1. Chapter 15 Accounting Information for management decisions

2. We are now beginning the final chapters in accounting. We are beginning to work with a manufacturing company. Our job is to make things and make sure that we sell them at an appropriate price and sell enough units to break-even.

3. Terms, Terms, Terms Total Costs All costs for a specific period of time Cost of merchandise sold for a period – is considered a total cost. Unit Costs An amount spend for one unit of a specific product or service. Cost of Merchandise Sold / Units = Cost of Merchandise Total Cost sold Sold Unit Cost

4. More Terms Variable Cost Total Costs that change in direct proportion to a change in the number of units Gas Prices – fill a tank up with the same amount each week, but the price changes. Fixed Costs A Total Cost that remains constant regardless of changes in business activity.

5. Contribution Margin In equation terms NET SALES (Sales – Sales return and allowances – sales discounts ) – ALL VARIABLE COSTS = Total Contribution Margin. This is basically how much money did it cost us to operate our business from the merchandise that we created. Total Contribution Margin / Units Sold = Contribution Margin per Unit

6. On Your OWN Part 1

8. How many units will we have to sell in order for our business to break even? Contribution Margin / Net Sales = Contribution Margin Rate $27,000 $180,000 15% Total Fixed Costs / Contribution Margin rate = $ breakeven point $21,000 15% $140,000 $ breakeven point / Unit sales price = Unit Breakeven Point $140,000 $5.00 28,000 This is if we already have an established product.

9. Breakeven Points and how to calculate them. Breakeven The amount of sales at which net sales is equal to total costs. This is the point at which there is no net income or net loss.

10. Breakeven Analysis What are the variables that we need to look at when we begin to manufacture our product so that our business stays afloat.

12. Calculating breakeven point for new products Unit Sales Price - Variable Cost per unit = Contribution Margin per unit $18.00 $12.00 $6.00 Total Fixed Costs / Contribution Margin per Unit = Unit Sales Breakeven Point $9000 / $6.00 1,500 units Unit Sales Breakeven Point x Unit Sales Price = Sales Dollar Breakeven Point 1,500 $18.00 $27,000 Total number of units to sell to break even

13. Breakeven Analysis Many different ways we can calculate a breakeven Increase or Decrease in Volume

14. 2. Effect of Cost Changes with Alternatives

15. Cost changes with above average product volume We increase the number of Units we sell from 30,000 to 32,000

16. Effect of Changes in Costs on Contribution Margin Rate

17. Effect on Change in Sales Price

18. Using breakeven to plan a Sales Mix We are making two items TV and VCR’s How many units do we need to sell of each in order to

19. Contribution Margin / Net Sales = Contribution Margin Rate $30,000 $75,000 40% Total Fixed Costs + Planned Net Income = Required Contrib Marg. Rate $34,000 $10,000 $34,000 Required Contri Marg. / Margin Rate = Total Dollar Sales $34,000 40% $85,000

20. Problems 15-1,2,3,4,5,6