Cma retail whitepaper webinar 2013 07 10-compressed -- final 2
Be Final Cma
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Transcript of Be Final Cma
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Your boss asks
How many of these things do
we have to sell beforewe start making money?
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then your boss asks
If we sell 100,000 units,what will our profit be?
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Finally, your boss asks
How much do we make
on one of these?
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Are you
going to have
the answers?
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Surprisingly, it is prettyeasy to answer these questions...
If you know how.
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In fact, those who become good at this
can answer these questionsin their heads.
Here is how it is done
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Here is the formula you can use to solve
every break-even problem.SP
-VC
CM-FCNI
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Here is what SP means:
SP = Selling Price-VCCM
-FCNI
Selling Price is usually stated on a per unit basis.For example, A football might sell for $25.00, acar might sell for $25,000, and a 50 yacht mightsell for $250,000.
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VC means:
SP-VC = Variable Cost
CM-FCNI
There will be a more detailed discussion onvariable cost, but for now variable costs
are costs such as labor to build orassemble the product and the materialsused in the product. They are costs thatincrease or decrease in proportion to how
many product units are made or sold.
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CM means: SP-VC
CM = Contribution Margin-FCNI
Selling price less the cost to make orbuy the product equals thecontribution margin. For example,
suppose a company sells a football for$25.00 and it costs the company$15.00 to make the football. The
contribution margin would be $10.00.
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FC means:
SP-VCCM
-FC = Fixed Costs
NI
Fixed costs are those costs that stay thesame regardless of how many products aresold or made (within a reasonable range ofsales or production). Some examples mayinclude property taxes, administrators
salaries, and insurance.
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FC means:
SP-VC
CM-FCNI = Net Income
Net income is simply the contributionmargin minus fixed costs. The break-evenpoint is when net income equals zero.
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The Break-Even Point
The break-even point is the point in thevolume of activity where the organizations
revenues and expenses are equal.
Sales 250,000$
Less: variable expenses 150,000
Contribution margin 100,000Less: fixed expenses 100,000
Net income -$
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Equation Approach
Sales revenue Variable expenses Fixed expenses = Profit
Unitsalesprice
Salesvolumein units
Unit
variableexpense
Salesvolumein units
($500 X) ($300 X)
$80,000 = $0
($200X) $80,000 = $0
X = 400 surf boards 7-15
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Contribution-Margin Approach
For each surf board sold,generates$200 in contribution margin.
Total Per Unit Percent
Sales (500 surf boards) 250,000$ 500$ 100%
Less: variable expenses 150,000 300 60%
Contribution margin 100,000$ 200$ 40%Less: fixed expenses 80,000
Net income 20,000$
Consider the following informationdeveloped by the accountant at FAROOQFIRM.:
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Contribution-Margin Approach
Fixed expensesUnit contribution margin
=Break-even point
(in units)
Total Per Unit Percent
Sales (500 surf boards) 250,000$ 500$ 100%
Less: variable expenses 150,000 300 60%
Contribution margin 100,000$ 200$ 40%
Less: fixed expenses 80,000
Net income 20,000$
$80,000
$200
= 400 surf boards
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Contribution-Margin Approach
Here is the proof!
Total Per Unit PercentSales (400 surf boards) 200,000$ 500$ 100%
Less: variable expenses 120,000 300 60%
Contribution margin 80,000$ 200$ 40%
Less: fixed expenses 80,000Net income -$
400 $500 = $200,000400 $300 = $120,000 7-18
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Contribution Margin Ratio
Calculate the break-even point in sales dollarsrather than units by using the contribution margin
ratio.
Contribution marginSales
= CM
RatioFixed expense
CM RatioBreak-even point(in sales dollars)
=
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Total Per Unit Percent
Sales (400 surf boards) 200,000$ 500$ 100%Less: variable expenses 120,000 300 60%
Contribution margin 80,000$ 200$ 40%
Less: fixed expenses 80,000
Net income -$
Contribution Margin Ratio
$80,000
40%
$200,000 sales=7-20
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Graphing Cost-Volume-ProfitRelationships
Viewing CVP relationships in a graph givesmanagers a perspective that can be obtained inno other way.
Consider the following information for FAROOQ:
300 units 400 units 500 units
Sales 150,000$ 200,000$ 250,000$
Less: variable expenses 90,000 120,000 150,000Contribution margin 60,000$ 80,000$ 100,000$
Less: fixed expenses 80,000 80,000 80,000
Net income (loss) (20,000)$ -$ 20,000$
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Cost-Volume-Profit Graph
Dollars
600 700 800
Units
200 300 400 500
450,000
100
200,000
150,000
100,000
50,000
400,000
350,000
300,000
250,000
Fixed expenses
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Cost-Volume-Profit Graph
Dollars
600 700 800
Units
200 300 400 500
450,000
100
200,000
150,000
100,000
50,000
400,000
350,000
300,000
250,000
Fixed expenses
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Cost-Volume-Profit Graph
Dollars
600 700 800
Units
200 300 400 500
450,000
100
200,000
150,000
100,000
50,000
400,000
350,000
300,000
250,000
Fixed expenses
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Cost-Volume-Profit Graph
Dollars
600 700 800
Units
200 300 400 500
450,000
100
200,000
150,000
100,000
50,000
400,000
350,000
300,000
250,000
Fixed expenses
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Cost-Volume-Profit Graph
Dollars
600 700 800
Units
200 300 400 500
450,000
100
200,000
150,000
100,000
50,000
400,000
350,000
300,000
250,000
Fixed expenses
Break-evenpoint
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Profit-Volume GraphSome managers like the profit-volume
graph because it focuses on profits and volume.
100 200 300 400 500 600 700Units
Profit
0
100,000
(20,000)
(40,000)
(60,000)
80,000
60,000
40,000
20,000
Break-evenpoint
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Target Net Profit
We can determine the number of surfboardsthat FAROOQ must sell to earn a profit of$100,000 using the contribution margin
approach.
Fixed expenses + Target profitUnit contribution margin
=Units sold to earnthe target profit
$80,000 + $100,000$200
= 900 surf boards
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Equation Approach
Sales revenue Variable expenses Fixed expenses = Profit
($500 X) ($300 X) $80,000 = $100,000
($200X) = $180,000
X = 900 surf boards
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THANK YOU FOR YOUR
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THANK YOU FOR YOURPATIANCE
We madeit!
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