Professional Documents
Culture Documents
Chapter 5
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright2012byTheMcGrawHillCompanies,Inc.Allrightsreserved.
5-2
Learning Objective 1
Explain how changes in
activity affect
contribution margin and
net operating income.
5-3
5-4
5-5
5-6
5-7
5-8
5-9
5-10
5-11
401
401 units
units $500
$500
401
401 units
units $300
$300
Profit
$200 = ($200,500 $120,300)
Variable expenses)
$80,000
Fixed expenses
Fixed
5-12
5-13
5-14
5-15
5-16
Learning Objective 2
5-17
5-18
Dollars
5-19
Dollars
Draw
Draw aa line
line parallel
parallel to
to the
the volume
volume axis
axis
to
to represent
represent total
total fixed
fixed expenses.
expenses.
Units
5-20
Dollars
Choose
Choose some
some sales
sales volume,
volume, say
say 400
400 units,
units, and
and plot
plot the
the point
point representing
representing
total
total expenses
expenses (fixed
(fixed and
and variable).
variable). Draw
Draw aa line
line through
through the
the data
data point
point
back
back to
to where
where the
the fixed
fixed expenses
expenses line
line intersects
intersects the
the dollar
dollar axis.
axis.
Units
5-21
Dollars
Choose
Choose some
some sales
sales volume,
volume, say
say 400
400 units,
units, and
and plot
plot the
the point
point representing
representing
total
total sales.
sales. Draw
Draw aa line
line through
through the
the data
data point
point back
back to
to the
the point
point of
of origin.
origin.
Units
5-22
Dollars
Break-even point
(400 units or $200,000 in sales)
Loss
Loss Area
Area
Units
Profit
Profit Area
Area
5-23
5-24
5-25
Learning Objective 3
Use the contribution
margin ration (CM ratio)
to compute changes in
contribution margin and
net operating income
resulting from changes in
sales volume.
5-26
5-27
CM per unit
=
CM Ratio =
SP per unit
$200
$500
= 40%
5-28
5-29
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. An average of 2,100 cups are sold each
month. What is the CM Ratio for Coffee Klatch?
a. 1.319
b. 0.758
c. 0.242
d. 4.139
5-30
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. An average of 2,100 cups are sold each
month. What is the CM Ratio for Coffee Klatch?
a. 1.319
Unit contribution margin
CM Ratio =
b. 0.758
Unit selling price
c. 0.242
($1.49 - $0.36)
=
d. 4.139
$1.49
=
$1.13
= 0.758
$1.49
5-31
5-32
Learning Objective 4
Show the effect on net
operating income of
changes in variable
costs, fixed costs, selling
price, and volume.
5-33
5-34
5-35
Sales
Sales increased
increased by
by $20,000,
$20,000, but
but net
net operating
operating
income
income decreased
decreased by
by $2,000
$2,000..
5-36
5-37
5-38
Sales
Sales increase
increase by
by $40,000
$40,000 and
and net
net operating
operating income
income
increases
increases by
by $10,200
$10,200..
5-39
5-40
Sales
Sales increase
increase by
by $62,000,
$62,000, fixed
fixed costs
costs increase
increase by
by
$15,000,
$15,000, and
and net
net operating
operating income
income increases
increases by
by $2,000
$2,000..
5-41
5-42
Sales
Sales increase
increase by
by $37,500,
$37,500, fixed
fixed expenses
expenses decrease
decrease by
by
$6,000,
$6,000, and
and net
net operating
operating income
income increases
increases by
by $12,375.
$12,375.
5-43
5-44
==
==
==
$$ 20
20 per
per bike
bike
300
300 per
per bike
bike
$$ 320
320 per
per bike
bike
5-45
Learning Objective 5
5-46
5-47
Equation Method
Profit = Unit CM Q Fixed expenses
Our goal is to solve for the unknown Q which
represents the quantity of units that must be sold
to attain the target profit.
5-48
5-49
5-50
$100,000 + $80,000
Unit sales =
$200
Unit sales = 900
5-51
Equation
Method
OR
Formula
Method
5-52
Equation Method
Profit = CM ratio Sales Fixed expenses
Our goal is to solve for the unknown
Sales, which represents the dollar
amount of sales that must be sold to
attain the target profit.
Suppose RBC management wants to know the
sales volume that must be generated to earn a
target
profit
of $100,000.
$100,000
= 40%
Sales
$80,000
40% Sales = $100,000 + $80,000
Sales = ($100,000 + $80,000) 40%
Sales = $450,000
5-53
Formula Method
$100,000 + $80,000
Dollar sales =
40%
Dollar sales = $450,000
5-54
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. Use the formula method to
determine how many cups of coffee would have to
be sold to attain target profits of $2,500 per month.
a. 3,363 cups
b. 2,212 cups
c. 1,150 cups
d. 4,200 cups
5-55
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
salesfixed expense per month is $1,300.
$0.36. The Unit
average
Target profit + Fixed expenses
to attain
= to determineUnit
Use the formula
method
howCM
many cups of
target
profit
coffee would
have
to be sold to attain target profits of
$2,500 + $1,300
$2,500 per month.
= $1.49 - $0.36
a. 3,363 cups
b. 2,212 cups
$3,800
=
$1.13
c. 1,150 cups
d. 4,200 cups
= 3,363 cups
5-56
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. Use the formula method to
determine the sales dollars that must be generated
to attain target profits of $2,500 per month.
a. $2,550
b. $5,013
c. $8,458
d. $10,555
5-57
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.
Use the formula
method
to determine the sales dollars
Sales
$
Targettarget
profitprofits
+ Fixed
expenses
that must be to
generated
to
attain
of
$2,500
attain =
CM ratio
per month.target profit
a. $2,550
$2,500 + $1,300
= ($1.49 0.36) $1.49
b. $5,013
c. $8,458
$3,800
=
d. $10,555
0.758
= $5,013
5-58
Learning Objective 6
5-59
Break-even Analysis
The equation and formula methods can be used to
determine the unit sales and dollar sales needed to
achieve a target profit of zero. Lets use the RBC
information to complete the break-even analysis.
5-60
$0 = $200 Q + $80,000
Profits are zero at the break-even point.
5-61
5-62
Fixed expenses
CM per unit
$80,000
Unit sales =
$200
Unit sales = 400
5-63
5-64
5-65
$80,000
Dollar sales =
40%
Dollar sales = $200,000
5-66
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. An average of 2,100 cups are sold each
month. What is the break-even sales dollars?
a. $1,300
b. $1,715
c. $1,788
d. $3,129
5-67
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. An average of 2,100 cups are sold
each month. What is the break-even sales dollars?
a. $1,300
Fixed expenses
Break-even
=
b. $1,715
CM Ratio
sales
$1,300
c. $1,788
=
0.758
d. $3,129
= $1,715
5-68
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. An average of 2,100 cups are sold each
month. What is the break-even sales in units?
a. 872 cups
b. 3,611 cups
c. 1,200 cups
d. 1,150 cups
5-69
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
Fixed
expenses
$1,300. An average Break-even
of 2,100 cups
are
sold
each
=
CM
per Unit
month. What is the break-even sales in
units?
$1,300
a. 872 cups
=
$1.49/cup - $0.36/cup
b. 3,611 cups
$1,300
c. 1,200 cups
=
$1.13/cup
d. 1,150 cups
= 1,150 cups
5-70
Learning Objective 7
5-71
5-72
Actual
Actual sales
sales
500
500 units
units
$$ 250,000
250,000
150,000
150,000
100,000
100,000
80,000
80,000
$$
20,000
20,000
5-73
Actual
Actual sales
sales
500
500 units
units
$$ 250,000
250,000
150,000
150,000
100,000
100,000
80,000
80,000
$$
20,000
20,000
5-74
$50,000
= 100 bikes
$500
5-75
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. An average
of 2,100 cups are sold each month. What is the
margin of safety expressed in cups?
a. 3,250 cups
b. 950 cups
c. 1,150 cups
d. 2,100 cups
5-76
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. An average of 2,100 cups are sold each
month. What is the margin of safety expressed in
cups?
a. 3,250 cups
b. 950 cups
Margin of safety = Total sales Break-even sales
c. 1,150 cups
= 2,100 cups 1,150 cups
d. 2,100 cups
= 950 cups
5-77
5-78
5-79
Learning Objective 8
Compute the degree of
operating leverage at a
particular level of sales
and explain how it can
be used to predict
changes in net operating
income.
5-80
Operating Leverage
Operating leverage is a measure of how sensitive
net operating income is to percentage changes
in sales. It is a measure, at any given level of
sales, of how a percentage change in sales
volume will affect profits.
Degree of
operating leverage
Contribution margin
= Net operating income
5-81
Operating Leverage
To illustrate, lets revisit the contribution income statement
for RBC.
Actual
Actual sales
sales
500
500 Bikes
Bikes
Sales
$$ 250,000
Sales
250,000
Less:
150,000
Less: variable
variable expenses
expenses
150,000
Contribution
100,000
Contribution margin
margin
100,000
Less:
80,000
Less: fixed
fixed expenses
expenses
80,000
Net
$$
20,000
Net income
income
20,000
Degree of
Operating
Leverage
$100,000
= $20,000
= 5
5-82
Operating Leverage
With an operating leverage of 5, if RBC
increases its sales by 10%, net operating
income would increase by 50%.
Percent increase in sales
Degree of operating leverage
Percent increase in profits
10%
5
50%
5-83
Operating Leverage
5-84
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. An average
of 2,100 cups are sold each month. What is the
operating leverage?
a. 2.21
b. 0.45
c. 0.34
d. 2.92
5-85
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. An average
of 2,100 cups are sold each month. What is the
operating leverage?
a. 2.21
b. 0.45
Operating Contribution margin
leverage = Net operating income
c. 0.34
d. 2.92
$2,373
= $1,073 = 2.21
5-86
Quick Check
At Coffee Klatch the average selling price of a cup of
coffee is $1.49, the average variable expense per cup
is $0.36, the average fixed expense per month is
$1,300, and an average of 2,100 cups are sold each
month.
If sales increase by 20%, by how much should net
operating income increase?
a. 30.0%
b. 20.0%
c. 22.1%
d. 44.2%
5-87
Quick Check
At Coffee Klatch the average selling price of a cup of
coffee is $1.49, the average variable expense per cup
is $0.36, the average fixed expense per month is
$1,300, and an average of 2,100 cups are sold each
month.
If sales increase by 20%, by how much should net
operating income increase?
a. 30.0%
b. 20.0%
c. 22.1%
d. 44.2%
5-88
Increased
sales
2,520 cups
$
3,755
907
2,848
1,300
$
1,548
20.0%
44.2%
5-89
5-90
5-91
5-92
Learning Objective 9
Compute the break
even point for a
multiproduct company
and explain the effects
of shifts in the sales mix
on contribution margin
and the break-even
point.
5-93
5-94
5-95
$170,000
48.2%
= $352,697
5-96
5-97
End of Chapter 5