Easy work to do 2

ACCT 224/344 – Ch 12 – Part 3 Homework
Name ___________________________________
1. Charlotte, Inc.’s selling price per unit is $100, the contribution margin ratio is 30%,
2,500 units are being produced and sold, and fixed expenses total $50,000.
a) Calculate the total sales revenues.
b) Calculate the contribution margin per unit and total contribution margin.
c) Calculate the variable costs per unit and total variable costs.
d) Calculate the operating income.
e) Calculate the break-even point in units.
f) Calculate the break-even point in sales dollars.
g) Calculate the margin of safety.
h) Calculate the margin of safety ratio.
i) Calculate the units needed for a target operating profit of $100,000
j) Calculate the sales dollars needed for a target operating profit of $100,000.
Set up:
$ per unit
# units
Net Sales Revenues
Variable Costs
Contribution Margin
Fixed Expenses
Operating Income
2. Riley, Inc.’s selling price per unit is $300, the contribution margin per unit is $120,
4,500 units are being produced and sold, and operating income totals $100,000.
a) Calculate the total sales revenues.
b) Calculate the total contribution margin and the contribution margin ratio.
c) Calculate the variable costs per unit and total variable costs.
d) Calculate the fixed expenses.
Total $$
e) Calculate the break-even point in units.
f) Calculate the break-even point in sales dollars.
g) Calculate the margin of safety.
h) Calculate the margin of safety ratio.
i) Calculate the units needed for a target operating profit of $200,000
j) Calculate the sales dollars needed for a target operating profit of $200,000.
Set up:
Net Sales Revenues
Variable Costs
Contribution Margin
Fixed Expenses
Operating Income
$ per unit
# units
Total $$
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Break–Even Point
Break-even point = amount of revenue needed
to break-even, meaning no profit or loss ($0)
BE in units = Fixed Expenses / CM per unit
BE in sales dollars = Fixed Expenses / CM Ratio
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3
Break-Even Point (p. 439-441)
• Selling price per unit = $12
• Variable expenses per unit = $8
• Total Fixed expenses = $45,000
• CM = ?
• CM Ratio = ?
• What is the minimum target # of units and the
minimum target revenues for the company to
just break even? ($0 profit)
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4
Break-Even Analysis
(p. 439-441) cont’d.
• Volume in Units at BE = Fixed expenses / CM
per unit
= $45,000 / $4 = 11,250 units
• Total Revenues at BE = Fixed expenses / CM
Ratio
= $45,000 / 33.3% = $135,000 in revenues
•
(Double check= 11,250 units x $12 selling price =
$135,000 sales revenues)
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5
Target Pricing (p.441) – $50,000
operating income target
• Volume in units for desired operating income
= (Fixed expenses + desired operating
income) / CM per unit
=($45,000 + $50,000) / $4 = 23,750 units
• Total revenues for desired operating income =
(Fixed expenses + desired operating income) /
CM ratio
=($45,000 + $50,000) / 33.33% = $285,000
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6
Margin of Safety (p.443)
• Margin of Safety = amount of sales decline a
company could withstand before a loss would
be incurred (loss cushion)
• Margin of Safety = Total sales – BE Sales
• Margin of Safety Ratio = Margin of Safety /
Total Sales
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7
Margin of Safety (cont’d)
• Assume sales revenue = $150,000 and BE sales
= $135,000
• Margin of Safety = Total Sales – BE Sales
= $150,000 – $135 000 = $15,000
• Margin of Safety Ratio = Margin of Safety /
Total Sales
= $15,000 / $150,000 = 10%
• If sales drop 10% or $15,000, company will still
break-even ($0 profit or loss)
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Multiple Product Mix Consideration
Sales mix is the relative combination in which
a company’s different products are sold.
Different products have different selling
prices, costs, and contribution margins.
A change in the sales mix will result in a
different contribution margin ratio.
Learning Objective 12-10: Analyze how changes in the sales mix can affect projections using CVP analysis.
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Multiple Product Mix Consideration
YardCare Inc. provides us
with the following information:
Sales
Variable expense
Contribution margin
Fixed expense
Operating income
Lawnmowers
$ 250,000 100%
150,000
60%
$ 100,000
40%
Lawn tractors
$ 300,000 100%
135,000
45%
$ 165,000
55%
Total
$550,000 100%
285,000
52%
$265,000
48%
170,000
$ 95,000
Both products have the same sales volume of 1,000 units.
However, each product has a different contribution margin ratio.
Learning Objective 12-10: Analyze how changes in the sales mix can affect projections using CVP analysis.
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Multiple Product Mix Consideration
YardCare Inc. provides us
with the following information:
Lawnmowers
Sales
$ 250,000 100%
Variable expense
150,000
60%
Contribution margin $ 100,000
40%
Fixed expense
Operating income
Lawn tractors
$ 300,000 100%
135,000
45%
$ 165,000
55%
Total
$ 550,000 100%
285,000
52%
$ 265,000
48%
170,000
$ 95,000
Average total contribution margin ratio provided from all products:
$265,000 = 48% (rounded)
$550,000
How will average total contribution margin change if Jones sold
1,500 lawn tractors, all other factors held constant?
Learning Objective 12-10: Analyze how changes in the sales mix can affect projections using CVP analysis.
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Multiple Product Mix Consideration
How will average total contribution margin change if YardCare sold
1,500 lawn tractors, all other factors held constant?
This ratio increases from 48 percent to 50 due to selling more
product with a higher CM ratio.
Lawnmowers
Sales
$ 250,000 100%
Variable expense
150,000
60%
Contribution margin $ 100,000
40%
Fixed expense
Operating income
Lawn tractors
$450,000 100%
202,500
45%
$247,500
55%
Average total contribution margin ratio
provided from all products:
Total
$ 700,000 100%
352,500 50%
$ 347,500 50%
170,000
$ 177,500
Increases
$347,500
$700,000 = 50% (rounded)
Learning Objective 12-10: Analyze how changes in the sales mix can affect projections using CVP analysis.
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Operating Leverage
When an entity’s revenues change because the volume of activity
changes, variable expenses and contribution margin will change
proportionately. But the presence of fixed expenses, which do not
change as the volume of activity changes, means that operating
income will change proportionately more than the change in
revenues.
This magnification of the
effect on operating income
resulting from a change in
revenue is called “operating
leverage.” The higher a firm’s
contribution margin ratio, the
greater its operating
leverage.
Learning Objective 12-12: Use operating leverage to evaluate cost structures.
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Operating Leverage
• A measure of how sensitive net income is to
percentage changes in sales.
• With high operating leverage, a small
percentage increase in revenue can produce a
much larger percentage increase in income.
Much larger %
increase in income
High Operating
Leverage
Learning Objective 12-12: Use operating leverage to evaluate cost structures.
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Operating Leverage
If revenues increase by 20 percent,
what is the percentage increase in income?
Learning Objective 12-12: Use operating leverage to evaluate cost structures.
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Operating Leverage
20 percent increase in revenue
80 percent increase in income
Operating leverage resulted in the operating income
increasing proportionately more than the increase in revenue.
Learning Objective 12-12: Use operating leverage to evaluate cost structures.
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End of Section 3
*******************
Example Problems:
#12.19, #12,20,
#12.21, #12.22
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