AMIS 310 Foundations of Accounting Chapter 12 Module 6 CHAPTER 1 MODULE 1 AMIS 310 Foundations of Accounting Professor Marc Smith

Chapter 12 Module 6: Break-Even Point (sales $) The break-even point (in sales dollars) represents the amount of sales revenue that must be generated to ‘break-even’ ● Variable cost ratio = Variable costs ÷ Sales Revenue OR Variable cost per unit ÷ Selling price per unit NOTE: Since variable costs are a function of activity, they will always be a constant percentage of sales

Chapter 12 Module 6: Example #3 d. Variable cost ratio = 19.80 ÷ 25.00 = 79.20% Net income = Sales – Variable costs – Fixed Costs 0 = Sales – (Variable cost ratio x Sales) – Fixed costs 0 = Sales – .792Sales – Fixed costs 0 = .208Sales – $468,000 .208Sales = $468,000 Sales = $2,250,000

Contribution margin ratio Chapter 12 Module 6: Example #3 Alternative formula to calculate the break-even point in sales dollars: Amount of revenue = Total Fixed costs Contribution margin ratio $468,000 ÷ 0.208 = $2,250,000

Chapter 12 Module 6: Example #3 e. Target Profit Units For break-even  0 = ($25 x Units) – ($19.80 x Units) – $468,000 130,000 = ($25 x Units) – ($19.80 x Units) – $468,000 130,000 = ($5.20 x Units) – $468,000 ($5.20 x Units) = $598,000 Units = 115,000 Proof Sales (115,000 units @ $25) $2,875,000 Less: Variable costs 2,277,000 Contribution margin $598,000 Less: Fixed costs 468,000 Net income $ 130,000

Chapter 12 Module 6: Example #3 f. Target Profit Units XYZ Company wants to know the number of units that must be sold in order to earn a profit equal to 8 percent of sales revenue. 0.08($25)(Units) = ($25 x Units) – ($19.8 x Units) – $468,000 $2 x Units = ($25 x Units) – ($19.8 x Units) – $468,000 $2 x Units = ($5.20 x Units) – $468,000 $3.20 x Units = $468,000 Units = 146,250

Chapter 12 Module 6: Example #3 Proof Sales (146,250 units @ $25) $3,656,250 Less: Variable costs 2,895,750 Contribution margin $ 760,500 Less: Fixed costs 468,000 Net income $ 292,500 292,500 ÷ 3,656,250 = 8%

Chapter 12 Module 6: Example #3 g. Income statement before any changes are made Units sold 120,000 Sales (120,000 units @ $25) $3,000,000 Less: Variable costs (120,000 units @ $19.8) 2,376,000 Contribution margin $ 624,000 Less: Fixed costs 468,000 Net income $ 156,000

Chapter 12 Module 6: Example #3 g. Income statement after the changes are made Units sold 160,000 Sales (160,000 units @ $24) $3,840,000 Less: Variable costs (160,000 units @ $19.8) 3,168,000 Contribution margin $ 672,000 Less: Fixed costs 518,000 Net income $ 154,000 Do not make the changes – net income is $2,000 less if the changes are made.