ACC 100 Lecture Notes - Lecture 4: Income Statement, Operating Leverage, Earnings Before Interest And Taxes

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ochrecrocodile426

21 Apr 2016

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Break even point: when the profits are zero, when the revenue equals the total cost. Contribution margin= sales- variable cost (income statement) Operating income = contribution margin fixed costs. Variable cost ratio= variable cost per unit. Contribution margin ratio= sales- variable cost (contribution margin) Units to be sold to achieve a target income. Number of units to earn target income = Units sold or revenue earned above break even volume. Margin of safety= sales in units- break even units. Mix of fixed costs to variable costs. Higher proportions of fixed costs to the amount of variable costs create higher operating leverage. The greater the degree of operating leverage, the larger the effect on operating income when sales change. Percentage change in the operating leverage= dol x percent change in sales.

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

Contribution Margin Ratio, Variable Cost Ratio, Break-Even SalesRevenue

The controller of Sandoval Company prepared the followingprojected income statement:

Sales	$90,000
Total Variable cost	79,000
Contributionmargin	$11,000
Total Fixed cost	6,500
Operating income	$4,500

Required:

1. Calculate the contribution margin ratio.Round your answer to the nearest whole number.

%

2. Calculate the variable cost ratio. Roundyour answer to the nearest whole number.

%

3. Calculate the break-even sales revenue forSandoval. If required, round your answer to nearest dollar.

$

rosealpaca729

Calculate the missing amounts for each columnm

NUmber of units	2900 units	14540 units	4620 units
sale price per unit	360	4600	5500
variable cost per unit	270	2760	1665
total fixed cost	81000	828000	5244750
target profit	180,000	27,600,000	12,703,960

Contributution margin per unit
contribution margin ratio
required units to achieve target profit
required units to break even
required sales dollars to break even

brownfish256

ACC 100 Lecture Notes - Lecture 4: Income Statement, Operating Leverage, Earnings Before Interest And Taxes

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