ACTG 2020 Chapter Notes - Chapter 4: Contribution Margin, Earnings Before Interest And Taxes, Break Even

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crimsonant364

31 Jan 2017

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4. 1 break even point in units and in sales dollars. If bep is greater than capacity --> reduce costs, simplify the product: greater chance to go out of business, cvp also analyses a lot of other things, number of units needed to break even. Break even point in units: convert the contribution margin income statement into an equation: Thus, the break even point is when operation income = 0. Break even point volume calculation using income statement approach. 4. 2 units to be sold to achieve a target income. Sales revenue to achieve a target income: cmr can be used to find the profit impact of a change in sales revenue, change in sales revenue * cmr = change in profits. Sales revenue to achieve a target income as percentage of sales. Income taxes impact on break-even analysis: right hand side = the target income before taxes, to obtain the number of units needed to be produced to achieve targeted income.

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

PROBLEM 5-26 Basic CVP Analysis; Graphing (L05-1, L05-2, L05-4, L05-5] The Fashion Shoe Company operates a chain of women's shoe shops that carry many styles of shoes that are all sold at the same price. Sales personnel in the shops are paid a substantial com- mission on each pair of shoes sold in addition to a small base salary) in order to encourage them to be aggressive in their sales efforts. The following worksheet contains cost and revenue data for Shop 48 and is typical of the company's many outlets: Per Pair of Shoes Selling price ...... $30.00 Variable expenses: Invoice cost ... Sales commission .. Total variable expenses ..... $13.50 4.50 $18.00 Annual Fixed expenses: Advertising ... Rent Salaries Total fixed expenses .... $ 30,000 20,000 100,000 $150,000 Required: 1. Calculate the annual break-even point in unit sales and in dollar sales for Shop 48. 2. Prepare a CVP graph showing cost and revenue data for Shop 48 from zero shoes up to 17,000 pairs of shoes sold each year. Clearly indicate the break-even point on the graph. 3. If 12,000 pairs of shoes are sold in a year, what would be Shop 48's net operating income or loss? 4. The company is considering paying the store manager of Shop 48 an incentive commission of 75 cents per pair of shoes in addition to the salesperson's commission). If this change is made, what will be the new break-even point in unit sales and in dollar sales? Refer to the original data. As an alternative to (4) above, the company is considering paying the store manager 50 cents commission on each pair of shoes sold in excess of the break-even point. If this change is made, what will be the shop's net operating income or loss if 15,000 pairs of shoes are sold? 6. Refer to the original data. The company is considering eliminating sales commissions entirely in its shops and increasing fixed salaries by $31,500 annually. If this change is made, what will be the new break-even point in unit sales and in dollar sales for Shop 48? Would you rec- ommend that the change be made? Explain.

Problem 8-8 Performing a Comprehensive CVP Analysis (LO2 - CC5, 6)

The Central Valley Company is a manufacturing firm that produces and sells a single product. The company’s revenues and expenses for the last four months are given below.

Central Valley Company Comparative Income Statement
	March			April				May		June
Sales in units		6,200			5,700			7,050		8,400
Sales revenue	$	762,600		$	701,100		$	867,150	$	1,033,200
Less: Cost of goods sold		402,800			378,594			450,918		526,932

Gross margin	$	359,800		$	322,506		$	416,232	$	506,268
Less: Operating Expenses
Shipping expense	$	63,900		$	53,600		$	67,400	$	65,000
Advertising expense		88,000			88,000			88,000		88,000
Salaries and commissions		164,400			137,000			167,500		171,500
Insurance expense		15,000			15,000			15,000		15,000
Amortization expense		48,000			48,000			48,000		48,000

Total operating expenses	$	379,300		$	341,600		$	385,900	$	387,500

Net income	$	(19,500	)	$	(19,094	)	$	30,332	$	118,768

Required:

1.	Management is concerned about the losses experienced during the spring and would like to know more about the cost behaviour. Develop a cost equation for each of the costs. (Do not round intermediate calculations. Round "Per Unit" answers to 2 decimal places.)

2.	Assume that fixed costs are incurred uniformly throughout the year. Compute the annual break-even sales, and the profit if 79,000 units are sold during the year. (Round "Break-even sales" answer to nearest whole number.)

3.	Calculate the change in profit if the selling price were reduced by $10.5 each and annual sales were to increase by 7,400 units.

4.	Determine the change in profit if the company were to increase advertising by $112,000 and if this were to increase sales by 7,400 units.

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ACTG 2020 Chapter Notes - Chapter 4: Contribution Margin, Earnings Before Interest And Taxes, Break Even

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