Learning

Objectives

• To explain how changes in sales volume affect contribution margin and net
operating income.
• Prepare and interpret a cost-volume profit (CVP) graph and a profit graph.
• Use the contribution margin ratio (CM ratio) to compute changes in
contribution margin and net operating income resulting from changes in
sales volume.
• Show the effects on net operating income of changes in variable costs,
fixed costs, selling price, and sales volume
 List of Group B’s Member
• Mg Kyaw Zin Win 1mba 040
• Ma Thu Zar Myo San 1mba 089
• Ma May Thandar Myint 1mba 045
• Mg Tun Tun Lin 1mba 092
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• Ma Hnin Akayi 1mba017
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• Ma Saw Nyein Wai 1mba 067

• Mg Htun Htun Win 1mba021

• Mg Saw Yae Lwin 1mba 68
• Ma Thi Thi San 1mba084
• Mg Soe Moe Htun 1mba 074
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• Mg Kyaw Than Win 1mba038
• Mg Zaw Zaw Oung 1mba106
• Mg Zin Min Tun 1mba104
• Ma Cho Mar Win 1mba009
 Learning
Objectives

• To explain how changes in sales volume affect contribution margin and net
operating income.
• Prepare and interpret a cost-volume profit (CVP) graph and a profit graph.
• Use the contribution margin ratio (CM ratio) to compute changes in
contribution margin and net operating income resulting from changes in sales
volume.
• Show the effects on net operating income of changes in variable costs, fixed
costs, selling price, and sales volume
Learning Objectives

Determine Determine the break-even point

Determine Determine the level of sales needed to achieve a desired target profit

Compute Compute the margin of safety and explain its significance.

Compute the degree of operating leverage at a particular level of sales and

Compute explain how it can be used to predict changes in net operating income

Compute the break-even point for a multiproduct company and explain the
Compute effects of shifts in the sales mix on contribution margin and the break-even point
The Excel worksheet from that appears below is to be used to recreate portions
of the Review Problem relating to Voltar Company. The workbook, and instructions on
how to complete the file can be found in Connect.

1. What is the contribution margin per unit?

 
Contribution Margin Per Unit = Contribution Margin
Unit Sale
= $8,000
1,000
= $8

2. What is the contribution margin ratio?

 
Contribution Margin Ratio = Contribution Margin x 100%
Sales
= $8,000 x 100%
$20,000
= 40%

3. What is the variable expenses ratio?

 
Variable Expenses Ratio = Variable Expense x 100%
Sales
= $12,000 x 100%
$20,000
= 60%

4.If sales increase to 1,001 Units, what would like be the increase in net operating
income?
1001 Units Per Unit Ratio
Sales $20,020 $20
Variable Expense 12,012 12 60%
__________________________________________________________________________
Contribution Margin 8,008 8 40%
Fixed Expense $6,000
__________________________________________________________________________
Net Operating Income $2,008
Therefore, If Sales Increase to 1001 units, the net operating income would
be increase to $2008.

5. If Sales Decline to 900 units, what would be the net operating income?
 
900 Units Per Unit Ratio
Sales $18,000 $20
6. If the selling price increase by $2 per unit and the sales volume decrease by 100
units, what would be the net operating income?
 
900 Units Per Unit

Sales $19,800 $22

Variable Expense 10,800 12
___________________________________________________________________
Contribution Margin 9,000 10
Fixed Expense $6,000
___________________________________________________________________
Net Operating Income $3,000
Therefore, if the selling price increase by $2 per unit and the sales volume
decrease by 100 units, the net operating income would be $3,000.

 
7. If the variable cost per unit increases by $1, spending on advertising increase
by $1,500, and unit sales increase by 250 units, what would be the net operating
income?
 
 1250 Units Per Unit
Sales $25,000 $20
Variable Expense 16,250 13
__________________________________________________________________________
Contribution Margin 8,750 7
Fixed Expense * $7,500
__________________________________________________________________________
Net Operating Income $1,250
(* $6,000 + Advertising Budget Increase of $1,500 = $7,500 )
Therefore, If the variable cost per unit increases by S1, spending on advertising
increase by $1,500, and unit sales increase by 250 units, the net operating income
would be $1,250.

8. What is the break-even point in unit sales? 

Break-even point in unit sales = Fixed Expenses
Unit CM
= 6000
8

9. What is the break-even point in dollar sales?

 
Break-even point in dollar sales = Fixed Expense
CM Ratio
= 6000
0.40
= $15,000
 

10.How many units must be sold to achieve a target profit of $5,000? 

Unit Sales to attain = Target Profit + Fixed Expenses
The target Profit CM Per Unit
= $5,000 + $6,000
 11. What is the margin of safety in dollars? What is the margin of safety percentage?
 Margin of Safety in dollars = Total Sales – Break-even Sales
= $20,000 - $15,000
= $5,000
 Margin of Safety in percentage = Margin of Safety in dollars
Total Sales
= $5,000
$20,000

= 25%
 
12. What is the degree of Operating Leverage? 
Degree of Operating leverage = Contribution Margin
Net Operation Income
= $8,000
$2,000

13.Using the degree of Operating Leverage, what is the estimated percent increase in
net operating income that would result from a 5% increase in unit sales?
If unit sales increases 5%,
 
Percentage change = Degree of x Percentage Change
in net operating income operating leverage in sales
= 4 x 5%
= 20%
14. Assume that the amounts of the company’s total variable expenses and total
fixed expenses were reversed. In other words, assume that the total variable expenses
are $6.000 and the total fixed expenses are $12,000. Under this scenario and assuming
that total sales remain the same, what is the degree of operating leverage?
 Sales $20,000
Variable Expense $6,000 30%
_____________________________________________________________________
Contribution Margin $14,000 70%
Fixed Expense $12,000
_____________________________________________________________________
Net Operating Income $2,000
Degree of Operating leverage = Contribution Margin
Net Operation Income
= $14,000
$2,000
= 7

15. Using the degree of operating leverage that you computed in previous question,
what is the estimated percent increase in net operating income that would result
from a 5% increase in unit sales.
 

Percentage change in = Degree of x Percentage Change

net operating income operating leverage in sales
= 7 x 5%
= 35%
 

The Excel worksheet from that appears below is to be used to recreate portions of the
Review Problem relating to Voltar Company. The workbook, and instructions on how to
complete the file can be found in Connect.
Chapter5: Applying Excel

Data

Unit Sale 20,000

Selling price Per unit $60

Variable expenses per unit $45

Fixed expenses $240,000

Review Problem: CVP

Relationships

Compute the CM ratio and variable expense ratio

Selling price per unit $60

 Variable expenses per unit $45

Contribution margin per unit $15

CM ratio 25%

Variable expense ratio 75%

Compute the break-even

Break-even in unit sales 16,000

Break-even in dollar sales $960,000

Compute the margin of

safety
Margin Of Safety In Dollars $240,000

Margin of safety Percentage 20%

Compute the degree of operating leverage

• Operating leverage is a measure of how sensitive net operating income is to
a given percentage change in unit sales. Operating leverage acts as a
multiplier. If operating leverage is high, a small percentage increase in unit
sales can produce a much larger percentage increase in net operating
income
Sales $1,200,01

Variable expenses $900,000

Contribution margin $300,000

Osloexpenses
Fixed Company Prepared the following contribution
$240,000 format income statement
based on a sales volume of 1,000 Units (the relevant range of production is
500 units to 1500 units)
Net Operating income $60,000

1000 Units Per Unit Ratio

Degree of operating leverage 5
• Sales $20,000 $20
• Variable Expense 12,000 12 60%
__________________________________________________________
• Contribution Margin 8,000 8 40%
• Fixed Expense $6,000
__________________________________________________________
• Net Operating Income $2,000