1. Lesson 15-3 Decisions That Affect Net Income
7/29/2019
LESSON 15-3
Decisions That Affect Net Income
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2. CALCULATING SALES TO EARN PLANNED NET INCOME
Lesson 15-3
7/29/2019
CALCULATING SALES TO EARN PLANNED NET INCOME
Determining the breakeven point provides management with important information about the relationship of sales, variable costs, & fixed costs.
Managers also need information that will assist them in achieving planned net income
The breakeven analysis can be used to calculate the dollar & unit sales needed to earn a specified amount of planned net income
LESSON 15-3
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3. CALCULATING SALES TO EARN PLANNED NET INCOME
Lesson 15-3
7/29/2019
CALCULATING SALES TO EARN PLANNED NET INCOME
page 455
Planned Net Income
Total Fixed Costs
Required Contribution Margin + =
$21,000.00
$22,500.00
$1,500.00
Calculate the required contribution margin. The sum of total fixed costs & the planned net income is the contribution margin necessary both to cover fixed costs & to earn the planned amount of net income.
Shows total sales required to earn $1,500 of net income
Contribution Margin Rate
Required Contribution Margin
Sales Dollars ÷ =
$22,500.00
$150,000.00
.15 or 15%
Calculate the amount of sales dollars by dividing the required contribution margin by the contribution margin rate.
LESSON 15-3
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4. EFFECT OF VOLUME CHANGES ON NET INCOME
Lesson 15-3
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EFFECT OF VOLUME CHANGES ON NET INCOME
page 456
LESSON 15-3
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5. EFFECT OF COST CHANGES AT AVERAGE VOLUME
Lesson 15-3
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EFFECT OF COST CHANGES AT AVERAGE VOLUME
page 457
Management is concerned that the relatively low contribution margin rate makes increasing net income difficult for the company
Considering an alternative production method
With alternative 2 the contribution margin is higher, but fixed costs also are higher
The higher fixed costs cancel the higher contribution margin
LESSON 15-3
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6. EFFECT OF COST CHANGES AT ABOVE AVERAGE VOLUME
Lesson 15-3
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EFFECT OF COST CHANGES AT ABOVE AVERAGE VOLUME
page 458
If the company expects a permanent sales increase, Alternative 2 would be more profitable than Alternative 1
LESSON 15-3
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7. EFFECT OF CHANGES IN COSTS ON CONTRIBUTION MARGIN RATE
Lesson 15-3
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EFFECT OF CHANGES IN COSTS ON CONTRIBUTION MARGIN RATE
page 458
A logical conclusion is “everything else being equal, the activity with the higher contribution margin rate is more profitable.” If “everything else” is equal, selecting the more profitable choice is simple
An effective business looks for the best combination of fixed & variable costs. 1 2
1. Contribution margin rate, Alternative 1.
2. Contribution margin rate, Alternative 2.
LESSON 15-3
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8. EFFECT OF CHANGE IN SALES PRICE
Lesson 15-3
7/29/2019
EFFECT OF CHANGE IN SALES PRICE
Setting the sales price of a product is extremely important.
If the price is set too high, potential customers will buy from another business
If the price is set too low, the company may not earn enough money to cover costs & may suffer a loss
Objective is to set sales prices that provide a reasonable amount of net income while keeping prices competitive
LESSON 15-3
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9. EFFECT OF CHANGE IN SALES PRICE
Lesson 15-3
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EFFECT OF CHANGE IN SALES PRICE
page 459
New Contribution Margin per Unit
Contribution Margin
Unit Sales Required to Maintain Planned Net Income ÷ =
$22,500.00 ÷ =
45,000 units
$0.50
LESSON 15-3
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10. USING BREAKEVEN TO PLAN SALES MIX
Lesson 15-3
7/29/2019
USING BREAKEVEN TO PLAN SALES MIX
Businesses that sell two or more products can also use breakeven point calculations to assist managers in planning
Relative distribution of sales among various products is called sales mix
The sales mix must be calculated to determine the breakeven point for a company that sells more than one product.
LESSON 15-3
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11. USING BREAKEVEN TO PLAN SALES MIX
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Product Sales ÷ Net Sales = Sales Mix
Television $52, ÷ $75, = 70%
VCR $22, ÷ $75, = 30%
Calculate the sales mix using information from the income statement. Net sales are divided by the sales amounts for each product. The total product mix must equal 100%
LESSON 15-3

12. USING BREAKEVEN TO PLAN SALES MIX
Lesson 15-3
7/29/2019
USING BREAKEVEN TO PLAN SALES MIX
page 460
Contribution Margin Rate
Contribution Margin
Net Sales ÷ =
.40 or 40%
$30,000.00
$75,000.00
$34,000.00
$24,000.00 +
$10,000.00
Required Contribution Margin
Total Fixed Costs
Planned Net Income
Calculate the contribution margin rate by dividing the contribution margin shown on the income statement by net sales
Add total fixed costs & the planned net income to determine the required contribution margin
LESSON 15-3
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13. USING BREAKEVEN TO PLAN SALES MIX
Lesson 15-3
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USING BREAKEVEN TO PLAN SALES MIX
page 460
$85,000.00
$34,000.00 ÷
.40 or 40% =
Total Sales Dollars
Required Contribution Margin
Contribution Margin Rate
Multiply the sales mix percentage by the total sales dollars to determine the sales dollars needed for each product.
LESSON 15-3
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14. USING BREAKEVEN TO PLAN SALES MIX
Lesson 15-3
7/29/2019
USING BREAKEVEN TO PLAN SALES MIX
page 460
Product Sales Dollars
Sales Mix
Total Sales Dollars × =
Product Unit Sales
Unit Sales Price ÷
Television
170 units
$59,500.00
$350.00
102 units
$25,500.00
$250.00
VCR
70%
$85,000.00
30%
Divide the product sales dollars by the unit sales price to determine product unit sales. The unit sales prices are found on the income statement.
The product unit sales indicate the number of units of each product that must be sold to achieve the planned net income of $10,000
LESSON 15-3
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15. Lesson 15-3
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TERM REVIEW
page 462
sales mix
LESSON 15-3
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