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

2024
Views:

463

Pages:

21
Author:

Samuel Bruce

Chapter 6 Cost-Volume-Profit Relationships, Part 1 Basics of Cost-Volume-Profit Analysis Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted. 6-2 Basics of Cost-Volume-Profit Analysis CM is used first to cover fixed expenses. Any remaining CM contributes to net operating income. 6-3 Learning Objective LO1 To explain how changes in activity affect contribution margin and net operating income. 6-4 The Contribution Approach Sales, variable expenses, and contribution margin can also be expressed on a per unit basis. If Racing sells an additional bicycle, $200 additional CM will be generated to cover fixed expenses and profit. 6-5 The Contribution Approach Each month, Racing must generate at least $80,000 in total CM to break even. 6-6 The Contribution Approach If Racing sells 400 units in a month, it will be operating at the break-even point. 6-7 The Contribution Approach If Racing sells one more bike (401 bikes), net operating income will increase by $200. 6-8 The Contribution Approach We do not need to prepare an income statement to estimate profits at a particular sales volume. Simply multiply the number of units sold above break-even by the contribution margin per unit. If Racing sells 430 bikes, its net income will be $6,000. 6-9 Learning Objective LO2 To prepare and interpret a cost-volume-profit (CVP) graph. 6-10 CVP Relationships in Graphic Form The relationship among revenue, cost, profit and volume can be expressed graphically by preparing a CVP graph. Racing developed contribution margin income statements at 300, 400, and 500 units sold. We will use this information to prepare the CVP graph. Income 300 units Sales $ 150,000 Less: variable expenses 90,000 Contribution margin $ 60,000 Less: fixed expenses 80,000 Net operating income $ (20,000) Income 400 units $ 200,000 120,000 $ 80,000 80,000 $ - Income 500 units $ 250,000 150,000 $ 100,000 80,000 $ 20,000 6-11 CVP Graph 450,000 400,000 350,000 300,000 250,000 In a CVP graph, unit volume is usually represented on the horizontal (X) axis and dollars on the vertical (Y) axis. 200,000 150,000 100,000 50,000 - 100 200 300 400 500 600 700 800 Units 6-12 CVP Graph 450,000 400,000 350,000 300,000 250,000 200,000 Fixed Expenses 150,000 100,000 50,000 - 100 200 300 400 500 600 700 800 Units 6-13 CVP Graph 450,000 400,000 350,000 300,000 Total Expenses 250,000 200,000 Fixed Expenses 150,000 100,000 50,000 - 100 200 300 400 500 600 700 800 Units 6-14 CVP Graph 450,000 400,000 Total Sales 350,000 300,000 Total Expenses 250,000 200,000 Fixed Expenses 150,000 100,000 50,000 - 100 200 300 400 500 600 700 800 Units 6-15 CVP Graph 450,000 Break-even point (400 units or $200,000 in sales) 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 - 100 200 300 400 500 600 700 800 Units 6-16 Learning Objective LO3 To use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume. 6-17 Contribution Margin Ratio The contribution margin ratio is: CM Ratio = Total CM Total sales For Racing Bicycle Company the ratio is: $80,000 = 40% $200,000 Each $1.00 increase in sales results in a total contribution margin increase of 40¢. 6-18 Contribution Margin Ratio Or, in terms of units, the contribution margin ratio is: Unit CM CM Ratio = Unit selling price For Racing Bicycle Company the ratio is: $200 = 40% $500 6-19 Contribution Margin Ratio 400 Bikes Sales $ 200,000 Less: variable expenses 120,000 Contribution margin 80,000 Less: fixed expenses 80,000 Net operating income $ - 500 Bikes $ 250,000 150,000 100,000 80,000 $ 20,000 A $50,000 increase in sales revenue results in a $20,000 increase in CM. ($50,000 × 40% = $20,000) 6-20 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 CM Ratio for Coffee Klatch? Unit contribution margin CM Ratio = a. 1.319 Unit selling price b. 0.758 ($1.49-$0.36) = c. 0.242 $1.49 d. 4.139 = $1.13 = 0.758 $1.49 6-22