1 / 40

Managerial Accounting

Managerial Accounting. Spring Semester 2007 Instructor: Kristen Lynch, CPA, MBA. Cost-Volume-Profit Relationships. Chapter Six. Contribution Margin. This is the amount remaining from sales revenue after variable expenses have been deducted. Sales Revenue Less variable expenses

artan
Download Presentation

Managerial Accounting

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Managerial Accounting Spring Semester 2007 Instructor: Kristen Lynch, CPA, MBA

  2. Cost-Volume-Profit Relationships Chapter Six

  3. Contribution Margin This is the amount remaining from sales revenue after variable expenses have been deducted. Sales Revenue Less variable expenses Contribution Margin Less fixed expenses Net income

  4. Can you guess? What term would we use to describe the following situation? Revenues $1,000,000 Less VC (500,000) Contribution Margin $500,000 Less FC $500,000 Net Income 0 BREAK-EVEN!!!

  5. Break-even Point We call the “Break-even point” the number of units that we need to sell (or level of sales) to generate the revenues to just cover our costs (therefore breaking even) $1,000,000 revenues/$2.50 selling price = 400,000 units

  6. Fixed Expenses CVP Graph Dollars Units

  7. Total Expenses Fixed Expenses CVP Graph Dollars Units

  8. Total Sales Total Expenses Fixed Expenses CVP Graph Dollars Units

  9. Total Sales Total Expenses Fixed Expenses CVP Graph Dollars Units

  10. Let’s Practice! • Turn to page 255 in textbook. • Exercise 6-2

  11. Chapter 6 Objectives • Break-even point defined • Contribution margin • Computing the break-even point • Compute level of sales to achieve xx in profit • Computing the margin of safety • Computing degree of operating leverage

  12. Total CM Total sales CM Ratio = $80,000 $200,000 = 40% Contribution Margin Ratio The contribution margin ratio is:For Racing Bicycle Company the ratio is: Each $1.00 increase in sales results in a total contribution margin increase of 40¢.

  13. Unit CM Unit selling price CM Ratio = $200 $500 = 40% Contribution Margin Ratio Or, in terms of units, the contribution margin ratiois:For Racing Bicycle Company the ratio is:

  14. A $50,000 increase in sales revenue results in a $20,000 increase in CM. ($50,000 × 40% = $20,000) Contribution Margin Ratio

  15. Let’s Practice! • Turn to page 255 in textbook. • Exercise 6-3

  16. Chapter 6 Objectives • Break-even point defined • Contribution margin • Computing the break-even point • Computing the margin of safety • Computing degree of operating leverage

  17. Chapter 6 Objectives • Break-even point defined • Contribution margin • Computing the break-even point • Compute level of sales to achieve xx in profit • Computing the margin of safety • Computing degree of operating leverage

  18. Calculating break-even point To calculate break-even point: Fixed Costs = units Contribution Margin Fixed Costs = Sales Revenue CM%

  19. Let’s Practice! • Turn to page 256 in textbook. • Exercise 6-5

  20. Key Point So far we are assuming that our company has only one product to sell. This is generally not the case. Contribution margin typically varies among different types of product. The estimate of how much of each product you are going to sell can significantly affect both total contribution margin and break even point!

  21. Break-even points Cakes Muffins Total Scenario A Est. sales 23,000 69,000 92,000 CM 10% 20% 18% Scenario B Est. sales 40,000 20,000 60,000 CM 10% 20% 13% In cases of 2 or more products, CM% is not fixed, but can fluctuate as the sales mix changes.

  22. Chapter 6 Objectives • Break-even point defined • Contribution margin • Computing the break-even point • Compute level of sales to achieve xx in profit • Computing the margin of safety • Computing degree of operating leverage

  23. Unit sales to attain the target profit Fixed expenses + Target profit Unit contribution margin = $80,000 + $100,000 $200/bike =900 bikes The Contribution Margin Approach The contribution margin method can be used to determine that 900 bikes must be sold to earn the target profit of $100,000.

  24. Let’s Practice! • Turn to page 256 in textbook. • Exercise 6-6

  25. Chapter 6 Objectives • Break-even point defined • Contribution margin • Computing the break-even point • Compute level of sales to achieve xx in profit • Computing the margin of safety • Computing degree of operating leverage

  26. The margin of safety is the excess of budgeted (or actual) sales over the break-even volume of sales. The Margin of Safety Margin of safety = Total sales - Break-even sales

  27. If we assume that Racing Bicycle Company has actual sales of $250,000, given that we have already determined the break-even sales to be $200,000, the margin of safety is $50,000 as shown The Margin of Safety

  28. The margin of safety can also be expressed as 20%of sales.($50,000 ÷ $250,000) The Margin of Safety

  29. The margin of safety can be expressed in terms of the number of units sold. The margin of safety at Racing is $50,000, and each bike sells for $500. Margin ofSafety in units $50,000$500 = = 100 bikes The Margin of Safety

  30. Let’s Practice! • Turn to page 256 in textbook. • Exercise 6-7

  31. Chapter 6 Objectives • Break-even point defined • Contribution margin • Computing the break-even point • Compute level of sales to achieve xx in profit • Computing the margin of safety • Computing degree of operating leverage

  32. Cost Structure and Profit Stability Cost structure refers to the relative proportion of fixed and variable costs in an organization. Managers often have some latitude in determining their organization’s cost structure.

  33. Cost Structure • Would you rather have high fixed costs or variable costs? • Discuss in small groups and we will reconvene to discuss as a class.

  34. Cost Structure High fixed costs • Disadvantage: break-even point is higher. A lot of pressure to make sales – runs higher risk of bankruptcy. • Key Point – Certain businesses require infrastructure – high fixed costs may not be avoidable • Advantage: Barrier to entry for possible competitors.

  35. The degree of operating leverage is a measure, at a given level of sales, of how a percentage change in sales volume will affect profits. Degree of operating leverage Contribution margin Net operating income = Operating Leverage All other things constant . . .If a firm has high fixed costs, its operating leverage will be lower than A firm who has low fixed costs.

  36. $100,000 $20,000 = 5 Operating Leverage At Racing, the degree of operating leverage is 5.

  37. With an operating leverage of 5, if Racing increases its sales by 10%, net operating income would increase by 50%. Operating Leverage Here’s the verification!

  38. Operating Leverage 10% increase in sales from $250,000 to $275,000 . . . . . . results in a 50% increase in income from $20,000 to $30,000.

  39. Let’s Practice! • Turn to page 256 in textbook. • Exercise 6-8

  40. Next Week • Study for Exam • Exam will cover Chapter 1-5 • You will have about 2 hours to complete the exam.

More Related