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					T4M4 Transcript

Slide 1

Before we can start using the Contribution Income Statement to
understand cost behaviors we need to become familiar with all of its
components. In this exhibit notice we have three columns of
   1. Totals column
   2. Per unit column
   3. Percentage column
The Totals column includes Total Sales, Total Variable Costs, Total
Contribution Margin, Total fixed costs and Net Operating Income. The
Per Unit column includes the Price, Variable cost per unit and the
Contribution Margin per unit. Notice that we do not have a per unit
amount for fixed costs.

Remember back in Topic 2 how variable costs per unit remained the
same no matter what the activity level, but fixed costs changed in
response to activity level. Well, the fixed per unit number would be
meaningless to us because it would change with each change in
activity. Therefore we don’t report it.

Next we have the Percentage column. Sales are always 100%.
Variable costs are always a percentage of Sales. To calculate this
percentage divide the variable cost (in total or per unit cost) by Sales
(in total or price). This will give you the percentage of variable cost to
sales. This goes also for the contribution margin. Take the contribution
margin and divide by sales. We refer to this calculation as the
“contribution margin ratio”.

Slide 2

To get a better understanding of how the parts of the contribution
income statement fit together we will now do this problem. Go to the
next problem to see a demonstration on how to fill in the empty
spaces of case 1. Then try to do the rest on your own.

Slide 3

First input all the known information. Here you see it colored in a pale
yellow. Then take stock of what information you have and find
something you can calculate. The first calculation that can be made is
#1. By taking Sales and subtracting variable costs the contribution
margin can be calculated. Then subtract the fixed costs to calculate
the net operating income. To determine the price per unit, take the
Sales and divide by total units. To determine the variable cost per unit
take the variable costs and divide by total units. To determine the
contribution margin per unit there are two possible calculations. The
first possible calculation is to divide the total contribution margin by
total units OR subtract the variable cost per unit from the price. And
there you have it the first case has been completed. Now try to
complete the rest of the cases before looking at the solutions slide.

Slide 4

Here is the solution slide. Notice that the numbers given in the
problem are highlighted in pale yellow. The black numbers were the
calculated numbers. Did you get these answers? Make sure you can
determine these numbers by yourself. It looks easy and in some ways
it is, but it requires practice to solve this type of problem.

Slide 5

Now let us do some what if analysis. Below are three cases played out
in the following slides.

Slide 6

This contribution income statement will serve as the original data in
the “what if” analysis to follow. Unless told otherwise always go back
to the original data in any problem you are solving to do the next
“what if” analysis.

Slide 7

In this case we increase the volume by 20% and increase advertising
by $150. Notice in the right hand corner I have a table of the old or
original data and the new. This helps me keep track of the changes
made in this case to the original data. Developing a methodology when
solving accounting problems can help you be successful in solving the
problem. Organization is often the biggest problem students have
when solving problems.

Okay, now back to the problem. Under the old you will see we
originally had 330 units of volume. The problem states that volume
has increased by 20%. To easily calculate the new volume take 100%
plus 20% or 120% or 1.20 and multiply it by 330 units. The change in
fixed costs is easy. Simply add the $150 to the $720. Next we take the
new data and fill it into the form below. Remember to use the new
volume, this is probably the most common mistake students make
when solving these problems. They calculate the new volume but fail
to use it particularly in the case of total variable cost. Complete the
form and then compare the new net operating with the old net
operating. In this case the new net operating is higher which means
spending the extra money in advertising is a good idea.

Slide 8

In this analysis we increase the sales price. In anticipation of reduced
sales we decreased the volume by 10%. As in the last “what if”
analysis complete the Old versus New section of the form and then
calculate net operating income. This too was a good idea as it
increased net operating by 18%.

Slide 9

This “what if” analysis is a bit more complicated. Once again complete
the old versus new section of the form. Then use the information to
calculate the new net operating income. In this case the decisions
made were not good and reduced net operating income by 9%. So,
this decision would not be implemented.

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