Business Unit Profit And Loss Statements Show – After working more with her team, Susan was able to break down selling and administrative costs into fixed and variable components. (This process is the same as the one we discussed earlier about production costs.) Susan then established the cost equations shown in Table 5.5 “Cost Equations for Unlimited Bicycles.”
Question: The challenge now is to organize this information in a way that is useful to management – especially Eric Mendez. The traditional income statement format used for external financial reporting simply breaks down costs by functional area: cost of goods sold and administrative and selling costs. It has no fixed and variable costs. Panel A of Figure 5.7 “Traditional Income Statement and Donation Margin for Unlimited Bicycles” illustrates the traditional format. (We postponed the consideration of the income tax to the end of chapter 6 “How is cost-volume-profit analysis used for decision-making?”.)
Business Unit Profit And Loss Statements Show
Answer: Another format of the profit and loss statement, called the contribution profit statement. A profit and loss statement used for internal reporting that presents information on fixed and variable costs. , shows the fixed and variable components of the cost information. This type of claim appears in Panel B of Figure 5.7 “Traditional Income and Contribution Margin Statements for Unlimited Bicycles”. Note that operating income is the same in both statements, but the organization of the data is different. The profit and loss statement organizes the data in a way that will make it easier for management to assess how changes in production and sales will affect operating profit. The revenue from sales of the contribution margin remains after deducting the variable costs of sales. Represents the sales revenue remaining after deducting the variable costs of sales. This is the remaining value that
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Eric indicated that sales volume in August might increase by 20% from sales of 5,000 units in June, which would increase unit sales to 6,000 units [= 5,000 units + (5,000 × 20%)] and he asked Susan to present a profit forecast for August. Eric also mentioned that the selling price will remain the same at $100 per unit. Using this information and the cost estimation equations in Table 5.5 “Cost Equations for Unlimited Bicycles,” Susan prepared the contribution margin income statement in Panel B of Figure 5.7 “Traditional Revenue and Contribution Margin Statement for Unlimited Bicycles.” For now, let’s assume that 6,000 units is in the relevant range for Bikes Unlimited. (We discuss this assumption later in this chapter.)
The contribution margin income statement shown in Panel B of Figure 5.7 “Traditional Income Statement and Contribution Margin for Unlimited Bicycles” clearly indicates which costs are variable and which are fixed. Keep this variable cost in mind
Change in proportion to changes in activity. Since 6,000 units are expected to be sold in August, total variable costs are calculated by multiplying 6,000 units by cost per unit ($53.42 per unit for cost of goods sold and $9.00 per unit for selling and administrative costs). So total
Selling and administrative costs are $54,000. These two values are combined to calculate total variable costs of $374,520, as shown in Panel B of Figure 5.7 “Traditional Statements of Revenue and Contribution Margin for Unlimited Bicycles.”
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The contribution margin of $225,480 represents the remaining sales revenue after deducting variable selling costs ($225,480 = $600,000 – $374,520). This is the remaining value that
SG&A costs remain at $110,000. This is true both for the activity level of 5,000 units for the month of June and for the predicted activity level of 6,000 units for August. Total fixed costs of $153,276 (= $43,276 + $110,000) are subtracted from the contribution margin to calculate an operating profit of $72,204.
Armed with this information, Susan meets with Eric the next day. Refer to Panel B of Figure 5.7 “Traditional Income Statements and Contribution Margins for Bikes Unlimited” as you read Susan’s comments on a contribution margin income statement.
Susan: Eric, I have some numbers for you. My forecast for August is complete and I expect profit to be about $72,000 if sales volume increases by 20%. Eric: Excellent! You were right in imagining that profit would grow at a higher rate than sales because of our fixed costs. Susan: Here is a copy of our projected income for August. This income statement format provides both variable and fixed costs. As you can see, our monthly fixed costs add up to about $153,000. Now that we have this information, we can easily make predictions for different scenarios. Eric: This will be very useful for making predictions for the coming months. I will bring your August predictions to the management group this afternoon. Thank you for your help!
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Lowe’s is the second largest home improvement retailer in the world, with more than 1,700 stores in the United States, Canada and Mexico. The company has 234,000 employees. The following financial information is from Lowe’s income statement for the year ended January 28, 2011 (amounts are in millions). Which of the company’s costs might be variable?
Variable costs may include cost of sales (cost of goods sold) and some general selling and administrative costs (for example, cost of labor hour). Cost of sales alone constitutes 65% of net sales (rounded). Retail companies like Lowe’s have higher variable costs than manufacturing companies like General Motors and Boeing.
Last month, Alta Production, Inc. Sold his product for $2,500 a unit. Fixed manufacturing costs were $3000.00 and variable manufacturing costs were $1400.00 per unit. Fixed selling and administrative costs totaled $50,000, and variable selling and administrative costs totaled $200 per unit. Alta Production produced and sold 400 units last month.
Prepare a traditional profit and loss statement and a contribution profit statement for Alta Production. Use Figure 5.7 “Traditional Income Statement and Donation Margin for Unlimited Bicycles” as a guide. The break-even point is when total costs equal total revenue. Below this point, you operate at a loss; Above that, you earn an operating profit.
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“Breakeven is the level of sales needed to cover all your costs,” explains Nicolas Fontaine, Senior Business Consultant, Consulting Services. “This is the minimum income needed to not lose money. But you’re not making money either.
In dollars, the break-even point is calculated by taking the total overhead costs and dividing them by the gross profit percentage.
From the profit and loss statement below it appears that ABC Co. Earned $100,000 in revenue from selling 10,000 units at $10 per unit. The gross profit percentage is 65% and the company’s total costs are $25,000.
Another way to measure breakeven is to look at the number of units sold, rather than the dollar amount of sales.
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The break-even point in units is calculated by taking the break-even point and dividing it by the selling price of the unit.
Let’s look at the ABC Co. example again, but this time let’s look at how many units need to be sold to break even. We know that ABC Co. Earned $100,000 in revenue from selling 10,000 units at $10 per unit. The gross margin is 65% and the company’s overhead costs are $25,000.
Although their trade is not in units, service companies can still calculate their break-even point.
“The service sector also has overhead costs and gross profit margin data. The only difference will be the type of volume you sell, for example a number of hours rather than a number of units or products. A consulting firm would be a good example of this,” explains Fontaine. “So the formula is the same: fractional overhead as a percentage of gross profit.”
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A break-even analysis examines where your business is headed and what course of action can be taken to lower your break-even point and increase profit.
The break-even point, on the other hand, sets a bar for success and helps define clear sales goals. Break-even analysis reveals how the break-even point changes for adjustments such as the selling price of the unit.
A break-even analysis is essential to understanding how your business is doing and how to proceed, according to Fontaine.
“Sometimes the hardest part for entrepreneurs is understanding the full impact of overhead costs on overall profitability. It can be easy to convince yourself to increase overhead costs to drive business growth, but if you’re doing it before more business, you need to clearly understand the impact Have these additional costs on new volume.”
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Fontaine says that because every business experiences fluctuations in revenue, the break-even point should be thought of as a range rather than a specific number.
“Let’s say with estimated overhead costs of $250,000 and a gross margin of 25%, you think you’d need to reach $1 million in revenue to break even. In a perfect world, you’d meet every element of your budget. Unfortunately, the reality is that after a month or two, or a quarter or Two months, you may have to revisit that balance point.”
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