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Presentation Sl Name 01 A.K.M Mohsin ID Group Member 10202061 02 Md. Moshiur Rahman 10202065 03 Md. Kabir Hossain 10202071 04 Roma Akter 10202073 05 Suraia Sultana 10202100 06 Md. Rasheduzzaman 10202107 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 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 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 Gross Margin Contribution Margin • Gross Margin is the Gross Profit as a percentage of Net Sales. • The calculation of the Gross Profit is: Sales minus Cost of Goods Sold. • The Cost of Goods Sold consists of the fixed and variable product costs, but it excludes all of the selling and administrative expenses. • Contribution Margin is Net Sales minus the variable product costs and the variable period expenses. • The Contribution Margin Ratio is the Contribution Margin as a percentage of Net Sales. Let’s illustrate the difference between gross margin and contribution margin with the following information: company had Net Sales of $600,000 during the past year. Its inventory of goods was the same quantity at the beginning and at the end of year. Its Cost of Goods Sold consisted of $120,000 of variable costs and $200,000 of fixed costs. Its selling and administrative expenses were $40,000 of variable and $150,000 of fixed expenses. • The company’s Contribution Margin is: Net Sales of $600,000 minus the variable product costs of $120,000 and the variable expenses of $40,000 for a Contribution Margin of $440,000. The Contribution Margin Ratio is 73.3% ($440,000 divided by $600,000). • The company’s Gross Margin is: Net Sales of $600,000 minus its Cost of Goods Sold of $320,000 ($120,000 + $200,000) for a Gross Profit of $280,000 ($600,000 - $320,000). The Gross Margin or Gross Profit Percentage is the Gross Profit of $280,000 divided by $600,000, or 46.7%. 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: Fixed Expenses Variable Expenses (150×600) $35,000 $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. 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. Definition of Contribution Margin Ratio: Formula of CM Ratio • The contribution margin as a percentage of total sales is referred to as contribution margin ratio (CM Ratio). • This ratio is extensively used in cost-volume profit calculations. • CM Ratio= Contribution Margin/ Sales 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% The following data is used to show the effect of changes in sales price on contribution margin and profitability. Basic Data: Selling price: Variable Expenses: Contribution Margin: Fixed Expenses: $250 (100%) $150 (60%) $250 – $150 = $100 (40%) $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? Solution: Variable cost per unit Desired profit per unit Quoted price per unit $150 20 ---------$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. 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 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 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 Example: Normal usage Maximum usage Minimum usage Re-order period 100 units per day 130 units per day 70 units per day 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 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. For example: Sales price per unit variable cost per unit Total fixed expenses $250 $150 $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