AMIS 310 Foundations of Accounting Chapter 12 Module 5 CHAPTER 1 MODULE 1 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 ● This means that for every unit sold, $5.20 of the selling price is available to pay fixed costs and contribute toward a profit b. Contribution margin ratio = 5.20 ÷ 25.00 = 20.8% ● This means that for every unit sold, 20.8% of the

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) $2,250,000 Less: Variable costs 1,782,000 Contribution margin $468,000 Less: Fixed costs 468,000 Net income $ 0

Contribution margin per unit Chapter 12 Module 5: Example #3 Alternative formula to calculate the break-even point in units: Contribution margin per unit Number of units = Total Fixed costs $468,000 ÷ $5.20 = 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)