CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 15-3 Decisions That Affect Net Income.
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Transcript of CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 15-3 Decisions That Affect Net Income.
CENTURY 21 ACCOUNTING © Thomson/South-Western
LESSON 15-3LESSON 15-3
Decisions That Affect Net Income
CENTURY 21 ACCOUNTING © Thomson/South-Western
CALCULATING SALES TO EARN PLANNED CALCULATING SALES TO EARN PLANNED NET INCOMENET INCOME
Determining the breakeven point provides management with important information about the relationship of sales, variable costs, & fixed costs.
Managers also need information that will assist them in achieving planned net income The breakeven analysis can be used to calculate the dollar &
unit sales needed to earn a specified amount of planned net income
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LESSON 15-3
CENTURY 21 ACCOUNTING © Thomson/South-Western
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LESSON 15-3
Contribution Margin Rate
Required Contribution Margin
Sales Dollars÷ =
$22,500.00 ÷ = $150,000.00.15 or 15%
PlannedNet Income
TotalFixed Costs
Required Contribution Margin
+ =
$21,000.00 + = $22,500.00$1,500.00
CALCULATING SALES TO EARN CALCULATING SALES TO EARN PLANNED NET INCOMEPLANNED NET INCOME page 455
• Calculate the required contribution margin. The sum of total fixed costs & the planned net income is the contribution margin necessary both to cover fixed costs & to earn the planned amount of net income. • Shows total sales required to earn $1,500 of net income
• Calculate the amount of sales dollars by dividing the required contribution margin by the contribution margin rate.
CENTURY 21 ACCOUNTING © Thomson/South-Western
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LESSON 15-3
EFFECT OF VOLUME CHANGES EFFECT OF VOLUME CHANGES ON NET INCOMEON NET INCOME page 456
CENTURY 21 ACCOUNTING © Thomson/South-Western
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LESSON 15-3
EFFECT OF COST CHANGES AT AVERAGE EFFECT OF COST CHANGES AT AVERAGE VOLUMEVOLUME page 457
• Management is concerned that the relatively low contribution margin rate makes increasing net income difficult for the company• Considering an alternative production method
• With alternative 2 the contribution margin is higher, but fixed costs also are higher• The higher fixed costs cancel the higher contribution margin
CENTURY 21 ACCOUNTING © Thomson/South-Western
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LESSON 15-3
EFFECT OF COST CHANGES AT EFFECT OF COST CHANGES AT ABOVE AVERAGE VOLUMEABOVE AVERAGE VOLUME page 458
• If the company expects a permanent sales increase, Alternative 2 would be more profitable than Alternative 1
CENTURY 21 ACCOUNTING © Thomson/South-Western
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LESSON 15-3
1. Contribution margin rate, Alternative 1.
2. Contribution margin rate, Alternative 2.
EFFECT OF CHANGES IN COSTS ON EFFECT OF CHANGES IN COSTS ON CONTRIBUTION MARGIN RATECONTRIBUTION MARGIN RATE page 458
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• A logical conclusion is “everything else being equal, the activity with the higher contribution margin rate is more profitable.” If “everything else” is equal, selecting the more profitable choice is simple
• An effective business looks for the best combination of fixed & variable costs.
CENTURY 21 ACCOUNTING © Thomson/South-Western
EFFECT OF CHANGE IN SALES PRICEEFFECT OF CHANGE IN SALES PRICE
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LESSON 15-3
• Setting the sales price of a product is extremely important.• If the price is set too high, potential customers will buy
from another business• If the price is set too low, the company may not earn
enough money to cover costs & may suffer a loss• Objective is to set sales prices that provide a
reasonable amount of net income while keeping prices competitive
CENTURY 21 ACCOUNTING © Thomson/South-Western
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LESSON 15-3
New Contribution Margin per Unit
Contribution Margin
Unit Sales Required to Maintain Planned
Net Income÷ =
$22,500.00 ÷ = 45,000 units$0.50
EFFECT OF CHANGE IN SALES PRICEEFFECT OF CHANGE IN SALES PRICE page 459
CENTURY 21 ACCOUNTING © Thomson/South-Western
USING BREAKEVEN TO PLAN SALES MIXUSING BREAKEVEN TO PLAN SALES MIX
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LESSON 15-3
• Businesses that sell two or more products can also use breakeven point calculations to assist managers in planning
• Relative distribution of sales among various products is called sales mix
• The sales mix must be calculated to determine the breakeven point for a company that sells more than one product.
CENTURY 21 ACCOUNTING © Thomson/South-Western
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LESSON 15-3
USING BREAKEVEN TO USING BREAKEVEN TO PLAN SALES MIXPLAN SALES MIX page 460
Product Sales ÷ Net Sales = Sales Mix
Television $52,500.00 ÷ $75,000.00 = 70%
VCR $22,500.00 ÷ $75,000.00 = 30%
Calculate the sales mix using information from the income statement. Net sales are divided by the sales amounts for each product. The total product mix must equal 100%
CENTURY 21 ACCOUNTING © Thomson/South-Western
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LESSON 15-3
USING BREAKEVEN TO USING BREAKEVEN TO PLAN SALES MIXPLAN SALES MIX page 460
Contribution Margin Rate
Contribution Margin Net Sales÷ =
.40 or 40%$30,000.00 ÷ $75,000.00 =
$34,000.00$24,000.00 + $10,000.00 =
Required Contribution Margin
Total Fixed CostsPlanned Net
Income+ =
Calculate the contribution margin rate by dividing the contribution margin shown on the income statement by net sales
Add total fixed costs & the planned net income to determine the required contribution margin
CENTURY 21 ACCOUNTING © Thomson/South-Western
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LESSON 15-3
USING BREAKEVEN TO USING BREAKEVEN TO PLAN SALES MIXPLAN SALES MIX page 460
$85,000.00$34,000.00 ÷ .40 or 40% =
Total Sales DollarsRequired
Contribution MarginContribution Margin Rate
÷ =
Multiply the sales mix percentage by the total sales dollars to determine the sales dollars needed for each product.
CENTURY 21 ACCOUNTING © Thomson/South-Western
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LESSON 15-3
USING BREAKEVEN TO USING BREAKEVEN TO PLAN SALES MIXPLAN SALES MIX page 460
Product Sales Dollars
Sales MixTotal Sales
Dollars× =
Product Unit Sales
Product Sales Dollars
Unit Sales Price
÷ =
Television 170 units$59,500.00 ÷ $350.00 =
102 units$25,500.00 ÷ $250.00 =VCR
Television $59,500.0070% × $85,000.00 =
$25,500.0030% × $85,000.00 =VCR
Divide the product sales dollars by the unit sales price to determine product unit sales. The unit sales prices are found on the income statement.
The product unit sales indicate the number of units of each product that must be sold to achieve the planned net income of $10,000
CENTURY 21 ACCOUNTING © Thomson/South-Western
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LESSON 15-3
TERM REVIEWTERM REVIEW
sales mix
page 462