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Introduction
Cost structure is defined as the relationship between a firms fixed and variable costs.
Cost Structure
Labor-Intensive = High Variable Costs
Cost Structure
Abacus Computers
Owns 2 computers
Abacus Computers Income Statement For Year Ended December 31, 2003
Sales Variable Costs Contribution Margin Fixed Costs Net Income
Dr. Fred Barbee
Tailor Made Company Income Statement For Year Ended December 31, 2003
Abacus and Tailor Made Company Income Statement Comparison For Year Ended December 31, 2003
Abacus
$500 100 $400 300 $100
Tailor Made
$500 300 $200 100 $100
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Sales VC CM FC NI
Dr. Fred Barbee
Sales VC CM FC NI
Abacus Computers Income Statement For Year Ended December 31, 2003
its profits by $0.80 for each Variable Costs 100,000 additional dollar of sales.
Contribution Margin Fixed Costs Net Income
Dr. Fred Barbee
Tailor Made Company Income Statement For Year Ended December 31, 2003
increase its profits by $0.40 for Variable Costs 300,000 each additional dollar of sales.
Contribution Margin Fixed Costs Net Income
Dr. Fred Barbee
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Abacus Computers will reduce its profits by $0.80 for each additional dollar of sales.
Tailor Made Company will reduce its profits by $0.40 for each additional dollar of sales.
ACCT202 Principles of Managerial Accounting 11
Abacus Computers will increase its profits by $0.80 for each additional dollar of sales.
Tailor Made Company will increase its profits by $0.40 for each additional dollar of sales.
ACCT202 Principles of Managerial Accounting 12
Leverage . . .
To the scientist . . .
Leverage explains how one is able to move a large object with a small force.
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Operating Leverage
Is
a measure of the extent to which fixed costs are being used in an organization.
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Financial Leverage
Financial leverage is the financing of a portion of the firms assets with securities bearing a fixed (limited) rate of return.
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Consider this . . .
Labor-Intensive Firms
FC:TC
Machine-Intensive Firms
FC:TC
Therefore, machine-intensive firms use more operating leverage than laborintensive firms.
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 16
Both increase sales by 20%. Which one will have the larger increase in profits? Why?
Dr. Fred Barbee ACCT202 Principles of Managerial Accounting 17
Formula . . .
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Abacus and Tailor Made Company Income Statement Comparison For Year Ended December 31, 2003
Abacus
$500 100 $400 300 $100
Tailor Made
$500 300 $200 100 $100
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Sales VC CM FC NI
Dr. Fred Barbee
Sales VC CM FC NI
Abacus Computers . . .
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Observations on DOL
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Excess of budgeted (or actual) sales over the break-even volume of sales. The amount by which sales can drop before losses begin to be incurred.
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Sales Mix
Sales mix is the relative proportions in which a companys products are sold. Different products have different selling prices, cost structures, and contribution margins.
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250,000
45%
300,000
55%
100.0%
CM Ratio
$170,000 = 0.482
= $352,697
Bikes Carts Sales $ 158,714 100% $ 193,983 Var. exp. 95,228 60% 87,293 Contrib. margin $ 63,485 40% $ 106,691 Fixed exp. Rounding error Net operating income
Dr. Fred Barbee
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Sales mix
$ 158,714
45%
$ 193,983
55%
100.0%