Module+5000+III.+Explanation+and+Examples

III. Module 5000 Explanation and Examples MJH Module 5000 example-Contribution-Margin-Based Income Statement CWR Module 5000 example Review Problem CWR

[]
 * Example: Taken from Accounting for management at: **

Assume that Validity Title Corp. has been able to sell only one (file) unit of product during the period. If company does not sell any more units during the period, the company's contribution margin income statement will appear as follows: For each additional unit (file) that the company is able to sell during the period, $100 more in contribution margin will become available to help cover the fixed expenses. If a second unit is sold, for example, then the total contribution margin will increase by $100 (to a total of $200) and the company's loss will decrease by $100, to $34800. If enough units can be sold to generate $35,000 in contribution margin, then all of the fixed costs will be covered and the company will have managed to at least break even for the month-that is to show neither profit nor loss but just cover all of its costs. To reach the breakeven point, the company will have to sell 350 units in a period, since each unit sold contribute $100 in the contribution margin. This is shown as follows by the contribution margin format income statement. **Note that the break even is the level of sales at which profit is ZERO . ** Once the breakeven point has been reached, net income will increase by unit contribution margin by each additional unit sold. For example, if 351 units are sold during the period then we can expect that the net income for the month will be $100, since the company will have sold 1 unit more than the number needed to break even. This is explained by the following contribution margin income statement. If 352 units are sold then we can expect that net operating income for the period will be $200 and so forth. To know what the profit will be at various levels of activity, therefore, manager s do not need to prepare a whole series of income statements. To estimate the profit at any point above the breakeven point, the manager can simply take the number of units to be sold above the breakeven and multiply that number by the unit contribution margin. The result represents the anticipated profit for the period. Or to estimate the effect of a planned increase in sale on profits, the manager can simply multiply the increase in units sold by the unit contribution margin. The result will be expressed as increase in profits. To illustrate it suppose company is currently selling 400 units and plans to sell 425 units in near future, the anticipated impact on profits can be calculated as follows:
 * **Validity Title Corp **  **Contribution margin Income Statement **   **For the month of July **  ||
 * || **Total **  ||  **<span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Per Unit **  ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Sales (1 file only) || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">$250 || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">$250  ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Less Variable expenses || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">150 || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">150  ||
 * || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">- || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">-  ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Contribution margin || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">100 || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">100  ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Less fixed expenses || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">35,000 || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">======  ||
 * || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">- ||   ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Net operating loss || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">$(34,900) ||   ||
 * || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">====== ||   ||
 * **<span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Validity Title Corp **  **<span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Contribution margin Income Statement **   **<span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">For the month of July **  ||
 * || **<span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Total **  ||  **<span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Per Unit **  ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Sales (350 Units) || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">$87,500 || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">$250  ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Less variable expenses || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">52,500 || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">150  ||
 * || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">- || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">-  ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Contribution margin || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">35,000 || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">$100  ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Less fixed expenses || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">35,000 || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">======  ||
 * || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">-- ||   ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Net operating profit || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">$0 ||   ||
 * || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">====== ||   ||
 * **<span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Validity Title Corp **  **<span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Contribution margin Income Statement **   **<span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">For the month of July **  ||
 * || **<span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Total **  ||  **<span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Per Unit **  ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Sales (351 Units) || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">$87,750 || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">$250  ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Less Variable expenses || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">52,500 || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">150  ||
 * || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">-- || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">--  ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Contribution margin || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">35,100 || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">100  ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Less fixed expenses || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">35,000 || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">======  ||
 * || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">-- ||   ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Net operating loss || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">$100 ||   ||
 * || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">====== ||   ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Increased number of units to be sold || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">25 ||
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Contribution margin per unit || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">×100 ||

|| <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">To summarize these examples, if there were no sales, the company's loss would equal to its fixed expenses. Each unit that is sold reduces the loss by the amount of the unit contribution margin. Once the breakeven point has been reached, each additional unit sold increases the company's profit by the amount of the unit contribution margin.
 * <span style="font-family: 'Verdana','sans-serif'; font-size: 13px;">Increase in the net operating income || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">2,500 ||
 * || <span style="display: block; font-family: 'Verdana','sans-serif'; font-size: 13px; text-align: center;">====== ||