Microsoft Office Tutorials and References
In Depth Information
Sales Revenue — Sales Volume * Average Selling Price
Sales Volume— (low- 2,000,000 / high- 5,000,000 / most likely- 3,500,000)
Probability of Sales Volume— (low- 17.5% / high- 17.5% / most likely- 65%)
Average Selling Price— (4, 5, or 6 with equal probability)
Cost of Goods Sold Expense — assumed to be a percent of the Sales Revenue- either 40% or 80% with
equal probability
Gross Margin
Sales Revenue- Cost of Goods Sold Expense
Variable Operating Expenses
Sales Volume Driven (VOESVD)
Sales Revenue * VOESVD%
VOESVD% is 10% if sales volume is low or most likely; 20% otherwise
Sales Revenue Driven (VOESRD) — Sales Revenue * VOESRD%
If Sales Volume is =2,000,000 VOESRD% is 15%
If Sales Volume is =3,500,000 VOESRD% is 10%
If Sales Volume is =5,000,000 VOESRD% is 7.5%
Contribution Margin
Gross Margin - Variable Operating Expenses
Fixed Expenses
Operating Expenses
Depreciation Expense
Operating Earnings (EBIT)
Contribution Margin - Fixed Expenses
(Earnings before interest and taxes)
Interest Expense
Earnings before income tax (EBT)
Operating Earnings - Interest Expense
Income Tax expense
23% Marginal tax rate for 1-5,000,000 EDT
34% Marginal tax rate >5,000,000 EBT
Net Income
Earnings before income tax - Income Tax
(Bottom-line Profit )
Exhibit 1.1 A very uncertain outcome
sales and a selling unit price of $5, or total price of $16.5 million. Another source of
uncertainty is the percentage of the Sales Revenue used to calculate Costs of Goods
Sold Expense , either 40 or 80% with equal probability of occurrence. Uncertainty
in sales volume and sales price also affects the variable expenses. Volume driven
and revenue driven variable expenses are dependent on the uncertain outcomes of
Sales Revenue and Sales Volume .
Julia’s workbook appears in Exhibits 1.2 and 1.3. These exhibits provide details
on the cell formulas used in the calculations. Note that Exhibit 1.2 consists of a
single worksheet comprised of a single forecasted Profit or Loss scenario; that is,
she has selected a single value for the uncertain variables (the most likely) for her
calculations. The Sales Revenue in Exhibit 1.3 is based on sales of 3.5 million units,
the most likely value for volume, and a unit price of $5, the mid-point of equally
possible unit sales prices.
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