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University America Mid of Accounting 1 I 17 11 7 11 Lesson 11 s I. I t i i i I iI ii i I iI Volume Profit it Analysis i i I i i Start here This lesson deals with the process pro ess of analyzing the relationship between cost volume anc and profit profit prof L This process is especially espe important in making product pricing production and capital investment decisions about a firms firm's product product The goal of this lesson leSOn is to define and describe the concept of volume profit analysis After you study the material you should be able to apply the equation and the contribution margin techniques of ot analysis as asell well ell as interpreting volume profit t graphs As you begin you should have nave a working knowledge of external financial statements as well wen as comprehensive budgets and cost behavior patterns The plan This newspaper will be your introduction to the topic We will refer you to the appropriate section in the theother theother theother other course components and provide you with a short introduction to the topic itself The television program Because Be ause there are so many different businesses represented j at a state fair this is the base we have used to illustrate the concepts of volume profit V P C V P analysis in this program The necessity to understand cost behavior in applying V P for view the analysis should be looked as you program And the relationship among cost volume and profit is explained explained The concept of contribution margin is Look especially for the situations which illustrate how V P analysis can be used IP in If pricing production and investment decisions The equation on technique and the contribution margin techniques user in performing V P analysis are described You'll You see the graphic approach to V P analysis analysts illustrated illustrated il Finally Finaly from viewing the program you should have a clear picture of the importance of understanding the assumptions and limitations of V P analysis analysis The print p nt material mate al for this lesson begins on Oil page of the study guide Let this material direct your study of Chapter 10 lOin in the text beginning on page Here you will willieam learn about the actual process of analyzing volume profit factors in product decisions In addition this text material will explain the differences in methods of analysis for singleproduct single and product multipleproduct companies Solving problem situations will wiil help you apply the II methods of analysis used in this lesson lesson These problems begin on page of the study guide guide In addition there is a practical application problem in your text beginning on page Audioassisted Audio problems begin on page of the theta ta study guide and are found on the audio recording entitled Volume Profit Analysis Analysis These problems give you five situations and talk you through the solutions Finally check how much you have learned and if you have met the goals for this lesson by going through the Checkpoints in the booklet booklet If f you have problems follow the suggested review procedure contained in inthe inthe inthe the checkpoints Produces eC through Grant NIE G from the me National Institute of ot EducatIOn c 1975 1475 University of Mid Mia Never give a sucker an even break but every new product deserves one One of the most difficult situations for managers comes when they decide to introduce a new product on or the market They are suddenly faces with a dizzying array of questions questions How much will it cost to produce this new item Will we have to buy new equipment or maybe build a new plant How much should we charge for it How many will we need to sell to make a profit on it There is a point where what you get in by selling a product equals your costs to produce it That is called the even breakeven point and the process through which H His it itis is 1 computed is a valuable tool toot in making pricing production and capital investment decisions about the new product The process is called volume profit analysis and is the subject of this lesson Basically the process considers the relationships between costs both fixed and variable the level of sales activity and net income income incomes Volume Profit Graph S 5 50 0 1 48 rn a o cco C e 5 Net Income Area e 4 30 GOO G a co 20 aco Break Point r Net Loss Area 5 Fixed 1 Cost Line 49 c C S 15 1 o C oo Q o UNiT SALES Some definitions The even break point is that point where total revenue equals eq als total costs If total revenue is greater than total costs the company makes a profit If total tota revenue is less youre you're in trouble Now lets let's break that statement down a bit Costs you remember can be broken into variable and fixed fi ed costs In the case of a new product fixed costs would mean say depreciation depredation expense on new machines to make the product Variable costs are those which rise in relation to the number of units produced like the costs of the material to produce the product product If we subtract the total variable costs from the total revenue produced by the new product the difference is called the contribution margin This is the amount which is available to cover fixed costs and to provide a profit profit The crucial question in all of this is how much volume that is how haw much sales activity whether stated in dollars or units sold will be needed to offset the total cost of operating a business of the units and to provide a profit Stated another way the company must sell enough to provide a contribution margin large enough to cover fixed costs and provide a profit There are three methods for determining the break break even point Two are mathematical the third is graphic All rely on techniques which you have already studied Prime among these is the ability to determine costs accurately From this information the manager is able to set up an equation which will show him the relationships of cost ost volume and profit You will need a basic knowledge of algebra in order to solve the equation Stated simply the equation is Sales S Total Costs TC Net Income NI Nl The same equation can also be stated as S TC NI Since total costs are composed of fixed costs and variable costs the equations can be restated in a form which is easier to work with S Fixed Costs FC Variable Costs VC NI Nl Now insert the figures you know and solve for the unknown For our example lets let's say that our company has determined that they can sell their new lowcalorie low pretzels to retailers for 2 a case They have determined that it wilt will cost them in variable costs to produce each case and a total of in fixed costs to purchase new baking equipment If x is the number of cases they must sell to break even the equation would read 0 Some explanation of the figures represents total sales since this equals the price per unit times the units sold x represents the variable costs since they equal the cost per unit 1 50 times the units sold x The last figure zero is included here hereto to show that there would be no net income to add in to the equation at the even breakeven point There is no net income at the even breakeven point The problem is solved below 1 52 SI x 50 x 1 The company would have to sell cases at 2 a case in order to break even The contribution margin technique uses the equation Contribution Margin CM Sales S Variable Costs VC The equation is then used in with another ii t I f fr r 1 It t t r to determine the even break point p int Fixed Costs CM CMor CMor Break Even Point t FC F or even Breakeven Point CM The same results can be obtained and it does not matter which approach is employed The graphic analysis is illustrated here and is a way of giving this information visual form The graph plots fixed costs total costs and total sales Where the total cost and total sales lines cross is the even breakeven point Above that point the firm is making a profit Below it the firm is operating at a loss With this information a manager can make intelligent decisions knowing how many units he will have to sell seli to reach a profit If the uncertainties of the market marketplace marketplace marketplace place change his costs or demand he will wi be able to plot the best method of dealing with the problem problem Survey The following questions are designed to help emphasize the important points from this lesson Some items are discussed in the material you just read other items are found in other components of the course such as television programs audioassisted audio problems and printed materials The answers are shown following the quiz 1 Contribution margin equals fixed costs plus variable cost True or false 2 2 volume profit analysis may be helpful in product pricing decisions True or false 3 V P analysis can be done using either mathematical al or graphical techniques True or false 4 In using V P analysis fora for a product multipleproduct company the UNIT contribution margin is not used for determining the even breakeven point for the company as a whole True or false 5 The margin of safety is the difference between present sales volume and sales volume at the break break even point True or false 6 Which of the following is NOT an assumption normally associated with volume profit analysis a. a costs will increase during the budget period b. b competition will not affect the expected results c. c the economy will not turn downward d. d none of the above 7 In the volume graph illustrated in this article sales of units results in net income of a. a c. c b. b d. d Answers P pL L B e 9 arid g arul g g anil q ani j g 8 z Z asle l.
Object Description
Title  Columbia Missourian Newspaper 19751116 
Description  68th Year, No. 47 
Subject 
Columbia (Mo.)  Newspapers Boone County (Mo.)  Newspapers 
Coverage  United States  Missouri  Boone County  Columbia 
Language  English 
Date.Search  19751116 
Type  Newspapers 
Format  
Collection Name  Columbia Missourian Newspaper Collection 
Publisher.Digital  University of Missouri Library Systems 
Rights  These pages may be freely searched and displayed. Permission must be received for distribution or publication. 
Contributing Institution 
State Historical Society of Missouri University of MissouriColumbia. School of Journalism 
Copy Request  Contact the State Historical Society of Missouri at: (800) 7476366 or (573) 8827083 or email contact@shsmo.org. Some fees apply: http://shsmo.org/research/researchfees 
County 
Boone County (Mo.) 
Description
Title  Columbia Missourian 19751116 Untitled 
Subject 
Columbia (Mo.)  Newspapers Boone County (Mo.)  Newspapers 
Coverage  United States  Missouri  Boone County  Columbia 
Language  English 
Date.Search  19751116 
Type  advertising 
Format  
Collection Name  Columbia Missourian Newspaper Collection 
Publisher.Digital  University of Missouri Library Systems 
Contributing Institution  State Historical Society of Missouri <br> University of Missouri School of Journalism 
Copy Request  Contact the State Historical Society of Missouri at: (800) 7476366 or (573) 8827083 or email contact@shsmo.org. Some fees apply: http://shsmo.org/research/researchfees 
Item.Transcript  University America Mid of Accounting 1 I 17 11 7 11 Lesson 11 s I. I t i i i I iI ii i I iI Volume Profit it Analysis i i I i i Start here This lesson deals with the process pro ess of analyzing the relationship between cost volume anc and profit profit prof L This process is especially espe important in making product pricing production and capital investment decisions about a firms firm's product product The goal of this lesson leSOn is to define and describe the concept of volume profit analysis After you study the material you should be able to apply the equation and the contribution margin techniques of ot analysis as asell well ell as interpreting volume profit t graphs As you begin you should have nave a working knowledge of external financial statements as well wen as comprehensive budgets and cost behavior patterns The plan This newspaper will be your introduction to the topic We will refer you to the appropriate section in the theother theother theother other course components and provide you with a short introduction to the topic itself The television program Because Be ause there are so many different businesses represented j at a state fair this is the base we have used to illustrate the concepts of volume profit V P C V P analysis in this program The necessity to understand cost behavior in applying V P for view the analysis should be looked as you program And the relationship among cost volume and profit is explained explained The concept of contribution margin is Look especially for the situations which illustrate how V P analysis can be used IP in If pricing production and investment decisions The equation on technique and the contribution margin techniques user in performing V P analysis are described You'll You see the graphic approach to V P analysis analysts illustrated illustrated il Finally Finaly from viewing the program you should have a clear picture of the importance of understanding the assumptions and limitations of V P analysis analysis The print p nt material mate al for this lesson begins on Oil page of the study guide Let this material direct your study of Chapter 10 lOin in the text beginning on page Here you will willieam learn about the actual process of analyzing volume profit factors in product decisions In addition this text material will explain the differences in methods of analysis for singleproduct single and product multipleproduct companies Solving problem situations will wiil help you apply the II methods of analysis used in this lesson lesson These problems begin on page of the study guide guide In addition there is a practical application problem in your text beginning on page Audioassisted Audio problems begin on page of the theta ta study guide and are found on the audio recording entitled Volume Profit Analysis Analysis These problems give you five situations and talk you through the solutions Finally check how much you have learned and if you have met the goals for this lesson by going through the Checkpoints in the booklet booklet If f you have problems follow the suggested review procedure contained in inthe inthe inthe the checkpoints Produces eC through Grant NIE G from the me National Institute of ot EducatIOn c 1975 1475 University of Mid Mia Never give a sucker an even break but every new product deserves one One of the most difficult situations for managers comes when they decide to introduce a new product on or the market They are suddenly faces with a dizzying array of questions questions How much will it cost to produce this new item Will we have to buy new equipment or maybe build a new plant How much should we charge for it How many will we need to sell to make a profit on it There is a point where what you get in by selling a product equals your costs to produce it That is called the even breakeven point and the process through which H His it itis is 1 computed is a valuable tool toot in making pricing production and capital investment decisions about the new product The process is called volume profit analysis and is the subject of this lesson Basically the process considers the relationships between costs both fixed and variable the level of sales activity and net income income incomes Volume Profit Graph S 5 50 0 1 48 rn a o cco C e 5 Net Income Area e 4 30 GOO G a co 20 aco Break Point r Net Loss Area 5 Fixed 1 Cost Line 49 c C S 15 1 o C oo Q o UNiT SALES Some definitions The even break point is that point where total revenue equals eq als total costs If total revenue is greater than total costs the company makes a profit If total tota revenue is less youre you're in trouble Now lets let's break that statement down a bit Costs you remember can be broken into variable and fixed fi ed costs In the case of a new product fixed costs would mean say depreciation depredation expense on new machines to make the product Variable costs are those which rise in relation to the number of units produced like the costs of the material to produce the product product If we subtract the total variable costs from the total revenue produced by the new product the difference is called the contribution margin This is the amount which is available to cover fixed costs and to provide a profit profit The crucial question in all of this is how much volume that is how haw much sales activity whether stated in dollars or units sold will be needed to offset the total cost of operating a business of the units and to provide a profit Stated another way the company must sell enough to provide a contribution margin large enough to cover fixed costs and provide a profit There are three methods for determining the break break even point Two are mathematical the third is graphic All rely on techniques which you have already studied Prime among these is the ability to determine costs accurately From this information the manager is able to set up an equation which will show him the relationships of cost ost volume and profit You will need a basic knowledge of algebra in order to solve the equation Stated simply the equation is Sales S Total Costs TC Net Income NI Nl The same equation can also be stated as S TC NI Since total costs are composed of fixed costs and variable costs the equations can be restated in a form which is easier to work with S Fixed Costs FC Variable Costs VC NI Nl Now insert the figures you know and solve for the unknown For our example lets let's say that our company has determined that they can sell their new lowcalorie low pretzels to retailers for 2 a case They have determined that it wilt will cost them in variable costs to produce each case and a total of in fixed costs to purchase new baking equipment If x is the number of cases they must sell to break even the equation would read 0 Some explanation of the figures represents total sales since this equals the price per unit times the units sold x represents the variable costs since they equal the cost per unit 1 50 times the units sold x The last figure zero is included here hereto to show that there would be no net income to add in to the equation at the even breakeven point There is no net income at the even breakeven point The problem is solved below 1 52 SI x 50 x 1 The company would have to sell cases at 2 a case in order to break even The contribution margin technique uses the equation Contribution Margin CM Sales S Variable Costs VC The equation is then used in with another ii t I f fr r 1 It t t r to determine the even break point p int Fixed Costs CM CMor CMor Break Even Point t FC F or even Breakeven Point CM The same results can be obtained and it does not matter which approach is employed The graphic analysis is illustrated here and is a way of giving this information visual form The graph plots fixed costs total costs and total sales Where the total cost and total sales lines cross is the even breakeven point Above that point the firm is making a profit Below it the firm is operating at a loss With this information a manager can make intelligent decisions knowing how many units he will have to sell seli to reach a profit If the uncertainties of the market marketplace marketplace marketplace place change his costs or demand he will wi be able to plot the best method of dealing with the problem problem Survey The following questions are designed to help emphasize the important points from this lesson Some items are discussed in the material you just read other items are found in other components of the course such as television programs audioassisted audio problems and printed materials The answers are shown following the quiz 1 Contribution margin equals fixed costs plus variable cost True or false 2 2 volume profit analysis may be helpful in product pricing decisions True or false 3 V P analysis can be done using either mathematical al or graphical techniques True or false 4 In using V P analysis fora for a product multipleproduct company the UNIT contribution margin is not used for determining the even breakeven point for the company as a whole True or false 5 The margin of safety is the difference between present sales volume and sales volume at the break break even point True or false 6 Which of the following is NOT an assumption normally associated with volume profit analysis a. a costs will increase during the budget period b. b competition will not affect the expected results c. c the economy will not turn downward d. d none of the above 7 In the volume graph illustrated in this article sales of units results in net income of a. a c. c b. b d. d Answers P pL L B e 9 arid g arul g g anil q ani j g 8 z Z asle l. 