Cost-Revenue-Net Income Analysis Saturday, July31,2021 56 AM is Unit Variable Cost: The unit variable cost is an adapted simple average formula (Formula 3.3) with specific definitions for the data and the quantity. ‘The end result ofthe calculation isthe typical or average variable cost associated with an individual unit of output. Being a dollar cost, the unit variable ‘cost is rounded to two decimals. ‘TVC is Total Variable Cost: The total ‘variable costs in dollars that were incurred at 4 particular level of output. Inthe simple average formula, this is represented by the symbol Ex, which stands forthe total of al picces of data. TVC n Formula 5.1 ~ Unit Variable Cost: WC = nis Level of Output: In the simple average formula, » represented the number of pieces of data. For this chapter, the definition is further specified to represent the total number of units produced (or sold oF the total output that incurred the total variable costs. [NI is Net Income: Net income i the amount of moncy lft over afterall costs are deducted from all revenues. If the number f postive, then the busines profitable Ifthe number i negative, then the busines suffers a ln since the cost are exceeding the revenues, Note that many companies we the terms net carning or at profi instead ofthe term net income. Net income i sed on a certain level of output. This model asumes that the number of units that are produced or purchased (or resale) by the company exactly ‘Therefore, the model docs not conser inventory and its asetated costs matches the numberof units tht are output owl by the company. ‘TEC + n(VC) is Total Costs: This term in the form calculates how mach money = spent generate the revenue, Total costs the sm ofall cling both the total fixed ‘cont and total variable cost. Two terme make up the 1n(S) is Total Revenue: This term inthe Formula calculates how mich money oF grose income the sale ofthe product ata certain output level brings into the organization, Total revenue the entire amount of money received by a company for sling its product, calculated by multiplying the quantity sold by the sling pice. cons: Total fixed costs (TFC) ae a constant since these cots do not change with the level of outpts total variable cots, represented mathematically by VC), are the level of up mlplied by the unt ‘arabe cst Formula 5.2~Net Income Using 2 Total Revenue and Cost Approach: NI = n(S) — (TFC + n(VC)) Sis Unit Selling Price: The uni selling price ofthe product. ‘arable cots XN ‘TECis Total Fixed Costs: The total ofall costs tht are not affected by the level of output of output,Exercise In the current period, Blue Mountain Packers in Salmon Arm, British Columbia, had fixed costs of $228,000 and a total cost of $900,000 while maintaining a level of output of 6,720 units. Next period sales are projected to rise by 20%. What total cost should Blue Mountain Packers project? TEC = $228,000, n = 6,720 900,000 - $228,000 = $672,000 ve= TE = $7200 — $100 TFC = $228,000; n = 6,720 x 1.2 = 8,064 VC =n(VC) = 8,064($100) = $806,400 Total cost = TFC + TVC = $228,000 + $806,400 = $1,034,400 Net Income Using a Total Contribution Margin Approach Formula 5.3 Unit Contribution” CM. = § — VC. TF you Fave no unit 31d, your net income f negative and pal tothe tal ined cots asocated with your basnes, since there sno offsetting revere to py for those costs. With each unit sold, the contribution margin of each product available to payoff Formula §4—Net Income Using Total Contribution Margin Approach NI = (CM) — TEC Bees! Exercise Fred runs a designer candle-making business out of his basement. He sells the candles for $15 each, and every candle costs him $6 to manufacture. If his fixed costs are $2,300 per month, what is his projectednet income or loss next month, for which he forecasts sales of 225 units? (CM =S - VC =$15 -$6=$9 Total contribution margin = n(CM) = 225(S9) = $2,025 ‘TFC = $2,300 NI=n(CM) ~ TFC NI = $2,025 - $2,300 Sx 10 Formula 55 Contribution Rate if Unit information Known) CR =F prema [Be information, ncating thew ‘cannot aply Formula 5.5, Sometimes oly aggregate product ae known 0 Exercise Last year, A Child's Place franchise had total sales of $743,000. If its total fixed costs were $322,000 and net income was $81,000, what was its contribution rate? ‘TR = $743,000; TFC = $322,000; NI = $81,000 ais) ~ (TFC + n(v¢)) x 100 = [424%Break-Even Analysis Saturday, July31,2021 530 AM Formula 5.8: Dollar Break-Even: Exercise If the break-even point is 15,000 units, the selling price is $95, and the unit variable cost is $75, what are the company's total fixed costs? TFC Formula 5.8: Dollar Break-Even: TR = TR Exercise If your organization has a contribution rate of 45% and knows the break-even point is $202,500, what are your organization's total fixed costs? TFC = unknown cR=0.45,$202,500 = TFC + 0.45 = $91,125 Exercise If a business has total revenue of $100,000, total variable costs of $60,000, and total fixed costs of $20,000, determine its break-even point in dollars. ‘TEC = $20,000 CR = ($100,000 - $60,000) = $100,000 = 0.4 ‘TR = $20,000 = 0.4 = $50,000 Exercise Ashley rebuilds old laptops as a home hobby business. Her variable costs are $125 per laptop and she sells them for $200. She has determined that her break-even point is 50 units per month. Determine her net income for a month in which she sells 60 units. TEC = unknown cm $200- $125 = $75 Total revenue = n(S) = 60($200) = $12,000 3,750; TVC = 60(8125) = $7500 12,000 ~ ($3,750 + $7,500) = $750