ACCT20200 Study Guide - Midterm Guide: Operating Leverage, Variable Cost, Accounts Receivable

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sangriacoyote110

20 Mar 2016

School

Department

Accountancy

Course

ACCT20200

Professor

Janet Otousa

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Document Summary

Chapter 5: contribution margin= sales-var costs, cm-fixed= net income, contribution margin ratio: cm/sales or unit cm/unit selling price, breakeven analysis. Where net income=0 and fixed costs=contribution margin. Formula or contribution margin method: targeted profit analysis. Sales= variable costs + fixed costs + net income (this is a set number) Also equation and contribution margin format: margin of safety. For percent do margin of safety/current amount of sales. Current sales revenue breakeven revenue = margin of safety. Diff between where you are now and breakeven in sales dollars. How much can sales go down before start using money: operating leverage= contribution margin/net operating income. For certain amount increase in sales, what will that give you in sales. Percent change in sales * operating leverage = percent change in net income: sales mix. Sales mix = % sales of one unit. Ex) page 211 exhibit 5-4 (cost volume profit for sales mix)

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

The project requires the comparison of two competing proposals. Only one will be selected. The details of the proposals are as follows:

1. The Production Manager wants to invest $250,000 into new manufacturing equipment that will improve the efficiency and quality of the production process. The production manager has been pushing for this investment for months and has stated that the variable manufacturing cost of the product will decrease by $10 per unit. The investment will cause an increase in the fixed manufacturing costs in the form of annual depreciation expense of $50,000 on the new equipment.
The accounting numbers are as follows:
i. Decrease in Variable cost of $10 per unit
ii. Increase to annual Fixed cost of $50,000

2. The Sales Manager wants to implement a 3 year marketing campaign at a total cost of $150,000 ($50,000 annually for 3 years) and to decrease the selling price of the product by $13 dollars. He guarantees this will increase sales units by 25%.
The accounting numbers are as follows:
i. Decrease in Selling price per unit of $13
ii. Increase in annual marketing expense (fixed cost) of $50,000
iii. Increase in sales units by 25% (at the new lower per unit selling price)

You will need to complete a Contribution Margin Report based on the current revenue and expenses and also one for each of the proposals. In addition to the Contribution Margin Report you will also need to include the following calculations for the current and for each of the proposals: The Breakeven point in sales units and dollars, the margin of safety in dollars and percentage. For the analysis of the two proposals ignore the net present value of cash flows.
After you have completed your analysis you will need to make your recommendation on the course of action that will be the most advantageous to the company. Be complete in your analysis and prepare a memo to your boss Sally outlining your findings and provide support for your recommendation. [Be sure to include âallâ of the information that the data is providing.]

Student Name:

Manning Enterprises

Set up a Contribution Margin Statement for Product A to use for your analysis

You gathered the following per unit information from the Company's accounting system for Product A:

Unit Sales 5,344
Sales Price per Unit $225.00
Variable Cost per unit $137.00
Total Traceable Fixed Cost $357,245.00

Using the above data prepare a current contribution margin report and a Forecasted contribution margin report (one for each of the proposals reflecting each of their proposed changes). You use a template that you kept from when you took Managerial Accounting . You saved all of the templates you used in Managerial Accounting because you knew someday you would need them!

Production Propsal

Current Per Unit % of Sales Current Proposed per Unit % of Sales Forecasted based on Proposal Difference

Units Sold
Sales

Variable Cost

Contribution Margin

Traceable Fixed Cost
Profit (Loss)

Sales Proposal

Current Per Unit % of Sales Current Proposed per Unit % of Sales Forecasted based on Proposal Difference
Units Sold
Sales
Variable Cost
Contribution Margin

Traceable Fixed Cost
Profit (Loss)

Current

Breakeven in Sales Units ______
Breakeven in Sales Dollars ______
Margin of Safety in sales dollars _____
Margin of Safety %

Production Propsal

Breakeven in Sales Units _______
Breakeven in Sales Dollars _____
Margin of Safety in sales dollars ______
Margin of Safety %

Sales Proposal

Breakeven in Sales Units ______
Breakeven in Sales Dollars _____
Margin of Safety in sales dollars ______
Margin of Safety % ______

yellowherring775

Basic information
Exhibit 1 Hallstead Jewelers
Income Statements for YearsEnded January 31 (thousands of dollars)
	2003	2004	2006

Sales	$9,000,000	$8,000,000	$11,000,000
Cost of goods sold	4,050,000	3,600,000	4,950,000
Gross margin	$4,950,000	$4,400,000	$6,050,000
Expenses
Selling expense
Salaries	2,021,000	2,081,000	4,085,000
Commissions	450,000	400,000	550,000
Advertising	254,000	250,000	257,000
Administrative expenses	418,000	425,000	535,000
Rent	420,000	420,000	840,000
Depreciation	84,000	84,000	142,000
Miscellaneous expenses	53,000	93,000	122,000
Total expenses	$3,700,000	$3,753,000	$6,531,000
Net income	$1,250,000	$647,000	$(481,000)

Exhibit 2 Hallstead JewelersOperating Statistics

	2003	2004	2006

Sales space (square feet)	10,000	10,000	15,000
Sales per square foot	$900	$800	$733
Sales tickets	5,000	5,000	7,000
Average sales ticket	$1,800	$1,600	$1,571

Assumptions:

Sales price per ticket = $1,572

Variable cost per unit = $786 (cost of goods sold of $707 +Sales commissions of $79)

Complete the table below:

*Alternative #1*	*Per unit*	*Total*	*Per unit*	*Total*
# of sales tickets	7000
Selling price per ticket	$1,572	$11,000,000
Variable cost per ticket	$786	$5,500,000
Contribution margin per ticket	$786	$5,500,000
Total fixed costs	5,981,000
Net income	$(481,000)
Change in net income if accept alternative
Breakeven point in units	7,610

Review of Question #4 requirements. Increase advertisingby $20,000, increase sales revenue (volume) by 2%.

For each question, answer yes or no for each piece ofinformation listed.

Information	For this alternative only, is there a change in this item thataffects calculation of net income? Yes or No	For this alternative only, is there a change in this item thateffects the calculation of the new breakeven point? Yes or No
Selling price per unit
Variable cost per unit
Total fixed costs
Net income
Sales volume

Complete the table below:

*Alternative #3*	*Per unit*	*Total*	*Per unit*	*Total*
# of sales tickets	7000
Selling price per ticket	$1,572	$11,000,000
Variable cost per ticket	$786	$5,500,000
Contribution margin per ticket	$786	$5,500,000
Total fixed costs	5,981,000
Net income	$(481,000)
Change in net income if accept alternative
Breakeven point in units	7,610

Alternatives	Change in Net Income	New Breakeven point in units	Change in Breakeven point in units
#1 Decrease SP, Increase sales volume
#2 Eliminate sales commissions	Increases by $550,000	6,914	Decreases by 696
#3 increase Fixed costs by $20,000 to get increase of 2% salesrevenue (volume)

periwinklemink994

ACCT20200 Study Guide - Midterm Guide: Operating Leverage, Variable Cost, Accounts Receivable

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