Managerial Accounting: Understanding Break-even Analysis and Contribution Margin, Lecture notes of Financial Management

Download Managerial Accounting: Understanding Break-even Analysis and Contribution Margin and more Lecture notes Financial Management in PDF only on Docsity! Engineering and Financial Cost Analysis Managerial Accounting Managerial Accounting • Managerial Accounting – Providing information to management within an organization • The role of the Manager – Planning; Organizing; Controlling; Decision Making • Features of Managerial Accounting • It places emphasis on the future • It is not governed by GAAP and is not required • Emphasizes only relevant data • Precision is not critical The CPV Curve for Profit Planning • To make a profit sales Revenues must exceed the sum of Fixed and Variable Expenses. Revenues > Fixed Expenses + Variable Expenses REVENUES TOTAL COSTS FIXED COSTS $$$ SALES VOLUME BREAKEVEN VOLUME VAR IAB LE C OST S PR IC E I NC RE AS E NEW BREAKEVEN The CPV Curve for Profit Planning • To make a profit sales Revenues must exceed the sum of Fixed and Variable Expenses. REVENUES TOTAL COSTS FIXED COSTS $$$ SALES VOLUME ORIGINAL BREAKEVEN NEW VA RIABLE COST C URVE NEW BREAKEVEN The Contribution Margin • The Gross Margin format – Separates costs by function • The Contribution Margin format – Separates Costs into Variable Expenses and Fixed Expenses. – The Contribution Margin shows how much revenue is left to contribute to Fixed Expenses. – This is a useful analytical tool for managerial accounting. Example 1 Application of Contribution Margin Price = $25/unit Variable Expenses = $10/unit Fixed Costs = $15,000 for the period 1. Calculate Breakeven Sales Volume 2. Calculate Breakeven Sales Dollars Example 2 Application of Contribution Margin Company Z is going to increase Advertising by $5,000 and expects an increase in Sales Revenues of $8,000. Is this a good decision? Given: CM = 60% FC = $15,000 P = $15/unit Source: Schaums Outlines, Managerial Accounting, pg.61 Example 3 Application of Contribution Margin Company Z is planning to hire a new Salesperson for $3,000/month. What is the minimum increase in Sales Revenues that is required (to cover the salary)? Given: CM = 60% FC = $15,000 P= $15/unit Source: Schaums Outlines, Managerial Accounting, pg.61