Contribution Margin Analysis for Racing Bicycle Company, Study notes of Cost Accounting

Download Contribution Margin Analysis for Racing Bicycle Company and more Study notes Cost Accounting in PDF only on Docsity!

CVP Analysis

Uses

of the Contribution Format

Uses o

t^

e Co

t^

but o

o

at

Th

t ib ti

i^

t t

t f

t i

d

Th

t ib ti

i^

t t

t f

t i

d

Th

e contribution income statement format is used The contribution income statement format is used

as an internal planning and decision making tool.as an internal planning and decision making tool.Thi

h i

f l f

Thi

h i

f l f

This approach is useful for:This approach is useful for: 1.1. Cost

Cost-

-volumevolume-

-profit analysisprofit analysisp

y

p^

y

2.2. Budgeting

Budgeting 3.3. Segmented reporting of profit

Segmented reporting of profit data

data

Special decisions s ch as pricing and makeSpecial decisions s ch as pricing and make or

or

4.4. Special decisions such as pricing and make

Special decisions such as pricing and make-

-oror-

buybuy analysis

analysis

2

The Contribution Format

Total

Unit

Total

Unit

Sales Revenue

100, $^

50 $

Less: Variable costs

60 000

30

Less: Variable costs

60,

30

Contribution margin

40, $^

20 $

Less: Fixed costs

30,

Net operating income

10, $

Th

t ib ti

i^

f^

t^

h^

i

Th

t ib ti

i^

f^

t^

h^

i

Th

e contribution margin format emphasizes The contribution margin format emphasizes cost behavior. Contribution margin covers fixedcost behavior. Contribution margin covers fixed

t^

d^

id

f^

i

t^

d^

id

f^

i

costs and provides for income.costs and provides for income.

3- 5

CVP Graph

4

0 000 450,000 400,000 350 000

Total Sales

350,000300,000 250,

Total Expenses

Total

Sales

200,000 150,

,

Fixed Expenses

Total Expenses

100,000^ 50,

• -^

100

200

300

400

500

600

700

800

U itUnits

CVP Graph

4

0 000 450,000 400,000 350 000

BreakBreak-

-even pointeven point

(400 units or $200,000 in sales)(400 units or $200,000 in sales)

350,000300,000 250,000200,000150,

, 100,00050,

• -^

100

200

300

400

500

600

700

800

U itUnits

Contribution Margin Ratio

O

i^

t^

f^

it

th

t ib ti

i^

ti

i

O

r, in terms of

units

, the contribution margin

ratio

is:

Unit CM

CM Ratio = For Racing Bicycle Company the ratio is:

Unit selling price

CM Ratio = For

Racing Bicycle Company the ratio is:

$200$200 $

= 40%

10

Contribution Margin Ratio

400 Bikes

500 Bikes

Sales

200, $^

250, $

Less: variable expenses

120,

150,

Contribution margin

80,

100,

L^

fi^

d^

80 000

80 000

Less: fixed expenses

80,

80,

Net operating income

$^

20, $

A $50,000 increase in sales revenueA $50,000 increase in sales revenueresults in a $20 000 increase in CMresults in a $20 000 increase in CMresults in a $20,000 increase in CM.results in a $20,000 increase in CM.

($50,000($50,000 ×

× 40% = $20,000)

40% = $20,000)

Contribution Margin Method

The contribution margin method has twoThe

contribution margin method has two

key equations.

Fi

d

B

k^

i^

Fi

xed expensesCM per unit

=

Break-even point

in units sold

Fixed expenses

CM ratio

=

Break-even point intotal sales dollars

CM ratio

Contribution Margin Method

Let

’s use the contribution margin method

Let s use the contribution margin method

to calculate the break-even point in total

sales dollars at Racing.

Fi

d

Break

even point in

Fi

xed expenses

CM ratio

=

Break-even point intotal sales dollars $80,000$80,

= $200,000 break= $200,000 break-

-even saleseven sales

$ 00,000 b ea$ 00,000 b ea

e e

sa es

e e

sa es

The Contribution Margin Approach The contribution margin method can beThe

contribution margin method can be

used to determine that 900 bikes must be

f^

f $100 000

sold to earn the target profit of $100,000.

Fi

d^

+^

T^

t^

fit

U^

it^

l^

t^

tt i

Fi

xed expenses + Target profit

CM per unit

=

Unit sales to attain the target profit$80,000 + $100,

$200/bik

=

900 bikes

$200/bike

900

bikes

16

The Margin of Safety

Th

i^

f^

f t

i^

th

f

Th

e margin of safety is the excess ofbudgeted (or actual) sales over the

break-even volume of sales.

M

i^

f^

f t

T t l

l^

B

k^

l

M

argin of safety = Total sales - Break-even sales^ Let’s look at Racing Bicycle Company and

determine the margin of safety.

g

y

17

The Margin of Safety

The margin of safety can be expressed asThe

margin of safety can be expressed as

20%

of sales.

($50 000 ÷ $250 000)($50,000 ÷ $250,000)

Break-even

sales 400 units

Actual sales

500 units

400 units

500 units

Sales

200, $^

250, $

Less: variable expenses

120,

150,

Contribution margin

80 000

100 000

Contribution margin

80,

100,

Less: fixed expenses

80,

80,

Net operating income

$^

20, $

The Margin of Safety

The margin of safety can be expressed inThe

margin of safety can be expressed in terms of the number of units sold. The margin of safety at Racing is $50 000 andmargin of safety at Racing is $50,000, and

each bike sells for $500.

Margin of

100 bik

Margin of

Safety in units

= 100 bikes