ACCT 102 Chapter Notes - Chapter 4-5: Contribution Margin, Net Profit, Variable Cost

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7 Mar 2017

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Contribution margin is the difference between sales and variable expenses. The unit contribution margin is the difference between selling price and unit variable cost. The margin of safety is the ratio by which the current sales value exceeds the break-even sales. If the sales mix changes, it is necessary to recompute the break-even point for the company as a whole. The formula (s vc)/s, or 1 (vc/s), is known as the contribution margin ratio: break-even analysis and cost-volume-profit analysis are not synonymous, an increase in total fixed costs causes the break-even point to increase. The break-even-point is reached when sales revenue equals total fixed and variable costs. The break-even point in units can be calculated by dividing total fixed costs by the unit contribution margin, whereas the break-even point in dollars can be computed by dividing total fixed costs by the contribution margin ratio. Cost-volume-profit analysis helps management investigate the effects of changes in costs, price, and volume on profits.

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 â 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 â 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 â 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

redant669

________ is the excess of sales over the cost of goods sold.

A) Gross margin

B) Contribution-margin ratio

C) Variable-cost ratio

D) Contribution margin

Answer:

Which statement is FALSE?

A) Each different sales-mix of products has a differentbreak-even point.

B) Changes in the sales-mix of products sold affects a company'snet operating profit.

C) Changes in the sales-mix of products sold affects a company'scontribution margin.

D) If the sales-mix of products sold changes, the break-evenpoint does not change.

Answer:

With mixed costs, the ________ element is unchanged over therelevant range and the ________ element varies proportionately withcost-driver activity.

A) variable cost; fixed cost

B) fixed cost; variable cost

C) fixed cost; step cost

D) step cost; variable cost

Answer:

The sales price is $30 per unit, the contribution margin is $8per unit and total fixed costs are $32,000. What is the break-evenpoint in units?

A) 857

B) 1,200

C) 2,000

D) 4,000

Answer:

If the selling price per unit increases, what is the effect onthe break-even point? (Assume no other changes.)

A) The break-even point increases.

B) The break-even point decreases.

C) The break-even point remains the same.

D) The break-even point is zero.

plumcod490

Exercise 19-2 In the month of June, Jose Hebertâs Beauty Salon gave 3,800 haircuts, shampoos, and permanents at an average price of $40. During the month, fixed costs were $16,500 and variable costs were 75% of sales. Determine the contribution margin in dollars, per unit and as a ratio. (Round contribution margin per unit and contribution margin ratio to 2 decimal places, e.g. 5.25 & 10.50.) Contribution margin $ Contribution margin per unit $ Contribution margin ratio % LINK TO TEXT Using the contribution margin technique, compute the break-even point in dollars and in units. (Round answers to 0 decimal places, e.g. 1,225.) Break-even point $ Break-even point units LINK TO TEXT Compute the margin of safety in dollars and as a ratio. (Round answers to 0 decimal places, e.g. 1,225.) Margin of safety $ Margin of safety ratio %

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ACCT 102 Chapter Notes - Chapter 4-5: Contribution Margin, Net Profit, Variable Cost

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