Apr 2nd accounting

Overview of Topics Covered

• Introduction and Material Distribution

• Exercise 1: Terminology Definitions

• Exercise 2: High-Low Method and Cost Analysis

• Exercise 3: Unit Contribution Margin and Break-even Analysis

• Exercises on Contribution Margin Ratio and Margin of Safety

• Summary and Important Dates

Introduction and Material Distribution

• The instructor is experiencing mobility issues due to an injury but proceeds with the lesson.

• Formula sheets were intended to be posted on Moodle but were missing; they were later reposted for student access.

Exercise 1: Terminology Definitions

• Breakeven Point: The level of sales at which total revenue equals total costs (fixed + variable costs).

• Fixed Costs: Costs that remain consistent regardless of the output or sales volume.

• Relevant Range: The span of activity over which the assumptions about fixed and variable costs remain valid.

• Contribution Margin: The difference between sales revenue and variable costs, not including fixed costs.

• Unit Contribution Margin: Calculated as the unit selling price minus the variable cost per unit.

• Economies of Scale: The cost reductions that result from increasing production levels, leading to lower per-unit costs.

• Semivariable Costs: Costs that change with the volume of production but not in direct proportion.

Exercise 2: High-Low Method and Cost Analysis

• High-Low Method: A technique to estimate variable and fixed costs using the highest and lowest levels of activity.

• Data Analysis for January-April showed the following:

  • Highest machine hours: January (6,000 hours) at a cost of $320,000

  • Lowest machine hours: April (2,500 hours) at a cost of $180,000

• Calculating Variable Costs:

  • Change in machine hours: 6,000 - 2,500 = 3,500 hours

  • Change in costs: $320,000 - $180,000 = $140,000

  • Variable cost per hour: $rac{140,000}{3,500} = 40$ dollars per machine hour.

• Calculating Fixed Costs:

  • Fixed cost = Total cost - (Variable cost * machine hours)

  • Using the high data: Fixed cost = $320,000 - (6,000 * $40) = $80,000.

• Forecasting May Costs:

  • Expected machine hours in May: 4,500

  • Total cost for May = Fixed cost + (Variable cost per hour * machine hours) = $80,000 + (40 * 4,500) = $260,000.

• Estimation for February and March:

  • February: Estimated cost = $80,000 + (40 * 3,200) = $200,000; Actual: $224,000; Underestimated by $16,000.

  • March: Estimated cost = $80,000 + (40 * 4,900) = $296,000; Actual: $264,000; Overestimated by $12,000.

Exercise 3: Unit Contribution Margin and Break-even Analysis

• Information for Winchester Manufacturing:

  • Sales price per unit: $18,000

  • Variable cost per unit: $6,400

  • Total fixed costs: $1,392,000

• Unit Contribution Margin:

  • Calculation: Contribution Margin = Selling Price - Variable Cost = $18,000 - $6,400 = $11,600.

• Break-even Analysis:

  • Break-even units = $rac{Fixed ext{ } Costs}{Unit ext{ } Contribution ext{ } Margin} = rac{1,392,000}{11,600} = 120 ext{ } units$.

• Units required for operating income of $928,000:

  • Required units = $rac{Fixed ext{ } Costs + Target ext{ } Income}{Contribution ext{ } Margin} = rac{1,392,000 + 928,000}{11,600} = 200 ext{ } units$.

Contribution Margin Ratio and Margin of Safety

• Murder To Go Exercise:

  • Unit sales price = $30

  • Variable cost per unit = $6

  • Fixed costs = $360,000

• Contribution Margin Ratio:

  • Contribution Margin = Sales Price - Variable Cost = $30 - $6 = $24

  • Contribution Margin Ratio = $rac{Contribution ext{ } Margin}{Sales ext{ } Price} = rac{24}{30} = 0.8 ext{ or } 80 ext{ }$.

• Sales Volume to Breakeven:

  • Breakeven = $rac{Fixed ext{ } Costs}{Contribution ext{ } Margin ext{ } Ratio} = rac{360,000}{0.8} = 450,000$ dollars.

• Sales Volume for Annual Operating Income of $440,000:

  • Sales Volume = $rac{Fixed ext{ } Costs + Target ext{ } Income}{Contribution ext{ } Margin ext{ } Ratio} = rac{360,000 + 440,000}{0.8} = 1,000,000$ dollars.

• Margin of Safety:

  • Margin of Safety = Actual Sales - Breakeven Sales

  • Actual Sales = 60,000 units at $30/unit = $1,800,000

  • Breakeven Sales = $450,000

  • Margin of Safety = $1,800,000 - $450,000 = $1,350,000.

• Operating Income Calculation:

  • Operating Income = Margin of Safety * Contribution Margin Ratio

  • Operating Income = $1,350,000 * 0.8 = $1,080,000.

Summary and Important Dates

• The next exam covers chapters 18, 19, and 20, scheduled for April 14.

• Additional class scheduled for April 28 to compensate for a previously cancelled class due to snow.