ADMS 1500 Lecture Notes - Lecture 7: Contribution Margin, Fixed Cost, Variable Cost

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22 Oct 2016

School

York University

Department

Administrative Studies

Course

ADMS 1500

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N/ A

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Document Summary

A variable cost is one that changes in response to changes in activity (output) The more products that are made, the greater will be the total dollar cost of each of these. A fixed cost is one that stays the same when activity (throughout) changes. All these stay the same dollar value no matter how much business is done. Some costs have both a variable component and a fixed component. The contribution margin per unit measures the advantage gained from selling one additional unit of product or service. It also measures the harm suffered when selling one unit fewer. Total sales revenue less: total variable cost ($ per unit or % of revenue) Less: fixed cost: (a lump sum: $ per month or year) = sausage + (cid:271)u(cid:374) + (cid:272)o(cid:374)di(cid:373)e(cid:374)ts + wrappi(cid:374)gs + (cid:862)(cid:272)o(cid:373)(cid:373)issio(cid:374)(cid:863) to operator. = cart rental + operator wage + cart transporting cost. = + + = (d)

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

If variable costs per unit increased because of an increase in hourly wage rates, the break-even point would:

a. increase.

b. remain the same.

c. decrease.

d. increase or decrease, depending upon the percentage increase in wage rates.

Zeke Company sells 25,000 units at $21 per unit. Variable costs are $10 per unit, and fixed costs are $75,000. The contribution margin ratio and the unit contribution margin are:

a. 53% and $7 per unit.

b. 47% and $11 per unit.

c. 52% and $11 per unit.

d. 47% and $8 per unit.

If sales are $500,000, variable costs are 75% of sales, and operating income is $40,000, what is the operating leverage?

a. 0

b. 1.3

c. 3.1

d. 1.25

Which of the following describes the behavior of the fixed cost per unit?

a. Increases with increasing production

b. Remains constant with changes in production

c. Decreases with increasing production

d. Decreases with decreasing production

If variable costs per unit decreased because of a decrease in utility rates, the break-even point would:

a. increase.

b. increase or decrease, depending upon the percentage increase in utility rates.

c. decrease.

d. remain the same.

Costs that vary in total in direct proportion to changes in an activity level are called:

a. differential costs.

b. fixed costs.

c. variable costs.

d. sunk costs

Which of the following conditions would cause the break-even point to increase?

a. Total fixed costs decrease

b. Unit variable cost decreases

c. Unit variable cost increases

d. Unit selling price increases

In cost-volume-profit analysis, all costs are classified into the following two categories:

a. discretionary costs and sunk costs

b. variable costs and fixed costs

c. mixed costs and variable costs

d. sunk costs and fixed costs

ochrespider8

5 Jeanlouis, Inc., manufactures and sells two products: ProductD0 and Product D5. The company has an activity-based costing systemwith the following activity cost pools, activity measures, andexpected activity:

		Estimated	Expected Activity
Activity Cost Pools	Activity Measures	Overhead Cost	Product D0	Product D5	Total
Labor-related	DLHs	$313,743	3,600	3,300	6,900
Production orders	orders	70,264	300	500	800
General factory	MHs	253,555	4,300	4,200	8,500
		$637,562

The total overhead applied to Product D5 under activity-basedcosting is closest to:

$319,252

$125,286

$304,920

$273,240

6 Ofarrell Corporation, a company that produces and sells asingle product, has provided its contribution format incomestatement for March.

Sales (6,800 units)	$401,200
Variable expenses	265,200
Contribution margin	136,000
Fixed expenses	103,500
Net operating income	$32,500

If the company sells 6,700 units, its net operating incomeshould be closest to:

$31,979

$28,000

$30,500

$32,500

Dybala Corporation's produces and sells a single product. Dataconcerning that product appear below:

	Per Unit	Percent of Sales
Selling price	$170	100%
Variable expenses	85	50%
Contribution margin	$ 85	50%

The company is currently selling 5,400 units per month. Fixedexpenses are $402,200 per month. The marketing manager believesthat a $6,400 increase in the monthly advertising budget wouldresult in a 150 unit increase in monthly sales. What should be theoverall effect on the company's monthly net operating income ofthis change?

Decrease of $6,400

Increase of $6,350

Decrease of $6,350

Increase of $12,750

8 Data concerning Wang Corporation's single product appearbelow: (Do not round your intermediatecalculations.)

Selling price per unit	$	210.00
Variable expense per unit	$	73.50
Fixed expense per month	$	138,450

The break-even in monthly dollar sales is closest to:

$213,000

$287,550

$138,450

$426,000

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ADMS 1500 Lecture Notes - Lecture 7: Contribution Margin, Fixed Cost, Variable Cost

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