University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

448

Pages:

23
Author:

leatherfaceg5v

Chapter 6 Cost-Volume-Profit Relationships, Part 2 Changes in Fixed Costs and Sales Volume What is the profit impact if Racing can increase unit sales from 500 to 540 by increasing the monthly advertising budget by $10,000? 6-24 Changes in Fixed Costs and Sales Volume $80,000 + $10,000 advertising = $90,000 Sales increased by $20,000, but net operating income decreased by $2,000. 6-25 Changes in Fixed Costs and Sales Volume The Shortcut Solution Increase in CM (40 units X $200) Increase in advertising expenses Decrease in net operating income $ 8,000 10,000 $ (2,000) 6-26 Change in Variable Costs and Sales Volume What is the profit impact if Racing can use higher quality raw materials, thus, increasing variable costs per unit by $10, to generate an increase in unit sales from 500 to 580? 6-27 Change in Variable Costs and Sales Volume 580 units × $310 variable cost/unit = $179,800 Sales increase by $40,000, and net operating income increases by $10,200. 6-28 Change in Fixed Cost, Sales Price and Volume What is the profit impact if Racing (1) cuts its selling price $20 per unit, (2) increases its advertising budget by $15,000 per month, and (3) increases unit sales from 500 to 650 units per month? 6-29 Change in Fixed Cost, Sales Price and Volume Sales increase by $62,000, fixed costs increase by $15,000, and net operating income increases by $2,000. 6-30 Change in Variable Cost, Fixed Cost and Sales Volume What is the profit impact if Racing (1) pays a $15 sales commission per bike sold, instead of paying salespersons flat salaries that currently total $6,000 per month, and (2) increases unit sales from 500 to 575 bikes? 6-31 Change in Variable Cost, Fixed Cost and Sales Volume Increase in CM (75 units X $85) Reduced fixed costs Increase in net operating income $ 6,375 6,000 $ 12,375 Sales increase by $37,500, variable costs increase by $31,125, but fixed expenses decrease by $6,000. 6-32 Change in Regular Sales Price If Racing has an opportunity to sell 150 bikes to a wholesaler without disturbing sales to other customers or fixed expenses, what price would it quote to the wholesaler if it wants to increase monthly profits by $3,000? 6-33 Change in Regular Sales Price $ 3,000 ÷ 150 bikes = Variable cost per bike = Selling price required = $ 20 per bike 300 per bike $ 320 per bike 150 bikes × $320 per bike = $ 48,000 Total variable costs = 45,000 Increase in net income = $ 3,000 6-34 Break-Even Analysis 1. 2. Break-even analysis can be approached in two ways: Equation method Contribution margin method 6-36 Equation Method Profits = (Sales – Variable expenses) – Fixed expenses OR Sales = Variable expenses + Fixed expenses + Profits At the break-even point profits equal zero 6-37 Break-Even Analysis Here is the information from Racing Bicycle Company: Total Sales (500 bikes) $ 250,000 Less: variable expenses 150,000 Contribution margin $ 100,000 Less: fixed expenses 80,000 Net operating income $ 20,000 Per Unit $ 500 300 $ 200 Percent 100% 60% 40% 6-38 Equation Method  We calculate the break-even point as follows: Sales = Variable expenses + Fixed expenses + Profits $500Q = $300Q + $80,000 + $0 Where: Q = Number of bikes sold $500 = Unit selling price $300 = Unit variable expense $80,000 = Total fixed expense 6-39 Equation Method  We calculate the break-even point as follows: Sales = Variable expenses + Fixed expenses + Profits $500Q = $300Q + $80,000 + $0 $200Q = $80,000 Q = $80,000 ÷ $200 per bike Q = 400 bikes 6-40 Equation Method  The equation can be modified to calculate the break-even point in sales dollars. Sales = Variable expenses + Fixed expenses + Profits X = 0.60X + $80,000 + $0 Where: X = Total sales dollars 0.60 = Variable expenses as a % of sales $80,000 = Total fixed expenses 6-41 Equation Method  The equation can be modified to calculate the break-even point in sales dollars. Sales = Variable expenses + Fixed expenses + Profits X = 0.60X + $80,000 + $0 0.40X = $80,000 X = $80,000 ÷ 0.40 X = $200,000 6-42 Contribution Margin Method The contribution margin method has two key equations. Break-even point = in units sold Break-even point in total sales dollars = Fixed expenses Unit contribution margin Fixed expenses CM ratio 6-43 Contribution Margin Method Let’s use the contribution margin method to calculate the break-even point in total sales dollars at Racing. Break-even point in total sales dollars = Fixed expenses CM ratio $80,000 = $200,000 break-even sales 40% 6-44 Quick Check  Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable Fixed expenses = Unit CM expense per cupBreak-even is $0.36. The average fixed expense per month is $1,300. On average 2,100 $1,300 = cups are sold each month. What is- $0.36/cup the break-even $1.49/cup sales in units? $1,300 = a. 872 cups $1.13/cup b. 3,611 cups = 1,150 cups c. 1,200 cups d. 1,150 cups 6-46 Quick Check  Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. On average 2,100 cups are sold each month. What is the break-even sales in dollars? a. $1,300 Fixed expenses Break-even = CM Ratio sales b. $1,715 $1,300 c. $1,788 = 0.758 d. $3,129 = $1,715 6-48