould not be positive and negative.

I have color coded some areas that should match, since you canuse these variances to check your work since they should equal eachother.

Comments in "K" are worth 1 pt. You need to clearly identifymultiple sales variance you have calculated and the impact inincome.

a. Calculate the Static-budget variance.

$338,850

F

Static Budgeted Variance =Actual total contribution margin lessStatic total Contribution margin

Look at level 1 in Panel C in exhibit 14-11.

b. Calculate the contribution margin for the flexiblebudget.

Basic

Deluxe

Total

Budgeted contribution margin per unit

$58

$86

Do not Total

Actual Number of units sold

Do not Total

Flexible -Budget Contribution Margin

c. Calculate the flexible budget variance.

d. Calculate the sales-volume variance.

Check Figure: static budget variance=flexible budget

variance+Sales volume Variance

Basic

Deluxe

e. Calculate the Actual sales mix:

f. Calculate the Budgeted sales mix:

g . Compute the sales-mix variance for each product and then thetotal sales-mix variance like the table shown on page 572. I haveset up the table for you to fill in.

Actual Units of All products sold

(Actual sales-mix%-Budgeted Sales Mix%

Budgeted Contribution Margin per unit

Sales-Mix Variance

Basic

Deluxe

g. Total Sales mix variance

Compute the sales-quantity variance by type of product andtotal.

Basic

Deluxe

h. Total Sales quantity variance

Check Figure: Sales-volume variance=Sales mixvariance+Sales Quantity Variance

Calculate the Actual market share:

Calculate the Budgeted market share:

Calculate the budgeted contribution margin

per composite unit of budgeted mix

Lastly:

I. Market-share Variance

j. Compute the market-size variance.

Check Figure: Sales-quantity variance=Market-sharevariance+Market size Variance

k. Comment on the results of the above variance analysis. Makesure your comments identify specific variances and the impact ofthese variances on income.