gave Klein and Baer the confidence target of selling 120,000 units for the year. For the second product both president and controller projected sales of 60,000 units for the year. The parent company gave Klein a target profit of $210,000. After, Baer made an analysis where she used an absorption approach that included fixed variable costs that showed monthly profits of $20,000. On Bear eyes this figure looks encouraging because it shows $30,000 extra from the target. On the other hand, Klein had other
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5-7: 1) Break-even point in unit sales using equation method: SP (Q) – VC (Q) – FC = P 8Q-6Q – 5,500 = P 2Q – 5,500 = P 2Q = 5,500 Q = 2,750 In order to break even they need to sell 2,750 units 2) Break-even point in sales dollars using the equation method and the CM ratio: Profit = CM ratio * sales – fixed expenses Target profit = CM ratio * sales – fixed expenses CM ratio * sales = target profit + fixed expenses Sales = (target profit + fixed expenses ) / CM ratio Sales =
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CHAPTER FIVE 5. INTRODUCTION TO COST VOLUME PROFIT (CVP) ANALYSIS Upon a successful completion of this chapter, you should be able to: ← distinguish between contribution margin and gross margin ← prepare and interpret a contribution income statement ← compute a break even point in total birrs and total units using the contribution margin approach and the equation approach ← Prepare a cost-volume –profit graph, and explain how it is used. ←
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CHAPTER 7 Cost-Volume-Profit Analysis ANSWERS TO REVIEW QUESTIONS 7-1 a. In the contribution-margin approach, the break-even point in units is calculated using the following formula: [pic] b. In the equation approach, the following profit equation is used: |[pic] |fixed expenses |[pic] | This equation is solved for the sales volume in units.
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Question: Break-even analysis, the construction of break-even charts, and the related cost-volume- profit analysis is an area of accounting that provides management with relevant data. Discuss management’s use of this data for purposes of profit planning, policy formulation, and decision-making. It is essential to a business’s going concern that management executes proper profit planning, policy formulation and decision making. This is achieved with the help of tools such as cost-volume-profit (CVP)
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Q#1 What are the assumptions implicit in Bill French’s determination of his company’s break-even point? 1. He assumed average details of all the company’s products combined in one break-even point. NO break-even point for individual product. 2. Next year’s profit is assumed based on same level of targets, without considering other plans for the products, additional dividends or additional variable cost due to union demand. Q#2 On the basis of French’s revised information, what does next year
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Question 5 The Value of Break-even Analysis Break-even analysis is a basic tool that can be used to determine the level of sales that is requiredfor the company to start earning a profit. Helps understand and formulate the relationship between costs (fixed and variable), output and profit Helps quickly observe profit levels at different outputs. In a wide product range, the analysis helps to find out which products are performing well andwhich are leading to losses
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Chapter 6 Cost-Volume-Profit Relationships Solutions to Questions 6-1 The contribution margin (CM) ratio is the ratio of the total contribution margin to total sales revenue. It can be used in a variety of ways. For example, the change in total contribution margin from a given change in total sales revenue can be estimated by multiplying the change in total sales revenue by the CM ratio. If fixed costs do not change, then a dollar increase in contribution margin will result in a dollar increase
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cost-volume-profit analysis, is used in managerial accounting to quickly calculate metrics that provide insight into the current and future performance of a business CVP analysis is very useful for all business, but small businesses benefit the most because it is mathematically simple” (para 1). CVP techniques can save managers a great deal of time without any loss of information. Some of CVP techniques that are affective and many business owners use these techniques frequently are break even analysis
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1.0 Introduction to Accounting • Accounting is the process of identifying, measuring and communicating information to permit informed judgments and decisions by users of the information. • There are two main types of accounting: 1. Financial accounting This is primarily concerned with the recording of transactions between the business and other individuals and organisations. It also includes the preparation of reports on the performance of the business
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