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Welcome to Our

Welcome to Our. Presentation. Group Name: “KHOKIKO”. Group Member. What is Contribution Margin. Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted Formula of contribution margin Sales revenue − Variable cost = Contribution Margin

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Welcome to Our

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  1. Welcome toOur Presentation

  2. Group Name: “KHOKIKO” Group Member

  3. What is Contribution Margin • Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted Formula of contribution margin • Sales revenue − Variable cost =Contribution Margin • Formula of Net operating Income or Loss Contribution margin − Fixed cost=Net operating Income or Loss

  4. Example of contribution margin • ABC company annual sales $50,0000 and variable cost is $50,000 and fixed cost $ 40,0000. calculate contribution margin and Net operating Income or Loss • Solution: Contribution margin = (Sales revenue − Variable cost ) =($ 500,000 - $ 500,00) =$450,000 Net operating Income or Loss =(Contribution margin − Fixed cost) =($450,000 - $ 400,000) Net operating Income =$ 500,00

  5. Formula of calculate profit Profit =( sales * cm ratio) – fixed cost Problem : Sales = $5,000,000 , cm ratio = 0.40 and Fixed cost = $1,600,000 Solution : Profit =( sales * cm ratio) – fixed cost =($5,000,000 * 0.40 ) - $1,600,000 =$2,000,000 - $1,600,000 = $400,000

  6. Difference Between Gross Margin and Contribution Margin

  7. Cost Volume Profit (CVP) Relationship in Graphic Form The relationships among revenue, cost, profit and volume can be expressed graphically by preparing a cost-volume-profit (CVP) graph or break even chart. A CVP graph highlights CVP relationships over wide ranges of activity and can give managers a perspective that can be obtained in no other way. Preparing a CVP Graph or Break-Even Chart: In a CVP graph some times called a break even chart unit volume is commonly represented on the horizontal (X) axis and dollars on the vertical (Y) axis. Preparing a CVP graph involves three steps. 1. Draw a line parallel to the volume axis to present total fixed expenses. For example assume total fixed expenses $35,000. 2. Choose some volume of sales and plot the point representing total expenses (fixed and variable) at the activity level you have selected. For example we select a level of 600 units. Total expenses at that activity level are as follows:

  8. Fixed Expenses $35,000 Variable Expenses (150×600) $90,000 --------- Total Expenses $125,000 ====== After the point has been plotted, draw a line through it back to the point where the fixed expenses line intersects the dollars axis.

  9. 3.Again choose some volume of sales and plot the point representing total sales dollars at the activity level you have selected. For example we have chosen a volume of 600 units. sales at this activity level are $150,000 (600units × $250) draw a line through this point back to the origin. The break even point is where the total revenue and total expense lines cross. See the graph and note that break even point is at 350 units. It means when the company sells 350 units the profit is zero. When the sales are below the break even the company suffers a loss. When sales are above the break even point, the company earns a profit and the size of the profit increases as sales increase.

  10. Definition of Contribution Margin Ratio

  11. Calculation / Computation of Contribution Margin Ratio: Consider the following contribution margin income statement of A. Q. Asem private Ltd. in which sales revenues, variable expenses, and contribution margin are expressed as percentage of sales. Total Per Unit Percent of Sales Sales (400 units) $100,000 $250 100% Less variable expenses 60,000 150 60% ------------ ------------ ------------ Contribution margin $40,000 $100 40% ====== === Less fixed expenses 35,000 ------------ Net operating income $5,000 ====== Calculate contribution margin ratio According to above data of A. Q. Asem private Ltd. the computations are: Contribution Margin Ratio = (Contribution Margin / Sales) × 100 = ($40,000 / $100,000) × 100 = 40% • In a company that has only one product such as A. Q. Asem CM ratio can also be calculated as follows: Contribution Margin Ratio = (Unit contribution margin / Unit selling price) × 100 = ($100 / $250) × 100 = 40%

  12. Effect of Change in Regular Sales Price on Contribution Margin and Profitability The following data is used to show the effect of changes in sales price on contribution margin and profitability. • Basic Data: Selling price: $250 (100%) Variable Expenses: $150 (60%) Contribution Margin: $250 – $150 = $100 (40%) Fixed Expenses: $35,000 per month The company is currently selling 400 units per month. The company has an opportunity to make bulk sale of 150 units to wholesaler if an acceptable price can be worked out. This sale would not disturb the company's regular sales and would not affect the company's total fixed expenses. What price per unit should be quoted to the wholesaler if company wants to increase its monthly profits by $3,000?

  13. Solution: Variable cost per unit $150 Desired profit per unit 20 ---------- Quoted price per unit $170 ====== Notice that fixed expenses are not included in the computation. This is because fixed expenses are not affected by the bulk sale, so all of the additional revenues that is in excess of variable costs increase the profit of the company.

  14. Re-order Level or Ordering Point or Ordering Level • Definition and explanation: This is that level of materials at which a new order for supply of materials is to be placed. In other words, at this level a purchase requisition is made out. This level is fixed somewhere between maximum and minimum levels. Order points are based on usage during time necessary to requisition order, and receive materials, plus an allowance for protection against stock out. • Formula of Re-order Level or Ordering Point: 1. Ordering point or re-order level = Maximum daily or weekly or monthly usage ×Lead time The above formula is used when usage and lead time are known with certainty; therefore, no safety stock is provided. When safety stock is provided then the following formula will be applicable: 2. Ordering point or re-order level = Maximum daily or weekly or monthly usage ×Lead time + Safety stock

  15. Example 1: Minimum daily requirement 800 units Time required to receive emergency supplies 4 days Average daily requirement 700 units Minimum daily requirement 600 units Time required for refresh supplies One month (30 days) Calculate ordering point or re-order level • Calculation: Ordering point = Ordering point or re-order level = Maximum daily or weekly ormonthly usage × Lead time = 800 × 30 = 24,000 units

  16. Minimum Limit or Minimum Level of Stock • Definition and Explanation: The minimum level or minimum stock is that level of stock below which stock should not be allowed to fall. In case of any item falling below this level, there is danger of stopping of production and, therefore, the management should give top priority to the acquisition of new supplies. • Formula: Minimum limit or level = Re-order level or ordering point – Average or normal usage× Normal re-order period Or the formula can be written as: Minimum limit or level = Re-order level or ordering point – Average usage for Normal period

  17. Example: Normal usage 100 units per day Maximum usage 130 units per day Minimum usage 70 units per day Re-order period 25 to 30 days Calculate: minimum limit or level [ To calculate minimum limit of materials we must calculate re-order point or re-order level first ] • Calculation: Ordering point or re-order level = Maximum daily or weekly or monthly usage × Maximum re-order = 130 × 30 = 3,900 units Minimum limit or level = Re-order level or ordering point – Average or normal usage × Normal re-order period = 3900 – (100 × 27.5*) =1150 units =*(25 + 30 ) / 2

  18. Break Even point • Definition: Break even point is the level of sales at which profit is zero. According to this definition, at break even point sales are equal to fixed cost plus variable cost. This concept is further explained by the following equation: [Break even sales = fixed cost + variable cost]  The break even point can be calculated using either the equation method or contribution margin method. These two methods are equivalent's. • Equation Method: The equation method centers on the contribution approach to the income statement. The format of this statement can be expressed in equation form as follows: Profit = (Sales − Variable expenses) − Fixed expenses Rearranging this equation slightly yields the following equation, which is widely used in cost volume profit (CVP) analysis: Sales = Variable expenses + Fixed expenses + Profit According to the definition of break even point, break even point is the level of sales where profits are zero. Therefore the break even point can be computed by finding that point where sales just equal the total of the variable expenses plus fixed expenses and profit is zero.

  19. For example: Sales price per unit $250 variable cost per unit $150 Total fixed expenses $35,000 Calculate break even point Calculation: Sales = Variable expenses + Fixed expenses + Profit $250Q* = $150Q* + $35,000 + $0** $100Q = $35000 Q = $35,000 /$100 Q = 350 Units Q* = Number (Quantity) of units sold. **The break even point can be computed by finding that point where profit is zero The break even point in sales dollars can be computed by multiplying the break even level of unit sales by the selling price per unit. 350 Units × $250 Per unit = $87,500

  20. Thank You

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