Chapter 15Accounting Information for

management decisions

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.

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

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.

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

On Your OWN Part 1

Operating RevenueNet Sales (47,000 sq ft @ $7.50) 352,500.00$

Variable CostCost of Merchandise Sold (47,000 sq ft @ $4.80) 225,600.00$ Sales Commis (47,000 sq ft @$.32) 15,040.00$ Delivery Costs (47,000 sq ft @ $.55) 25,850.00$ Other Selling Costs (47,000 @ $.35) 16,450.00$ Other Administrative Costs (47,000 @ .33) 15,510.00$

Total Variable Costs 298,450.00$

Contribution margin 54,050.00$ Fixed CostsRent 3,800.00$ Insurance 450.00$ Other Selling Costs 7,120.00$ Other Admin Costs 12,540.00$

Total Fixed Cost 23,910.00$ Net Income 30,140.00$

Wightman's LumberIncome Statement

For Month Ended February 28th, 2007

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.

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.

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.

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Revenue

cost

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

Breakeven Analysis Many different ways we can calculate a

breakeven Increase or Decrease in Volume

26,000 28,000 30,000Net Sales 5.00$ 130,000 140,000 150,000Variable Costs 4.25$ 110,500 119,000 127,500Contribution Margin 0.75$ 19,500 21,000 22,500Fixed Costs 21,000 21,000 21,000Net Income (Loss) -1,500 0 1,500

Per UnitNumber of Units

2. Effect of Cost Changes with Alternatives

Per Unit Units Sold Total Per Unit Units Sold TotalNet Sales 5.00$ 30,000 150,000 5.00$ 30,000 150,000Variable Costs 4.25 30,000 127,500 4.00$ 30,000 120,000Contribution Margin 0.75 30,000 22,500 1.00$ 30,000 30,000Fixed Costs 21,000 28,500Net Income (Loss) 1,500 1,500

Alternative Manual Cutting Alternative 2 Automated Cuttting

Cost changes with above average product volume

Per Unit Units Sold Total Per Unit Units Sold TotalNet Sales 5.00$ 32,000 160,000 5.00$ 32,000 160,000Variable Costs 4.25 32,000 136,000 4.00$ 32,000 128,000Contribution Margin 0.75 32,000 24,000 1.00$ 32,000 32,000Fixed Costs 21,000 28,500Net Income (Loss) 3,000 3,500

Alternative Manual Cutting Alternative 2 Automated Cuttting

We increase the number of Units we sell from 30,000 to 32,000

Effect of Changes in Costs on Contribution Margin Rate

Per Unit Units Sold Total Per Unit Units Sold TotalNet Sales 5.00$ 30,000 150,000 5.00$ 30,000 150,000Variable Costs 4.25 30,000 127,500 4.00$ 30,000 120,000Contribution Margin 0.75 30,000 22,500 1.00$ 30,000 30,000Fixed Costs 21,000 28,500Net Income (Loss) 1,500 1,500

Alternative Manual Cutting Alternative 2 Automated Cuttting

Dollars Percent Dollars PercentNet Sales 150,000 100% 150,000 100%Variable Costs 127,500 85% 120,000 80%Contribution Margin 22,500 15% 30,000 20%

Alternative 1 Manual Cutting

Alternative 2 Automated Cutting

Effect on Change in Sales Price

Per Unit Units Sold Total Per Unit Units Sold TotalNet Sales 5.00$ 30,000 150,000 4.75$ 36,000 171,000Variable Costs 4.25 30,000 127,500 4.25$ 36,000 153,000Contribution Margin 0.75 30,000 22,500 0.50$ 36,000 18,000Fixed Costs 21,000 21,000Net Income (Loss) 1,500 -3,000

Current PricePrice Reduction and Sales Volume

Increase

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

Product Sales / Net Sales = Sales MixT.V. 52,500 75,000 70%VCR 22,500 75,000 30%

Product Sales / Net Sales = Sales MixT.V. 52,500 75,000 70%VCR 22,500 75,000 30%

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

Sales Mix xTotal Sales

Dollars =

Product Sales Dollars

T.V. 70% 85,000.00$ 59,500.00$ VCR 30% 85,000.00$ 25,500.00$

Product Sales Dollars /

Unit Sales Price =

Product Unit Sales

T.V. 59,500.00$ $350 170 unitsVCR 25,500.00$ $250 102 units

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