AnalysisofCost,Volume,andPricingtoIncreaseP

AnalyzingCost,Volume,andPricingtoIncreaseProfitabilityChapter3Copyright©2003McGraw-HillRyersonLimited,Canada3-2OperatingLeverageHowasmallpercentageincreaseinsalesvolumecanproduceasignificantlyhigherpercentageincreaseinprofitability.Copyright©2003McGraw-HillRyersonLimited,Canada3-3TotalPerUnitSales(500units)250,000$500$Less:variableexpenses150,000300Contributionmargin100,000200$Less:fixedexpenses80,000Netincome20,000$Jeff'sComputersK6ModelDeterminingtheContributionMarginPerUnitContributionmargin(CM)isthedifferencebetweenthesalesrevenueandthevariablecosts.Copyright©2003McGraw-HillRyersonLimited,Canada3-4TotalPerUnitSales(500units)250,000$500$Less:variableexpenses150,000300Contributionmargin100,000200$Less:fixedexpenses80,000Netincome20,000$Jeff'sComputersK6ModelCMisameasureoftheamountavailabletocoverfixedcostsandprofitsforanenterprise.DeterminingtheContributionMarginPerUnitCopyright©2003McGraw-HillRyersonLimited,Canada3-5ForeachadditionalK6unitJeffsells,$200moreincontributionmarginwillhelptocoverfixedexpensesandprofit.TotalPerUnitPercentSales(500units)250,000$500$100%Less:variableexpenses150,00030060%Contributionmargin100,000$200$40%Less:fixedexpenses80,000Netincome20,000$DeterminingtheContributionMarginPerUnitCopyright©2003McGraw-HillRyersonLimited,Canada3-6DeterminingtheContributionMarginPerUnitEachmonthJeffmustgenerateatleast$80,000inCMtobreakeven.TotalPerUnitPercentSales(500units)250,000$500$100%Less:variableexpenses150,00030060%Contributionmargin100,000$200$40%Less:fixedexpenses80,000Netincome20,000$Copyright©2003McGraw-HillRyersonLimited,Canada3-7DeterminingtheContributionMarginPerUnitIfJeffsells400unitsinamonth,itwillbeoperatingatthebreak-evenpoint.TotalPerUnitSales(400units)200,000$500$Less:variableexpenses120,000300Contributionmargin80,000200$Less:fixedexpenses80,000Netincome-$Jeff'sComputersContributionIncomeStatementFortheK6ModelCopyright©2003McGraw-HillRyersonLimited,Canada3-8DeterminingtheContributionMarginPerUnitIfJeffsellsoneadditionalunitabovethebreak-evenpoint,netincomeincreasesbytheamountofthecontributionmargin.CurrentSales(400units)ProjectedSales(401units)Sales200,000$200,500$Less:variableexpenses120,000120,300Contributionmargin80,00080,200Less:fixedexpenses80,00080,000Netincome-$200$Copyright©2003McGraw-HillRyersonLimited,Canada3-9DeterminingtheBreak-EvenPointThebreak-evenpointiswheretotalrevenueisequaltotalcosts.Copyright©2003McGraw-HillRyersonLimited,Canada3-10DeterminingtheBreak-EvenPointThebreak-evenpointinunitscanbedeterminedusingthefollowingequation:Break-EvenVolumeinUnits=FixedCostsContributionMarginPerUnitCopyright©2003McGraw-HillRyersonLimited,Canada3-11DeterminingtheBreak-EvenPointThebreak-evenpointinunitscanbedeterminedusingthefollowingequation:Break-EvenVolumeinUnits=FixedCostsContributionMarginPerUnitForJeff’sK6modelcomputerthebreak-evenvolumeinunitsis:$80,000$200=400computersCopyright©2003McGraw-HillRyersonLimited,Canada3-12EstimatingtheSalesVolumeNecessarytoAttainaTargetProfitAtthebreak-evenpointprofitsequalzero.SalesVolumeinUnits=FixedCosts+DesiredProfitContributionMarginPerUnitCopyright©2003McGraw-HillRyersonLimited,Canada3-13EstimatingtheSalesVolumeNecessarytoAttainaTargetProfitJeffwantstoknowhowmanyK6computersmustbesoldtoearnaprofitof$100,000.Copyright©2003McGraw-HillRyersonLimited,Canada3-14EstimatingtheSalesVolumeNecessarytoAttainaTargetProfitCalculatevolumeinunits:SalesVolumeinUnits=FixedCosts+DesiredProfitContributionMarginPerUnitSalesVolumeinUnits=$80,000+$100,000$200SalesVolumeinUnits=900unitsCopyright©2003McGraw-HillRyersonLimited,Canada3-15EstimatingtheSalesVolumeNecessarytoAttainaTargetProfitHere’stheproof:TotalPerUnitSales(900computers)450,000$500$Less:variableexpenses270,000300Contributionmargin180,000$200$Less:fixedexpenses80,000Netincome100,000$Copyright©2003McGraw-HillRyersonLimited,Canada3-16EstimatingtheEffectsofChangesinSalesPriceTotalPerUnitSales(500computers)250,000$500$Less:variableexpenses150,000300Contributionmargin100,000$200$Less:fixedexpenses80,000Netincome20,000$CompetitionisforcingJefftoconsideradropinsellingpriceoftheK6model.Whatistheimpactonbreak-evenofadropinsellingpricefrom$500to$460perunit?Copyright©2003McGraw-HillRyersonLimited,Canada3-17EstimatingtheEffectsofChangesinSalesPriceThenewcontributionperunitwouldbe$160($460-$300).Break-EvenVolumeinUnits=FixedCostsContributionMarginPerUnitBreak-EvenVolumeinUnits=$80,000$160Break-EvenVolumeinUnits=500unitsCopyright©2003McGraw-HillRyersonLimited,Canada3-18EstimatingtheEffectsofChangesinSalesPriceHereistheproof...CurrentSales(500units)ProjectedSales(500units)Sales250,000$230,000$Less:variableexpenses150,000150,000Contributionmargin100,00080,000Less:fixedexpenses80,00080,000Netincome20,000$-$Copyright©2003McGraw-HillRyersonLimited,Canada3-19ChangesinFixedCostsandSalesVolumeJeffiscurrentlyselling500K6computerspermonth.Thesalesmanagerbelievesthatanincreaseof$10,000inthemonthlyadvertisingbudgetwouldincreasesalesto540units.ShouldJeffauthorizetherequestedincreaseintheadvertisingbudget?Copyright©2003McGr