Lecture 2 Accounting

Managerial Accounting and control Dr. Mohamed Youssef Lecture 2 Example: Per Unit Selling Price $5 Variable Cost 4 Difference $1 Total monthly fixed expenses = $8,000 Rent Labor Other

Percentage 100 80 20

$2000 $5500 $ 500

Contribution Margin Technique Selling Price Variable Cost Difference

Per Unit $5 4 $1

Q= $ 8000/ $1 = 8000 units 8000 uX $5= $40000 $ 8000/20% =$40000 Equation Technique BEF= sales – Total cost=0 $5Q-$4Q-$8000 =0 $1Q=$8000 Q=80000/$1 Q=8000 unit Let S=sales in dollars needed to break even s-.8s-$8000=0 .2s=$8000 s=8000/.2 s=40000 Income statement Sales revenue 8000x $5 Less V.C 8000 x 4 c.m Less F.C Variable income

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40000 (32000) 8000 (8000) 0

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Managerial Accounting and control Dr. Mohamed Youssef Lecture 2 Example:

A B C D

Revenues

V.C

F.C

Total cost

Operating income

Contribution margin percentage

A B

2000 2000

$500 1500

300 300

1200 200

75% 25%

C

1000

700

300

0

30%

D

1500

900

300

800 180 0 100 0 120 0

300

40%

Selli ng Price $30 25 12 20

V.C / Unit

UCM

Total unit sold

Total c.m

Total F.C.

Operating income

$20 20 10 14

10 5 2 6

70000 180000 150000 20000

700000 900000 300000 120000

715000 800000 220000 10800

- 15000 100000 12000 12000

Example:

Example:

sales (100,000 units)

Costs Fixed Direct materials 0 Direct labor 0 Factory costs 100,000 Marketing and admin cost 110,000 Total costs Budgeted operating income

210,000

Compute A)

Breakeven point in units

BEP in unit = F.C /UCM Ucm =usp-uvc =(1,000,000/100,000)-(7000,000/100,000) = 10-7 = 3 BEP in unit = F.C /UCM = 210,000/3 =7000 BEP in $ = 7000 x 10 = $ 70000 Chapter 2

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$1,000,000 Variable 300,000 200.000 150,000 50,000 700,000

910,000 90,000

Managerial Accounting and control Dr. Mohamed Youssef Lecture 2

B)

Number of units that must be sold to achieve a target net income $ 90,000, assuming that the income tax rate is 40% Q = (F.C.+TOI) / UCM= (210,000+[90000/(1-0.4)])/ 3 =(210,000+[90000 / 0.6])/ 3 =(210,000+150,000)/3 =(360,000)/3 = 12,000 TOI=TNI+TOI x taxes% TOI-taxes% x TOI = TNI TOI (1-taxes%) = TNI TOI (1-0.4) = TNI TOI x 0.6= TNI C) Breakeven point in units assuming fixed costs increase by $ 31,500 BEP in unit = F.C /UCM = (210,000+31,500)/3 = 80,500 units TOI: TNI:

Target operating income Target net income after reducing the taxes

Value chain :

Research And Development

The sequence of six business functions in which utility (usefulness) is added to the products or services of an organization

Design

Production

Marketing

Distribution

Upstream: Research and development and design function Manufacturing or operation: production function Downstream: Marketing, distributon and customer service functions We have two types of Leverage • Financial leverage • Operating leverage Financial leverage: Assets 1000 Operating leverage:

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Debt 300 Equity 700 The ratio of fixed to variable costs

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Customer Service

Managerial Accounting and control Dr. Mohamed Youssef Lecture 2 Example:

Sales equal 15000, and Q = 1000 Company X 2000 8000 10000 0.25% 5000

F.C. V.C Total cost Net profit

Company Y 6000 4000 10000 1.5% 5000

Company Y has high risk , Company X has low risk • If quantity of sales changed to 600 unit and sales to 9000 Company X 9000 2000 4800 6800 0.42% 2200

Sales F.C. V.C Total cost Net profit

Company Y 9000 6000 2400 8400 2.5% 600

. Notes: • In high leveraged companies, small changes in sales volume result in large changes in net income • Companies with less leverage are not affected as much by changes in sales volume • We must produce product with highest quality and lowest price, so from time to time we must make sensitivity analysis

Contribution Margin and Gross Margin Contribution Margin:

amount of profit after covering all variable costs

Gross Margin: Example:

amount of profit after covering manufacturing cost of goods fixed and variable. Contribution margin income statement

Income statement Sales revenue ( 1000 x 5$) Less V.C. (1000 x 3$) C.M Less F.C Chapter 2

5000 (3000) { manufat(2000).,marketing(500), admin(500)} 2000 (2000) 4

Managerial Accounting and control Dr. Mohamed Youssef Lecture 2 { manufat(600).,marketing(700), admin(700)} 0

Operating income Example:

Gross margin income statement

Income statment Sales revenue (1000x $5) Less: cost of manufactured (f.c,V.c) (2000+600) Gross Margin Less: Marketing (500+700) Less: admin (V.c+F.c) (500+700) Operating income

5000 (2600) 2400 (1200) (1200) 0

Effects of sales Mix on income Sales Mix is the combination of products that a business sells Example:

To produce 1 amount of product x, we should produce 3 amount of product Y Product Amount usp Less: uvc Ucm

X 1 $20 ($18) $2

Y 3 $15 ($6) $9

Total cm per package = 2+9x3= 29 Example:

To produce 3 amount of product x, we should produce 1 amount of product Y Product Amount usp Less: uvc Ucm

X 3 $20 ($18) $2

Y 1 $15 ($6) $9

Total cm per package = 3+9x1= 15 Notes:

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Managerial Accounting and control Dr. Mohamed Youssef Lecture 2 • If we shift our sales Mix to the product with high cm, this will increase profit margin • If we shift our sales Mix to the product with lowest cm ,this will decrease the profit margin • Products must be from the same row material. Example:

page 36. Avisha’s Dresses Example Selling price : $90 Less variable cost 32 Equal cm per dress $58 Fixed cost Unit Usp Uvc Ucm

$96,000 Dress 1 90 32 58

Blouses 2 30 19 11

Cm per package = 58+22=$80 BEP in unit = F.C /wm cm BEP in package = F.c / total cm per package Weighted amount cm = total cm /no of units

•

BEP in package = F.c / total cm per package = 96000/$80 =1200 packages 1200 x2 =2400 blouses 1200 x 1 =1200 dresses Total units = 3600 Breakeven points in $ 2400blouses x $30 = 72,000 1200 dresses x $90=108,000 total =180,000

•

BEP in unit = F.C /wm cm = 96000x3/80 = 3600 3600 x1/3=1200 dresses 3600 x 2/3=2400 blouses Sales Mix can be stated in sales dollars Dress Sales price 90 Chapter 2

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Blouses 60

Managerial Accounting and control Dr. Mohamed Youssef Lecture 2 V.C cm Cm ratio

32 58 64.4 %

38 22 36.6 %

Assume that the sale mix in dollars is 60% dresses and 40 % blouses Weighted contribution must be 64.4% x 60%= 38.64 %dresses 36.6 % x 40 %= 14.64 blouses Total =53.28% BEP in $ = 96000/ 53.28 % = 180,000 $180000 x 60 % =108000 dress $180000 x 40 % =72,000 blouses

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