4 - 1 © 2005 accounting 1/e, terrell/terrell planning for and predicting performance chapter 4

4 - 4 - 11© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell

Planning for andPlanning for and

Predicting PerformancePredicting Performance

Chapter 4Chapter 4


Learning Objective 1Learning Objective 1

Classify costs by cost objectsClassify costs by cost objects

and cost drivers and describeand cost drivers and describe

the characteristics of activity-the characteristics of activity-

based cost systems andbased cost systems and

standard cost systems.standard cost systems.


Classifying CostsClassifying Costs

The type of decision managementThe type of decision managementmust make determines the typemust make determines the type

of cost information needed.of cost information needed.

The type of decision managementThe type of decision managementmust make determines the typemust make determines the type

of cost information needed.of cost information needed.


Cost ObjectsCost Objects

ActivityActivityProductProductServiceService

ActivityActivityProductProductServiceService

ProjectProjectGeographic regionGeographic region

DepartmentDepartment

ProjectProjectGeographic regionGeographic region

DepartmentDepartment

Cost objects are those entitiesCost objects are those entitiesfor which management desiresfor which management desiresa separate cost measurement.a separate cost measurement.

Cost objects are those entitiesCost objects are those entitiesfor which management desiresfor which management desiresa separate cost measurement.a separate cost measurement.


Cost ObjectsCost Objects

Direct costsDirect costsDirect costsDirect costs

Indirect costsIndirect costs(common costs)(common costs)

Indirect costsIndirect costs(common costs)(common costs)


Activity-Based CostingActivity-Based Costing(ABC) Systems(ABC) Systems

uses that activity as the basisuses that activity as the basisfor common cost allocation.for common cost allocation.

uses that activity as the basisuses that activity as the basisfor common cost allocation.for common cost allocation.

A cost driver is the activity thatA cost driver is the activity thatcauses the expense to occur.causes the expense to occur.

A cost driver is the activity thatA cost driver is the activity thatcauses the expense to occur.causes the expense to occur.

It identifies the specific activity thatIt identifies the specific activity thatcauses the cost to occur and...causes the cost to occur and...

It identifies the specific activity thatIt identifies the specific activity thatcauses the cost to occur and...causes the cost to occur and...


Standard Cost SystemsStandard Cost Systems

Standards are used to evaluateStandards are used to evaluateactual performance.actual performance.

Standards are used to evaluateStandards are used to evaluateactual performance.actual performance.

A A standardstandard is a pre-established is a pre-establishedbenchmark for desirable performance.benchmark for desirable performance.

A A standardstandard is a pre-established is a pre-establishedbenchmark for desirable performance.benchmark for desirable performance.



Distinguish between Distinguish between

productproduct

and period costs.and period costs.


Product CostsProduct Costs

Product costs are all costs of acquiringProduct costs are all costs of acquiringor manufacturing to make themor manufacturing to make themavailable for sale to customers.available for sale to customers.

Product costs are all costs of acquiringProduct costs are all costs of acquiringor manufacturing to make themor manufacturing to make themavailable for sale to customers.available for sale to customers.


Product CostsProduct Costs

Manufactured goods:Manufactured goods: MaterialsMaterials LaborLabor Other plant expensesOther plant expenses Transportation costsTransportation costs Make-ready expenseMake-ready expense

Manufactured goods:Manufactured goods: MaterialsMaterials LaborLabor Other plant expensesOther plant expenses Transportation costsTransportation costs Make-ready expenseMake-ready expense

Purchased goods:Purchased goods: Invoice priceInvoice price Transportation costsTransportation costs Make-ready expenseMake-ready expense

Purchased goods:Purchased goods: Invoice priceInvoice price Transportation costsTransportation costs Make-ready expenseMake-ready expense

Balance sheetBalance sheet

Assets:Assets: InventoryInventory

Balance sheetBalance sheet

Assets:Assets: InventoryInventory

WhenWhen

purchasedpurchased

WhenWhenmanufacturedmanufactured

Income statementIncome statement

Cost of goods soldCost of goods sold

Income statementIncome statement

Cost of goods soldCost of goods sold

WhenWhensoldsold


Period CostsPeriod Costs

These are the costs of operating aThese are the costs of operating abusiness that are not product costs.business that are not product costs.

These are the costs of operating aThese are the costs of operating abusiness that are not product costs.business that are not product costs.

Selling costsSelling costsSelling costsSelling costs Administrative costsAdministrative costsAdministrative costsAdministrative costs


Income Statement forIncome Statement forFamily Dollar Stores, Inc.Family Dollar Stores, Inc.

Consolidated Income StatementConsolidated Income StatementFor the Year Ended August 31, 2002For the Year Ended August 31, 2002

(in thousands)(in thousands)

Net salesNet sales $4,162,652$4,162,652Costs and expenses:Costs and expenses:

Cost of salesCost of sales 2,766,733 2,766,733Selling, general, and admin.Selling, general, and admin. 1,054,298 1,054,298

Income before income taxesIncome before income taxes $ 341,621$ 341,621Income taxesIncome taxes 124,692 124,692Net incomeNet income $ 216,929$ 216,929

Net salesNet sales $4,162,652$4,162,652Costs and expenses:Costs and expenses:

Cost of salesCost of sales 2,766,733 2,766,733Selling, general, and admin.Selling, general, and admin. 1,054,298 1,054,298

Income before income taxesIncome before income taxes $ 341,621$ 341,621Income taxesIncome taxes 124,692 124,692Net incomeNet income $ 216,929$ 216,929

ProductProductcostscosts

PeriodPeriodcostscosts



Differentiate between fixed Differentiate between fixed

and variable costs and and variable costs and

classify costs by cost classify costs by cost

behavior.behavior.


Cost BehaviorCost Behavior

Variable costsVariable costs change proportionately change proportionatelywith the volume of sales or production.with the volume of sales or production.

Variable costsVariable costs change proportionately change proportionatelywith the volume of sales or production.with the volume of sales or production.

Mixed costsMixed costs have both a fixed have both a fixedand a variable component.and a variable component.

Mixed costsMixed costs have both a fixed have both a fixedand a variable component.and a variable component.

Fixed costsFixed costs remain the same in remain the same intotal regardless of the volumetotal regardless of the volume

of sales or production.of sales or production.

Fixed costsFixed costs remain the same in remain the same intotal regardless of the volumetotal regardless of the volume

of sales or production.of sales or production.


Graph of Fixed, Variable,Graph of Fixed, Variable,and Mixed Costsand Mixed Costs

00

200200

400400

600600

800800

10001000

12001200

14001400

00 3030 6060 9090

Production LevelProduction Level

$ C

osts

$ C

osts Fixed costsFixed costs

Variable costVariable costMixed costMixed cost



Explain the concept of aExplain the concept of a

relevant range and its relevant range and its

effecteffect

on cost information.on cost information.


Relevant RangeRelevant Range

It is a range of business activityIt is a range of business activityin which cost behavior patternsin which cost behavior patterns

remain unchanged.remain unchanged.

It is a range of business activityIt is a range of business activityin which cost behavior patternsin which cost behavior patterns

remain unchanged.remain unchanged.


Relevant Ranges of Fixed Relevant Ranges of Fixed Costs by Number of ShiftsCosts by Number of Shifts

0

100

200

300

400

500

600

700

Production in Millions of Cases

$ F

ixed

Costs

(th

ou

san

ds)

RelevantRelevantrangerange1 shift1 shift

RelevantRelevantrangerange

2 shifts2 shifts

RelevantRelevantrangerange

3 shifts3 shifts



Analyze cost information toAnalyze cost information to

construct a total cost construct a total cost

formulaformula

for a business activity.for a business activity.


The Total Cost FormulaThe Total Cost Formula

Variable costs = Unit variable cost × VolumeVariable costs = Unit variable cost × VolumeVariable costs = Unit variable cost × VolumeVariable costs = Unit variable cost × Volume

Total cost = Fixed costs + Variable costsTotal cost = Fixed costs + Variable costsTotal cost = Fixed costs + Variable costsTotal cost = Fixed costs + Variable costs



FixedFixedcostscosts

$250,000$250,000$350,000$350,000$450,000$450,000

Unit variableUnit variablecosts per casecosts per case

$12.00$12.00$11.75$11.75$11.40$11.40

NumberNumberof shiftsof shifts

112233



TC = $350,000 + ($11.75 × 6,000,000)TC = $350,000 + ($11.75 × 6,000,000)TC = $350,000 + ($11.75 × 6,000,000)TC = $350,000 + ($11.75 × 6,000,000)

TC = $350,000 + $70,500,000TC = $350,000 + $70,500,000TC = $350,000 + $70,500,000TC = $350,000 + $70,500,000

TC = $70,850,000TC = $70,850,000TC = $70,850,000TC = $70,850,000

What is the cost of producing 6 millionWhat is the cost of producing 6 millioncases employing 2 shifts of workers?cases employing 2 shifts of workers?

What is the cost of producing 6 millionWhat is the cost of producing 6 millioncases employing 2 shifts of workers?cases employing 2 shifts of workers?


Operating IncomeOperating Income

Sales revenuesSales revenues $455,000$455,000Cost of goods soldCost of goods sold 245,000 245,000Gross profitGross profit $210,000$210,000Operating expensesOperating expenses Selling expensesSelling expenses $105,000$105,000 Administrative expensesAdministrative expenses 60,000 60,000 Total operating expensesTotal operating expenses 165,000 165,000Operating incomeOperating income $ 45,000$ 45,000

Sales revenuesSales revenues $455,000$455,000Cost of goods soldCost of goods sold 245,000 245,000Gross profitGross profit $210,000$210,000Operating expensesOperating expenses Selling expensesSelling expenses $105,000$105,000 Administrative expensesAdministrative expenses 60,000 60,000 Total operating expensesTotal operating expenses 165,000 165,000Operating incomeOperating income $ 45,000$ 45,000

Jason’s Furniture Gallery, Inc.Jason’s Furniture Gallery, Inc.Income StatementIncome Statement

For the Year Ended December 31, 2004For the Year Ended December 31, 2004

Product costsProduct costsPeriod costsPeriod costs


Contribution IncomeContribution IncomeStatementStatement

Sales revenuesSales revenues $455,000$455,000Variable expensesVariable expenses Cost of goods soldCost of goods sold $245,000$245,000 Selling expensesSelling expenses 55,000 55,000 Administrative expensesAdministrative expenses 9,400 9,400 309,400 309,400Contribution marginContribution margin $145,600$145,600Fixed expensesFixed expenses Selling expensesSelling expenses $ 50,000$ 50,000 Administrative expensesAdministrative expenses 50,600 50,600 100,600 100,600Operating incomeOperating income $ 45,000$ 45,000

Sales revenuesSales revenues $455,000$455,000Variable expensesVariable expenses Cost of goods soldCost of goods sold $245,000$245,000 Selling expensesSelling expenses 55,000 55,000 Administrative expensesAdministrative expenses 9,400 9,400 309,400 309,400Contribution marginContribution margin $145,600$145,600Fixed expensesFixed expenses Selling expensesSelling expenses $ 50,000$ 50,000 Administrative expensesAdministrative expenses 50,600 50,600 100,600 100,600Operating incomeOperating income $ 45,000$ 45,000

Jason’s Furniture Gallery, Inc.Jason’s Furniture Gallery, Inc.Contribution Income StatementContribution Income Statement

For the Year Ended December 31, 2004For the Year Ended December 31, 2004


Contribution IncomeContribution IncomeStatement ExampleStatement Example

What is the unit selling price?What is the unit selling price?What is the unit selling price?What is the unit selling price?

What is the unit variable cost?What is the unit variable cost?What is the unit variable cost?What is the unit variable cost?

What is the unit contribution margin?What is the unit contribution margin?What is the unit contribution margin?What is the unit contribution margin?

Assume that Jason’s sole product is one styleAssume that Jason’s sole product is one styleof sofa and that in 2004 he sold 910 sofas.of sofa and that in 2004 he sold 910 sofas.

Assume that Jason’s sole product is one styleAssume that Jason’s sole product is one styleof sofa and that in 2004 he sold 910 sofas.of sofa and that in 2004 he sold 910 sofas.


Contribution IncomeContribution IncomeStatement ExampleStatement Example

SalesSales SS $455,000$455,000 USPUSP $500$500Variable costsVariable costs VCVC 309,400 309,400 UVCUVC 340 340Contribution marginContribution margin CMCM $145,600$145,600 UCMUCM $160$160Fixed costsFixed costs FCFC 100,600 100,600Operating incomeOperating income OIOI $ 45,000$ 45,000

SalesSales SS $455,000$455,000 USPUSP $500$500Variable costsVariable costs VCVC 309,400 309,400 UVCUVC 340 340Contribution marginContribution margin CMCM $145,600$145,600 UCMUCM $160$160Fixed costsFixed costs FCFC 100,600 100,600Operating incomeOperating income OIOI $ 45,000$ 45,000

Per unitPer unitTotalTotal



Conduct cost-volume-profitConduct cost-volume-profit

analysis to determineanalysis to determine

breakeven points.breakeven points.


Cost-Volume-Profit AnalysisCost-Volume-Profit Analysis

BreakevenBreakeven occurs when a company’s occurs when a company’soperating income is zero.operating income is zero.

BreakevenBreakeven occurs when a company’s occurs when a company’soperating income is zero.operating income is zero.

CVP analysis is the analysis of theCVP analysis is the analysis of therelationships between cost andrelationships between cost and

volume, and the effect ofvolume, and the effect of those relationships on profit.those relationships on profit.

CVP analysis is the analysis of theCVP analysis is the analysis of therelationships between cost andrelationships between cost and

volume, and the effect ofvolume, and the effect of those relationships on profit.those relationships on profit.


Breakeven AnalysisBreakeven Analysis

(1) $455,000 – $309,400 – $100,600 = $45,000(1) $455,000 – $309,400 – $100,600 = $45,000(1) $455,000 – $309,400 – $100,600 = $45,000(1) $455,000 – $309,400 – $100,600 = $45,000

(2) Sales – Variable costs = Contribution margin(2) Sales – Variable costs = Contribution margin(2) Sales – Variable costs = Contribution margin(2) Sales – Variable costs = Contribution margin

(2) $455,000 – $309,400 = $145,600(2) $455,000 – $309,400 = $145,600(2) $455,000 – $309,400 = $145,600(2) $455,000 – $309,400 = $145,600

(1) Sales – Variable costs – Fixed costs(1) Sales – Variable costs – Fixed costs= Operating income= Operating income

(1) Sales – Variable costs – Fixed costs(1) Sales – Variable costs – Fixed costs= Operating income= Operating income



(3) $145,600 – $100,600 = $45,000(3) $145,600 – $100,600 = $45,000(3) $145,600 – $100,600 = $45,000(3) $145,600 – $100,600 = $45,000

(4) USP – UVC = UCM(4) USP – UVC = UCM$500 – $340 = $160$500 – $340 = $160

(4) USP – UVC = UCM(4) USP – UVC = UCM$500 – $340 = $160$500 – $340 = $160

(5) (USP × V) – (UVC × V) = (UCM × V)(5) (USP × V) – (UVC × V) = (UCM × V)(5) (USP × V) – (UVC × V) = (UCM × V)(5) (USP × V) – (UVC × V) = (UCM × V)

(3) Contribution margin – Fixed costs(3) Contribution margin – Fixed costs= Operating income= Operating income

(3) Contribution margin – Fixed costs(3) Contribution margin – Fixed costs= Operating income= Operating income


Determining Breakeven Determining Breakeven UnitsUnits

(b) Contribution margin – Fixed costs = 0(b) Contribution margin – Fixed costs = 0(b) Contribution margin – Fixed costs = 0(b) Contribution margin – Fixed costs = 0

(c) Contribution margin = Fixed costs(c) Contribution margin = Fixed costs(c) Contribution margin = Fixed costs(c) Contribution margin = Fixed costs

VVBEBE = FC ÷ UCM = FC ÷ UCM$100,600 ÷ $160 = 628.75 $100,600 ÷ $160 = 628.75 629 sofas 629 sofas

VVBEBE = FC ÷ UCM = FC ÷ UCM$100,600 ÷ $160 = 628.75 $100,600 ÷ $160 = 628.75 629 sofas 629 sofas

(a) Sales – Variable costs – Fixed costs = 0(a) Sales – Variable costs – Fixed costs = 0(a) Sales – Variable costs – Fixed costs = 0(a) Sales – Variable costs – Fixed costs = 0


Determining Breakeven Determining Breakeven UnitsUnits

VVDPDP = (FC + DP) ÷ UCM = (FC + DP) ÷ UCMVVDPDP = (FC + DP) ÷ UCM = (FC + DP) ÷ UCM

($100,600 + $75,000) ÷ $160 = 1,097.5 ($100,600 + $75,000) ÷ $160 = 1,097.5 1,098 1,098($100,600 + $75,000) ÷ $160 = 1,097.5 ($100,600 + $75,000) ÷ $160 = 1,097.5 1,098 1,098

How many units must Jason sellHow many units must Jason sellto make a profit of $75,000?to make a profit of $75,000?



Determining BreakevenDetermining BreakevenSales DollarsSales Dollars

SalesSales SS $455,000$455,000 100.0%100.0%Variable costsVariable costs VCVC 309,400 309,400 68.0% 68.0%Contribution marginContribution margin CMCM $145,600$145,600 32.0% 32.0%

SalesSales SS $455,000$455,000 100.0%100.0%Variable costsVariable costs VCVC 309,400 309,400 68.0% 68.0%Contribution marginContribution margin CMCM $145,600$145,600 32.0% 32.0%

PercentPercentof salesof salesTotalTotal

Contribution margin ratio =Contribution margin ratio =Contribution margin ÷ SalesContribution margin ÷ Sales

Contribution margin ratio =Contribution margin ratio =Contribution margin ÷ SalesContribution margin ÷ Sales


Determining BreakevenDetermining BreakevenSales DollarsSales Dollars

SSBEBE = FC ÷ CMR = FC ÷ CMRSSBEBE = FC ÷ CMR = FC ÷ CMR

$100,600 ÷ 0.32 = $314,375 $100,600 ÷ 0.32 = $314,375 $100,600 ÷ 0.32 = $314,375 $100,600 ÷ 0.32 = $314,375

What is the breakeven point in sales dollars?What is the breakeven point in sales dollars?What is the breakeven point in sales dollars?What is the breakeven point in sales dollars?



Perform sensitivity Perform sensitivity

analysis.analysis.


Sensitivity AnalysisSensitivity Analysis

Sensitivity helps us to solve “what if” questions.Sensitivity helps us to solve “what if” questions.Sensitivity helps us to solve “what if” questions.Sensitivity helps us to solve “what if” questions.

If Jason raises the selling price of the sofasIf Jason raises the selling price of the sofasto $525 and kept the same volume of 910to $525 and kept the same volume of 910

per year, how much would his profit change?per year, how much would his profit change?

If Jason raises the selling price of the sofasIf Jason raises the selling price of the sofasto $525 and kept the same volume of 910to $525 and kept the same volume of 910

per year, how much would his profit change?per year, how much would his profit change?

Contribution margin increases by $25 to $185.Contribution margin increases by $25 to $185.Contribution margin increases by $25 to $185.Contribution margin increases by $25 to $185.

This is a technique to determine theThis is a technique to determine theeffect of changes on the CVP relationships.effect of changes on the CVP relationships.

This is a technique to determine theThis is a technique to determine theeffect of changes on the CVP relationships.effect of changes on the CVP relationships.



($100,600 + $75,000) ÷ $185 = 949.2 ($100,600 + $75,000) ÷ $185 = 949.2 950 950($100,600 + $75,000) ÷ $185 = 949.2 ($100,600 + $75,000) ÷ $185 = 949.2 950 950

If Jason decreases the selling price by 10%,If Jason decreases the selling price by 10%,what is his new contribution margin?what is his new contribution margin?

If Jason decreases the selling price by 10%,If Jason decreases the selling price by 10%,what is his new contribution margin?what is his new contribution margin?

$160 – $50 = $110$160 – $50 = $110$160 – $50 = $110$160 – $50 = $110

How many units must he sellHow many units must he sellto make a profit of $75,000?to make a profit of $75,000?

How many units must he sellHow many units must he sellto make a profit of $75,000?to make a profit of $75,000?



1.20 × 910 = 1,0921.20 × 910 = 1,0921.20 × 910 = 1,0921.20 × 910 = 1,092



($100,600 + $75,000) ÷ $110 = 1,596.4 ($100,600 + $75,000) ÷ $110 = 1,596.4 1,597 1,597($100,600 + $75,000) ÷ $110 = 1,596.4 ($100,600 + $75,000) ÷ $110 = 1,596.4 1,597 1,597

What would sales be with aWhat would sales be with a20% increase in volume?20% increase in volume?

What would sales be with aWhat would sales be with a20% increase in volume?20% increase in volume?



Build initial operatingBuild initial operating

and capital budgets.and capital budgets.


Building an Initial BudgetBuilding an Initial Budget

To launch Elevation Sports, Inc.,To launch Elevation Sports, Inc.,in a fiscally responsible manner,in a fiscally responsible manner,management needs to spendmanagement needs to spend

time and energy preparingtime and energy preparingbudgets to analyze costs, revenues,budgets to analyze costs, revenues,

equipment needs, and financing.equipment needs, and financing.

To launch Elevation Sports, Inc.,To launch Elevation Sports, Inc.,in a fiscally responsible manner,in a fiscally responsible manner,management needs to spendmanagement needs to spend

time and energy preparingtime and energy preparingbudgets to analyze costs, revenues,budgets to analyze costs, revenues,

equipment needs, and financing.equipment needs, and financing.


Building an Initial BudgetBuilding an Initial Budget

Initial budgets focus heavily on costInitial budgets focus heavily on costestimation whereas ongoing budgetsestimation whereas ongoing budgets

begin with revenue estimation.begin with revenue estimation.

Initial budgets focus heavily on costInitial budgets focus heavily on costestimation whereas ongoing budgetsestimation whereas ongoing budgets

begin with revenue estimation.begin with revenue estimation.


Operating CostsOperating Costs

SellingSellingSellingSelling

AdministrativeAdministrativeAdministrativeAdministrative

ManufacturingManufacturingManufacturingManufacturing


Operating Costs ExampleOperating Costs Example

Insurance costs will be $5,000 per yearInsurance costs will be $5,000 per yearplus $1.00 per snowboard manufactured.plus $1.00 per snowboard manufactured.

Insurance costs will be $5,000 per yearInsurance costs will be $5,000 per yearplus $1.00 per snowboard manufactured.plus $1.00 per snowboard manufactured.

Interest expense will be 10%Interest expense will be 10%of the long-term debt of theof the long-term debt of the

equipment loan, or $6,000 per year.equipment loan, or $6,000 per year.

Interest expense will be 10%Interest expense will be 10%of the long-term debt of theof the long-term debt of the

equipment loan, or $6,000 per year.equipment loan, or $6,000 per year.

Rent will be $1,500 per month.Rent will be $1,500 per month.Rent will be $1,500 per month.Rent will be $1,500 per month.



Utilities:Utilities:Ski shop: $250 per monthSki shop: $250 per month

Plant: $500 per monthPlant: $500 per monthAdministrative space: $75 per monthAdministrative space: $75 per month

Utilities:Utilities:Ski shop: $250 per monthSki shop: $250 per month

Plant: $500 per monthPlant: $500 per monthAdministrative space: $75 per monthAdministrative space: $75 per month

Legal fees:Legal fees:One-time expense: $2,000One-time expense: $2,000

Per month: $300Per month: $300Secure patents, etc.: $12,000Secure patents, etc.: $12,000

Legal fees:Legal fees:One-time expense: $2,000One-time expense: $2,000

Per month: $300Per month: $300Secure patents, etc.: $12,000Secure patents, etc.: $12,000



USSA membership: $600 per yearUSSA membership: $600 per yearBooth space and travel expenses:Booth space and travel expenses:

$9,000 per year$9,000 per year

USSA membership: $600 per yearUSSA membership: $600 per yearBooth space and travel expenses:Booth space and travel expenses:

$9,000 per year$9,000 per year

Advertising costs:Advertising costs:One-time expense: $3,000One-time expense: $3,000

Per month: $1,000Per month: $1,000

Advertising costs:Advertising costs:One-time expense: $3,000One-time expense: $3,000

Per month: $1,000Per month: $1,000



Variable cost per unit: $46.90Variable cost per unit: $46.90Variable cost per unit: $46.90Variable cost per unit: $46.90

Monthly fixed costs: $14,329Monthly fixed costs: $14,329Monthly fixed costs: $14,329Monthly fixed costs: $14,329

Internet Web site:Internet Web site:Initial cost: $500Initial cost: $500

Monthly cost: $300Monthly cost: $300

Internet Web site:Internet Web site:Initial cost: $500Initial cost: $500

Monthly cost: $300Monthly cost: $300


Summary of Capital CostsSummary of Capital Costsand One-Time Expensesand One-Time Expenses

Capital items:Capital items:Factory equipmentFactory equipment $75,000$75,000ComputersComputers 4,500 4,500Furniture and fixtures down paymentFurniture and fixtures down payment 2,000 2,000Patents, trademarks, and copyrightsPatents, trademarks, and copyrights 12,000 12,000Total capital itemsTotal capital items $93,500$93,500

One-time costs:One-time costs:Web site costsWeb site costs $ 500$ 500Legal costs for incorporationLegal costs for incorporation 2,000 2,000Initial advertisingInitial advertising 3,000 3,000

Total one-time costsTotal one-time costs $ 5,500$ 5,500

Capital items:Capital items:Factory equipmentFactory equipment $75,000$75,000ComputersComputers 4,500 4,500Furniture and fixtures down paymentFurniture and fixtures down payment 2,000 2,000Patents, trademarks, and copyrightsPatents, trademarks, and copyrights 12,000 12,000Total capital itemsTotal capital items $93,500$93,500

One-time costs:One-time costs:Web site costsWeb site costs $ 500$ 500Legal costs for incorporationLegal costs for incorporation 2,000 2,000Initial advertisingInitial advertising 3,000 3,000

Total one-time costsTotal one-time costs $ 5,500$ 5,500



$135.00 – $46.90 = $88.10$135.00 – $46.90 = $88.10$135.00 – $46.90 = $88.10$135.00 – $46.90 = $88.10

$14,329 ÷ $88.10 = 162.64 $14,329 ÷ $88.10 = 162.64 163 163$14,329 ÷ $88.10 = 162.64 $14,329 ÷ $88.10 = 162.64 163 163

Assume that the selling price is $135 perAssume that the selling price is $135 persnowboard, what is the breakeven point?snowboard, what is the breakeven point?

Assume that the selling price is $135 perAssume that the selling price is $135 persnowboard, what is the breakeven point?snowboard, what is the breakeven point?


Initial Monthly Operating Initial Monthly Operating Budget for Elevation Sports, Budget for Elevation Sports,

Inc.Inc.

Budgeted sales ($135.00 × 6 × 30)Budgeted sales ($135.00 × 6 × 30) $24,300$24,300Budgeted variable expenses ($46.90 × 6 × 30)Budgeted variable expenses ($46.90 × 6 × 30) 8,442 8,442

Budgeted contribution margin (88.10 × 6 × 30)Budgeted contribution margin (88.10 × 6 × 30) $15,858$15,858Budgeted fixed expensesBudgeted fixed expenses 14,329 14,329

Budgeted operating incomeBudgeted operating income $ 1,529$ 1,529Estimated income taxes (30%)Estimated income taxes (30%) 459 459

Budgeted net incomeBudgeted net income $ 1,070$ 1,070

Budgeted sales ($135.00 × 6 × 30)Budgeted sales ($135.00 × 6 × 30) $24,300$24,300Budgeted variable expenses ($46.90 × 6 × 30)Budgeted variable expenses ($46.90 × 6 × 30) 8,442 8,442

Budgeted contribution margin (88.10 × 6 × 30)Budgeted contribution margin (88.10 × 6 × 30) $15,858$15,858Budgeted fixed expensesBudgeted fixed expenses 14,329 14,329

Budgeted operating incomeBudgeted operating income $ 1,529$ 1,529Estimated income taxes (30%)Estimated income taxes (30%) 459 459

Budgeted net incomeBudgeted net income $ 1,070$ 1,070

Elevation Sports, Inc.Elevation Sports, Inc.Initial Monthly Operating BudgetInitial Monthly Operating Budget


End of Chapter 4End of Chapter 4

4 - 1 © 2005 accounting 1/e, terrell/terrell planning for and predicting performance chapter 4

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