amount of remaining from sales revenue after variable expenses have been deducted
amount available to cover fixed expenses and then provide profits for the period
Contribution Margin Formula
sales revenue - variable expenses
Contribution Margin Ratio
contribution margin as a percentage of sales
Contribution Margin Ratio Formula
contribution margin / sales revenue
Variable Expense Ratio
variable expenses as a percentage of sales
Variable expense Ratio Formula
variable expense / sales revenue
Contribution Margin Income Statement
separates costs on the income statement by cost behavior (variable and fixed)
Contribution Margin Income Statement (part 2)
sales revenue
less: variable expenses (product and period)
Contribution Margin
less: fixed expenses (product and period)
Net Operating Income
Break Even Point
the level of sales the company's profit equals zero
bareminimum level to just cover cost -> everything after is profit
Equation Method
cm / unit (x) - fixed expenses
Formula Method
fixed expenses + target profit / cm/unit
Equation and Formula method find
break-even point in units
Break-Even Dollar Sales
fixed expense + target profit / cmratio
Break Even Sales in Dollar Sales finds
break-even point in sales dollars (revenue)
Selling price increases
break-evenpointdecreases
contributionmarginincreases
sell price decreases
break-evenincreases
contribution margindecreases
variable or fixed cost increases
break-even increases
variable or fixed costs decreases
break-even decreases
Fixed cost doesn't effect
contribution margin
variable cost increases
contribution margin decreases
variable cost decreases
contribution margin increases
Indicator of risk uses
margin of safety
Margin of Safety
excess of budgeted or actual sales dollars over the break-even sales dollars
Safety net for error
Want more space between margin of risk and breakeven so you don't lose profit
Margin of Safety in dollars
actual or expectedtotal sales - breakeven sales
Margin of Safety Percentage
margin of sales / actual or expected sales
Admission ticket per person: $35Variable cost per person: $22Fixed costs: $6,000
what is the CM per unit
$13/unit
The Hartford Guild has a break-even point of 462 guests for its charity dinner. What is the margin of safety in dollars, and the margin of safety percentage, if they are expecting 1,600 guests and admission ticket per person $35
margin of safety in dollars = $39,830
margin of safety percentage = 71%
Standard Admission VIP AdmissionSales $44,800 $19,200Variable Costs $28,160 $11,520Contribution Margin $16,640 $7,680Fixed Costs $6,000Step 1: Find the overall CM ratio
38%
Sales Mix
relative proportions in which a company's products are sold. The goal is to achieve the combination or mix that will yield the greatest profits
Standard Admission VIP AdmissionSales $44,800 $19,200Variable Costs $28,160 $11,520Contribution Margin $16,640 $7,680Fixed Costs $6,000Step 2: Calculate the break-even point in sales dollars
$15,790
Standard Admission VIP AdmissionSales $44,800 $19,200Variable Costs $28,160 $11,520Contribution Margin $16,640 $7,680Fixed Costs $6,000Step 3: Calculate sales at the break-even point for each product
Standard = $11,053
VIP = $4,737
least-squares regression estimates the fixed and variable elements of a mixed cost
Least-Squares Regression Method
determines the line and cost equation that best fits all the data points in the data set
More accurate than the high-low method because it uses all the data points
can calculate with Excel
R^2 ( R-squared)
it is the measure of "goodness of fit"
how accurately is the volume able to predict that variable cost
Excel Steps to Find R^2
enter data unto an Excel worksheet with volume in one column and cost in another
"Charts" group in the "Insert" tab click the "Scatter"
right-click on any data point in the graph and select "Add Trendline"
under "Trendline Options" select "Linear"
under "Trendline Name" select ' Automatic"
next to the word "Backward" input the lowest volume from the data
check the two boxes " Display equation on chart" and "Display R-squared value on chart"
.7589x + 3430.9
the variable cost/unit is .7589
the total fixed cost is 3430.9
the volume is x
The Hartford Guild is planning a fundraising event to benefit a local charitable organization. They are expecting 1,500 guests to attend. Below is the admission and cost information:Admission ticket per person: $35Variable cost per person: $22Fixed costs: $6,000
What is the contribution margin per unit?
$13/unit
The Hartford Guild is planning a fundraising event to benefit a local charitable organization.They are expecting 1,500 guests to attend. Below is the admission and cost information:Admission ticket per person: $35Variable cost per person: $22Fixed costs: $6,000
2. What is the contribution margin ratio?
.37 or 37%
The Hartford Guild is planning a fundraising event to benefit a local charitable organization. They are expecting 1,500 guests to attend. Below is the admission and cost information:Admission ticket per person: $35Variable cost per person: $22Fixed costs: $6,0003.
How many tickets must be sold to break even?
462 tickets
The Hartford Guild is planning a fundraising event to benefit a local charitable organization. They are expecting 1,500 guests to attend. Below is the admission and cost information:Admission ticket per person: $35Variable cost per person: $22Fixed costs: $6,000
4. How much revenue must be earned if The Hartford Guild wants to earn a target profit of $10,000?