Transcript Slide 1

CHAPTER 1 MODULE 1
Chapter
12 Module 5
AMIS 310
Foundations of Accounting
Professor Marc Smith
Chapter 12 Module 5: Example #3
a.
Contribution margin per unit =
25.00 - 19.80 = $5.20
●
b.
This means that for every unit sold, $5.20 of the
selling price is available to pay fixed costs and
contribute toward a profit
Contribution margin ratio =
5.20 ÷ 25.00 = 20.8%
●
This means that for every unit sold, 20.8% of the
selling price is available to pay fixed costs and
contribute toward a profit
Chapter 12 Module 5: C-V-P Analysis
Cost-Volume-Profit Analysis is a way of
determining how revenues, costs, and profits
behave (change) as the volume of activity
changes
Typical starting point in a CVP analysis:
find the break-even point
Chapter 12 Module 5: Break-Even Point
The break-even point is the point where:
● no profit is earned (or loss incurred)
● Sales = Variable Costs + Fixed Costs
QUESTION:
Why would a company be
interested in the break-even
point?
Chapter 12 Module 5: Break-Even Point
ANSWER:
It aids in decision-making by giving
managers a minimum target revenue
as well as providing some insight
as to the viability of offering a new
product or entering a new market
The break-even point (in units) represents the number
of units that must be sold to ‘break-even’
Chapter 12 Module 5: Break-Even Point (units)
Sales revenues
– Variable costs
– Fixed costs
= Net income
NOTES:
1. Sales revenues = selling price per unit x number of units
2. Variable costs = variable cost per unit x number of units
3. At the break-even point, net income = 0
Chapter 12 Module 5: Example #3
c.
Break Even in Units
0 = ($25 x Units) – ($19.80 x Units) – $468,000
0 = ($5.20 x Units) – $468,000
($5.20 x Units) = $468,000
Units = 90,000
Proof
Sales (90,000 units @ $25)
Less: Variable costs
Contribution margin
Less: Fixed costs
Net income
$2,250,000
1,782,000
$468,000
468,000
$
0
Chapter 12 Module 5: Example #3
Alternative formula to calculate the break-even
point in units:
Number of
=
units
$468,000 ÷
$5.20
Total Fixed costs
Contribution margin per unit
=
90,000 units
Chapter 12 Module 5: Break-Even Point
QUESTION:
If the company sells 90,001 units,
will it earn a profit or incur a loss
and how much?
ANSWER:
It will earn a profit
$5.20  CM per unit
Chapter 12 Module 5: Break-Even Point
QUESTION:
If the company sells 89,998 units,
will it earn a profit or incur a loss
and how much?
ANSWER:
It will incur a loss
$10.40  (CM per unit x 2)