ACCT 2230 Chapter Notes - Chapter 4: Income Statement, Operating Leverage

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1 Nov 2017

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The level of sales at which profit is zero. The break-even point can also be defined as the point where total sales equals total expenses, or as the point where total contribution margin equals total fixed expenses. Sales variable expenses fixed expenses = sh: cost-volume-profit graph (cvp) The relationships among revenues, costs, and level of activity presented in graphic form: contribution margin ratio (cm) The contribution margin as a percentage of total sales: variable expense ratio. The ratio of variable expenses to sales: incremental analysis. An analytical approach that focuses only on those items of revenue, cost, and volume that will change as a result of a decision: equation method. A method of computing break-even sales using the contribution format income statement: formula method. A method of computing the break-even point where the fixed expenses are divided by the contribution margin per unit: margin of safety.

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EXERCISE 5-18 Break-Even and Target Profit Analysis; Margin of Safety; CM Ratio [LO5-1, L05-3, L05-5, L05-6, L05-7] Menlo Company distributes a single product. The company's sales and expenses for last month follow: Per Unit $30 Total $450,000 180,000 270,000 216,000 $ 54,000 Variable expenses ...... Contribution margin. Fixed expenses Net operating income ....... 12 Required: 1. What is the monthly break-even point in unit sales and in dollar sales? 2. Without resorting to computations, what is the total contribution margin at the break-even point? 3. How many units would have to be sold each month to earn a target profit of $90,000? Use the formula method. Verify your answer by preparing a contribution format income statement at the target sales level. 4. Refer to the original data. Compute the company's margin of safety in both dollar and per- centage terms. 5. What is the company's CM ratio? If sales increase by $50,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

1)The manager of Able Car Inspection reviewed his monthlyoperating costs for the past year. His costs range from $4,100 for1,100 inspections to $3,700 for 700 inspections.

1. Calculate variable cost per inspection. use the high-lowmethod. round to the nearest cent

2. calculate the total fixed costs

3. write the equation and calculate the operating costs for 900inspections

4. Draw a graph illustrating your total cost under this plan.show your costs at 700, 900, and 1,100 inspections

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2) For its top managers, Airborn Travel formats its incomestatements as follows:

Airborn Travel

contribution margin income statement

three months ended March 31, 2012

Sales revenue $318500

Variable costs $111475

contribution margin 207025

fixed costs 176000

operating income $31025

Airborn's relevant range is between sales of $253000 and$366000

1) calculate the contribution margin ratio

2) Prepare two contribution margin income statements: one at the$253000 level and one at the $366,000 level. (Hint: the proportionof each sales dollar that goes toward variable costs is constantwithin the relevant range.) enter losses with a minus sign orparentheses

3) compute breakeven sales in dollars.

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3) Hang Ten, Co., produces sports socks. The company has fixedcosts of $91,080 and variable costs of $0.81 per package. Eachpackage sells for $1.80.

1. Compute the contribution margin per package and thecontribution margin ratio. (round answers to 2 decimal places)

2. Find the breakeven point in units and in dollars, using thecontribution margin approach.

Jorge Company bottles and distributes B-Lite, a diet soft drink.The beverage is sold for 50 cents per 16-ounce bottle to retailers,who charge customers 78 cents per bottle. For the year 2014,management estimates the following revenues and costs.

Sales	$ 1,805,800	Selling expensesâvariable	$ 65,400
Direct materials	428,800	Selling expensesâfixed	65,400
Direct labor	358,300	Administrative expensesâvariable	47,386
Manufacturing overheadâvariable	310,000	Administrative expensesâfixed	60,200
Manufacturing overheadâfixed	293,000

*(a)


	Your answer is partially correct. Try again.

Prepare a CVP income statement for 2014 based on managementâsestimates.

JORGE COMPANY CVP Income Statement (Estimated) For the Year Ending December 31, 2014
Sales		$ 1805800
Variable Expenses
Cost of Goods Sold	$ 1097100
Selling Expenses	65400
Administrative Expenses	47386
Total Variable Expenses		1209886
Contribution Margin		595914
Fixed Expenses
Cost of Goods Sold	293,000
Selling Expenses	65400
Administrative Expenses	60200
Total Fixed Expenses		418600
Net Income/(Loss)		$

Attempts: 3 of 3 used

Variable Cost per Bottle: $ .34

Attempts: 3 of 3 used

Compute the break-even point in (1) units and (2) dollars.(Round answers to 0 decimal places, e.g.1,225.)

(1)

Compute the break-even point

_____

units

Determine the sales dollars required to earn net income of $241,100 . (Round answers to 0 decimal places, e.g.1,225.)

Required sales dollars $______

Compute the contribution margin ratio and the margin of safetyratio. (Round answers to 0 decimal places, e.g.25%.)

Contribution margin ratio			%
Margin of safety ratio			%

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ACCT 2230 Chapter Notes - Chapter 4: Income Statement, Operating Leverage

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