ACC 406 Chapter Notes - Chapter 4: Contribution Margin, Earnings Before Interest And Taxes, Fixed Cost

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graytiger892

1 Feb 2017

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Chapter 4 cost, volu(cid:373)e, profit a(cid:374)alysis: a ma(cid:374)agerial. Break-even point in units and in sales dollars. Cost-volume-profit (cpv) analysis estimates how changes in cost (both variable and fi(cid:454)ed), sales (cid:448)olu(cid:373)e, a(cid:374)d p(cid:396)i(cid:272)e affe(cid:272)t a (cid:272)o(cid:373)pa(cid:374)(cid:455)"s profit. The break-even point (bep) is the point where total revenue equal total cost. Fo(cid:396) cpv a(cid:374)al(cid:455)sis, it"s useful to o(cid:396)ga(cid:374)ize (cid:272)osts i(cid:374)to the fi(cid:454)ed a(cid:374)d (cid:448)a(cid:396)ia(cid:271)le (cid:272)o(cid:373)po(cid:374)e(cid:374)ts. Variable costs are all costs that increase as more units are sold, including: Fixed costs include fixed factory overhead and fixed selling and administrative costs. The i(cid:374)(cid:272)o(cid:373)e state(cid:373)e(cid:374)t fo(cid:396)(cid:373)at that"s (cid:271)ased o(cid:374) the sepa(cid:396)atio(cid:374) of (cid:272)osts i(cid:374)to fi(cid:454)ed a(cid:374)d variable components is called the contribution margin income statement. Defined as the excess of sales over variable costs. Contribution margin = sales variable costs. It"s useful (cid:271)e(cid:272)ause it p(cid:396)o(cid:448)ides i(cid:374)sight i(cid:374)to the p(cid:396)ofit pote(cid:374)tial of a (cid:272)o(cid:373)pa(cid:374)(cid:455). It indicates the percentage of each sales dollar available to cover the fixed costs and to provide income from operations.

Related Questions

1. The following is a listof various costs of producing T-shirts. Classify each cost aseither a variable, fixed, or mixed cost for units produced andsold.

(a)	Leather used to make a handbag.
(b)	Warehouse rent of $8,000 per month plus $.50 per square foot ofstorage used.
(c)	Thread.
(d)	Electricity costs of $.038 per kilowatt-hour.
(e)	Janitorial costs of $4,000 per month.
(f)	Advertising costs of $12,000 per month.
(g)	Accounting salaries.
(h)	Color dyes for producing different colors of sweatshirts.
(i)	Salary of the production supervisor.
(j)	Straight-line depreciation on sewing machines.
(k)	Patterns for different designs. Patterns typically last manyyears before being replaced.
(l)	Hourly wages of sewing machine operators.
(m)	Property taxes on factory, building, and equipment.
(n)	Cotton and polyester cloth.
(o)	Maintenance costs with sewing machine company. The cost is$2,000 per year plus $.001 for each machine hour of use.

2. Copper Hillsmanufactures laser printers within a relevant range of productionof 70,000 to 100,000 printers per year. The following partiallycompleted manufacturing cost schedule has been prepared:

	Number of Printers Produced
	70,000	90,000	100,000
Total costs:
Total variable costs	$350,000	(d)	(j)
Total fixed costs	630,000	(e)	(k)
Total costs	$980,000	(f)	(l)
Cost per unit:
Variable cost per unit	(a)	(g)	(m)
Fixed cost per unit	(b)	(h)	(n)
Total cost per unit	(c)	(i)	(o)

Complete the preceding cost schedule, identifying each cost bythe appropriate letter (a) through (o).

3. For the current year ending April 30, HaleyCompany expects fixed costs of $60,000, a unit variable cost of$70, and anticipated break-even of 1,715 sales units.

(a)	Compute the unit sales price.
(b)	Compute the sales (units) required to realize an operatingprofit of $8,000.

Round your answer to the nearest whole number.

4. Currently, the unitselling price is $50, the variable cost, $34, and the total fixedcosts, $108,000. A proposal is being evaluated to increase theselling price to $54.

(a)	Compute the current break-even sales (units).
(b)	Compute the anticipated break-even sales (units), assuming thatthe unit selling price is increased and all costs remainconstant.

5. For the coming year,Reve Company estimates fixed costs at $109,000, the unit variablecost at $21, and the unit selling price at $85. Determine (a) thebreak-even point in units of sales, (b) the unit sales required torealize operating income of $150,000 and (c) the probable operatingincome if sales total $500,000.

Round units to the nearest whole number and percentage to onedecimal place.

scarletcheetah409

Each question refers to the same initial data. Treat each question separately. Ignore income taxes. Assume no beginning or ending inventories. Calculations and backup should be completed and submitted in Excel. Use proper Contribution Income Statement formatting. Analysis can either be typed into cells in Excel (formatted to be easily legible) or typed into a text box in Excel.

Data for all questions: Tamâs Tables produces wooden kitchen and dining room tables. Their tables are sold at many local furniture stores. The cost of manufacturing and marketing their tables, at their normal factory volume of 2,000 tables per month, is shown in the table below. These tables sell for $700 each. Tamâs Tables is making a small profit, but would prefer to increase profitability.

(Note: Fixed costs are shown on a per-unit basis in the table based on normal volume. However, fixed costs as a total do not change when volume changes, so you will need to determine total fixed costs first.)

	Per Unit	Per Unit
Unit Manufacturing Costs:
Variable Materials	$ 175.00
Variable Labor	$ 125.00
Variable Overhead	$ 50.00
Fixed Overhead	$ 150.00
Total Unit Manufacturing Costs:		$ 500.00

Unit Marketing Costs:
Variable Marketing Costs	$ 75.00
Fixed Marketing Costs	$ 100.00
Total Unit Marketing Costs:		$ 175.00

Question 1: What is the break-even point? A) In units? B) In sales dollars?

Question 2: A large furniture chain has offered to purchase 2,000 tables (one time for their family dinner advertising campaign) if the sales price was lowered to $575 per table. Tamâs Tablesâ maximum capacity is 3,000 units. A) Based on the cost data provided, what would be the impact of the price decrease on sales, costs, and operating income if Tamâs Tables accepted this sale? Use a contribution margin income statement to show your results. B) Do you think Tamâs Tables should accept this sale? Support your decision with evidence and analysis.

Question 3: Some of the furniture stores have been asking for granite-topped tables. Tamâs Tables would be able to produce a granite-topped table with their wooden frame and legs on their existing assembly line if they purchased a new machine to shape the granite top. This would increase fixed overhead costs by $150,000 per month (still based on normal production volume of 2,000 units). The variable materials costs for the granite tables would also be double the cost of the variable materials for the granite tables (the granite is more expensive than the wood). Maximum production for both types of tables together would still be 3,000 units because the same assembly line would be used. The granite tables would sell for $1,000 each. A) What would be the break-even point if Tamâs Tables only sold granite tables? (In units and sales dollars) B) Create a contribution income statement for a month in which Tamâs Tables sold 1,000 wooden tables, and 1,500 granite tables. C) Explain, in your own words, how the changes to fixed and variable costs for the granite tables impact profitability.

maroonmarten943

Quiz 5 Name:________________________

Part I: True or False Question and Fill in Blank.

1. T or F: The planning horizon for a discretionary fixed costusually encompasses many years.

2. Tor F: Committed fixed costs are those that relate to theinvestment in facilities, equipment and the basic organizationalstructure of a company.

3. T or F: The high-low method uses cost and activity data fromjust two extreme volume levels (periods) to establish a costformula.

4. T or F: On an income statement prepared by the traditionalapproach, costs are organized and presented according tofunction.

5. T or F: Contribution margin is defined as sales lessdiscretionary fixed costs.

6. T or F: The contribution format is widely used for preparingexternal financial statements.

7. T or F: Reynold Enterprises sells a single product for $25.The variable expense per unit is $15 and the fixed expense per unitis $5 at the current level of sales. The company's net operatingincome will increase by $5 if one more unit is sold over BEP.

8. T or F: Incremental analysis is an analytical approach thatfocuses on those items of revenue and cost that will change as aresult of a decision.

9. T or F: On a CVP graph for a profitable company, the totalrevenue line will be steeper than the total expense line.

10. T or F: The impact on net operating income of a given dollarchange in sales can be computed by applying the contribution marginratio to the dollar change in sales.

11. T or F: The larger the contribution margin ratio, thesmaller the amount of sales required to cover a given amount offixed expenses.

12. T or F: Fawn Company's margin of safety is $90,000. If thecompany's sales drop by $80,000, it will still have positive netoperating income.

13. T or F: The margin of safety can be defined as the amount bywhich sales can decrease before losses are incurred by the company.

14. Mark Company currently sells a video recorder with a sellingprice of $300 per unit. The variable expense per unit is $175 andfixed expenses are $100,000. If the company reduces variableexpenses by $20 per unit and increases the fixed expenses by$10,000, the break-even point will __increase or decrease__.

15. The degree of operatingleverage is computed by dividing contribution margin by______________.

16. The variable expenseper unit is $12 and the selling price per unit is $40. Then thecontribution margin ratio

is _____________%.

17. Long Companyâsvariables expenses are 60% of sales. A $1,200 increase in thecompanyâs fixed expenses will

increasethe break-even point in sales by $ _______________.

Part II: Classification of Costs asPeriod or Product Cost (@1/2)

1. ______________Depreciation on salespersonsâ cars.

2. ______________Rent on equipment used in the factory.

3. ______________Lubricants used for maintenance of machines.

4. ______________Salaries of finished goods warehouse personnel.

5. ______________Soap and paper towels used by factory workers at the end of ashift.

6. ______________Factory supervisorsâ salaries.

7. ______________Heat, water, and power consumed in the factory.

8. ______________Advertising costs.

9. ______________Workersâ compensation insurance on factory employees.

10. ______________ Attractivelydesigned box for packaging the companyâs product.

brownmallard872

ACC 406 Chapter Notes - Chapter 4: Contribution Margin, Earnings Before Interest And Taxes, Fixed Cost

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