Exercises and Problems 1,2, 3,6,7. 5 chapter Exercises & Problems8, 9,10. 7 chapter Chapter 7...

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Exercises and Problems 1,2, 3,6,7. 5 chapter Exercises & Problems8, 9,10. 7 chapter Chapter 7 Exercises &Problems 1,2,3, Chapter 8 Exercises & Problems 9,13,16,17

No Slide Title Chapter 5 Profit, Profitability, and Break-Even Analysis $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Learning Objectives Understand the difference between efficiency and effectiveness. Distinguish between profit and profitability. Compare accounting and entrepreneurial profit. Understand the relationship of profit margin and asset turnover with the earning power of a company. Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Learning Objectives (Continued) Given the variable costs, revenue, and fixed costs of a business, determine the break-even point and contribution margin. Construct and analyze a break-even chart when given variable costs, revenue, and fixed costs of a business. Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Learning Objectives (Continued) Understand the use of leverage and its relationship to profitability and loss. Compare and contrast the degree of operating, financial and combined leverage, and their effect on the profitability of a corporation. Distinguish between Chapter 11, Chapter 13, and Chapter 7 bankruptcy. Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Efficiency and Effectiveness Efficiency is obtaining the highest possible return with the minimum use of resources. Effectiveness, on the other hand, is accomplishing a specific task or reaching a goal. Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Profit Versus Profitability Profit is an absolute number that is earned on an investment. Accounting profit, for a business, is typically shown at the bottom of an income statement as net income. Entrepreneurial profit is the amount that is earned above and beyond what the entrepreneur would have earned if he or she had chosen to invest time and money in some other enterprise. Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Profit Versus Profitability (continued) Profitability can be measured in a business by using a ratio that is obtained by dividing net profit by total assets. Profitability, therefore, is our Return on Investment (assets). Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Earning Power The earning power of a company can be defined as the product of two factors: the company’s ability to generate income on the amount of revenue it receives, which is also known as net profit margin; and its ability to maximize sales revenue from proper asset employment, also known as total asset turnover. Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Earning Power Formulas Earning power is equal to net profit margin multiplied by total asset turnover, which is equal to return on investment (total assets). Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Break-Even Analysis Break-even analysis is a process of determining how many units of production must be sold, or how much revenue must be obtained, before we begin to earn a profit. For break-even Quantity: where Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Break-Even Analysis (Continued) Break-even dollars: For a retail firm: For a Manufacturing firm: Where VC is variable cost expressed as a percentage of sales (revenue). For retail firm: VC percentage =(Cost of Goods Sold)/(Net Sales) For manufacturing firm: VC percentage = (Variable cost of a unit)/(Unit selling price) Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Break-Even Analysis (Continued) Contribution margin is the amount of profit that will be made by a company on each unit that is sold above and beyond the break-even quantity. Contribution margin is also the amount the company will lose for each unit of production by which it falls short of the break-even point. Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Profit and Break-Even Desired profit with break-even analysis in quantity to produce. VC is variable cost per unit Desired profit with break-even analysis in dollars. VC is a percentage of sales dollar (e.g., cost of goods sold as a percent). Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Break-Even Charts Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Leverage Leverage uses those items that have a fixed cost to magnify the return to a company. Fixed costs can be related to company operations or related to the cost of financing. Interest expenses paid on the amount of debt incurred is the fixed cost of financing. A firm is heavily financially leveraged if the fixed costs of financing are high. Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Leverage (continued) Degree of operating leverage (DOL) is the percentage change in operating income divided by the percentage change in sales. Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Leverage (Continued) Degree of financial leverage (DFL) is the percentage change in earnings per share divided by the percentage change in operating income. Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Leverage (Continued) Degree of combined leverage (DCL) is the percentage change in earnings per share divided by the percentage change in sales. Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Bankruptcy Bankruptcy for a business occurs when the liabilities of the firm exceed the assets and the business does not have sufficient cash flow to make payments to creditors. There are essentially three types of bankruptcy: Chapter 11, Chapter 13, and Chapter 7. Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Bankruptcy (Continued) Chapter 11 bankruptcy occurs when a business seeks court protection while it develops a reorganization plan. Chapter 13 bankruptcy is reserved for individuals and sole proprietorships and is similar to, but much simpler than, Chapter 11. Chapter 7 bankruptcy requires liquidation of all assets of the business, and payment to the creditors. Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Bankruptcy (Continued) Bankruptcy Abuse, Prevention, and Consumer Protection Act. Signed into law by President Bush April 20, 2005. Took effect October 17, 2005. Makes it much more difficult for individuals and business to declare Chapter 7 bankruptcy. Establishes a means test to determine if an individual filing Chapter 7 is abusing the system. Imposes Federal guidelines for using the homestead exemption. Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Copyright © 2014 Pearson Education, Inc. $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ FC = Fixed costs P = Price charged per unit VC = Variable cost per unit Contribution margin = P - VC FC = Fixed costs P = Price charged per unit VC = Variable cost per unit Contribution margin = P - VC T5-1 Table 5-1 Balance Sheet, The Tom Jones Company The Tom Jones Company Balance Sheet As of December 31, 2000 Assets Current assets Checking account$ 2,000 Accounts receivable10,000 Inventory35,000 Total current assets$ 47,000 Fixed assets Land$ 50,000 Buildings$ 250,000 Less: Accumulated depreciation100,000$ 150,000 Equipment50,000 Less: Accumulated depreciation30,000$ 20,000 Total fixed assets$ 220,000 Total assets$ 267,000 Liabilities and owner’s equity Current liabilities Accounts payable trade$ 20,000 Notes payable bank20,000 Taxes payable3,000 Total current liabilities$ 43,000 Long-term liabilities Building mortgage$ 200,000 Equipment loan30,000 Total long-term debt$ 230,000 Total liabilities$ 273,000 Owner’s equity(6,000) Total liabilities and owner’s equity$ 267,000 T5-2 Table 5-2 Cost Data for Carl’s Toy Trucks Cost CategoryPayment BasisCost ($) RentMonthly2,000.00 SalariesMonthly5,000.00 Employee benefitsAnnually7,000.00 InsuranceQuarterly1,500.00 Property taxesAnnually3,000.00 WoodPer truck1.25 Paint and finishingPer truck0.25 LaborPer truck2.5 Packing and shippingPer truck2 Break-Even Chart Carl's Figure 5-1 Break-Even Chart for Carl's Toy Trucks Revenue605550454035302520151050600550500450400350300250200150100500TC605550454035302520151050460430400370340310280250220190160130100Units Sold in Thousand (000) Dollars in Thousands (000) Total Revenue Total Cost = FC + VC Break-Even Point Fixed Costs (FC) Loss Area Profit Area Break Even Data Price10 Variable Cost6 Fixed Costs100 UNITSRevenueTCVC 60600460360 55550430330 50500400300 45450370270 40400340240 35350310210 30300280180 25250250150 20200220120 1515019090 1010016060 55013030 001000 Cost CategoryPayment BasisCost ($) RentMonthly2000.00 SalariesMonthly5000.00 Employee benefitsAnnually7000.00 InsuranceQuarterly1500.00 Property taxesAnnually3000.00 WoodPer truck1.25 Paint and finishingPer truck0.25 LaborPer truck2.50 Packing and shippingPer truck2.00 Table 5-1 Cost Data for

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Himanshu · Accepted Answer

Chapter 5
1. John and Marry work for a direct marketing firm.
	 (in one Hour)
	Total completed calls
	Sales
	John
	50
	2
	Mary
	50
	1
We may clearly infer that John has achieved more efficient work than Mary because both have completed 50 calls, but John has two sales while Mary has only one, implying that John has obtained the best possible result with the least amount of money. Mary, on the other hand, is more effective at completing the particular mission.
2. Joan purchased a 30 – year federal government bond for $10,000, rate 4% annual interest.  
Jim Purchased a 30 – year corporate rate bonds for $20,000 that pays 7% annual interest. 
	(Owner)
	Time
	Amount
	Rate
	Goal
	Joan
	30
	$10,000
	4%
	$400
	Jim
	30
	$20,000
	7%
	$1,400
a. In comparison to Joan, Jim is more efficient because he wants high returns in the same amount of time. He will achieve high returns after one year that conclude the efficiency of the Jim. Utilizing the amount smartly.
b. Joan is more effective because he only seeks returns. It could be high or low. He will get the returns on time that shows the effectiveness.
3. a.) Accounting Profit of Sam will be $20,000 and Entrepreneurial profit is $10,000.
b.) Accounting benefit is the amount of money a company has left over after deducting all costs from its earnings. The economic principle of opportunity cost underpins entrepreneurial profit. This is capital gained in excess of what would have been gained had any investment or venture been undertaken.
6. Owner’s option to not invest to avoid losses.
7. cost per cabinet = $80 
45 minutes for one cabinet, each cabinet maker works 8 hours a day $18 per hour 
Raw material = $25 
20 day a month
2 cabinet makers
Fixed cost = $5000
a. contribution margin = Price charged per unit – Variable cost
d.) 
Excel Spread sheet
Chapter 7
1.
Cash = $3,500
Account Payable = $10,200
Account Receivable = $15,000
Sales Taxes = $750
Sale taxes due at horizon department = $3,450
Inventory = $17,500
Wages payable = $5,350
Taxes payable = $2,570
Money market fund = $12,300
Computer = $3,400
a. Current asset, 
Cash = $3,500
       Account Receivable = $15,000
       Inventory = $17,500
       Money market fund = $12,300
Current Liability,
Account Payable = $10,200
Wages payable = $5,350
Taxes payable = $2,570
Sales Taxes = $750
Sale taxes due at horizon department = $3,450
Total current assets = $48,

No Slide Title Chapter 5 Profit, Profitability, and Break-Even Analysis $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ $$ 5- Learning Objectives Understand the difference between efficiency and...

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