MANAGERIAL ACCOUNTING

COST  BEHAVIORS,  SYSTEMS,  AND  ANALYSIS

with  Gary  Hecht

Cost-­Volume-­Profit  Analysis
Foundations  and  Basic  Analyses
LESSON 4-­1 OBJECTIVES

You  should  understand:

The  fundamental  concepts  of  CVP  analysis

How  to  apply  CVP  analysis,  recognizing  

the  influence  of  setting  characteristics  on  
method  and  conclusions
COST-­VOLUME-­PROFIT
ANALYSIS

Analytic  tool  useful  for:

“What-­if” analysis

Uses  relationships  among  

fundamental  components  of  
basic  “accounting” equation  
representing  income
TWO APPROACHES TO PROFIT

Financial Managerial
Revenue Revenue
-­ Direct  materials   - Direct materials (V)
-­ Direct  labor   - Direct labor (V)
-­ Overhead   - Overhead (V)
- Other expenses (V)
= Gross  margin
= Contribution margin
-­ Other  expenses
- All fixed expenses (F)
= Profit = Profit
FUNDAMENTAL EQUATION

Operating  Profit  = Revenues  – Total  VC – Total  FC

We  can  use  this  equation  to  ask  a  very  basic  question:

How  many  units  do  we  have  to  sell  to  break  even?
FUNDAMENTAL EQUATION

Operating  Profit  = Revenues  – Total  VC  – Total  FC

Step  1:    Set  operating  profit  to  $0

0  = Revenues  – Total  VC – Total  FC

FUNDAMENTAL EQUATION

0  = Revenues  – Total  VC  – Total  FC

Step  2:  Simplify  terms  into  components  (where  applicable)

0  = (Selling  price  x  Q)  – (VC  per  unit  x  Q)  – Total  FC

FUNDAMENTAL EQUATION

0  = (SP  x  Q)  – (VC  x  Q)  – Total  FC

Step  3:  Isolate  Total  FC  and  factor  out  Q    

Total  FC  = Q  x  (SP  – VC)

FUNDAMENTAL EQUATION

Total  FC  = Q  x  (SP  – VC)

Step  4:  Isolate  Q

Q  = Total  FC  = Total  FC

(SP – VC) CM
EXAMPLE 1

The  following  information  relates  to  a  microchip  manufactured  by  

Kane  Corporation:
Current  selling  price,  per  unit:  $7.55
Direct  labor,  per  unit:   $1.00
Direct  materials,  per  unit:   $2.00
Variable  manufacturing  overhead,  per  unit:   $1.35
Other  variable  costs  (mostly  selling),  per  unit:   $1.20
Fixed  manufacturing  overhead  for  microchip:   $2.5  M/year
Other  fixed  costs  for  microchip:   $1.5  M/year
EXAMPLE 1

Calculate  the  break-­even  

point  for  Kane  Company.
ASSUMPTIONS UNDERLYING CVP ANALYSIS

Costs  can  be  categorized  as  fixed  or  variable  –

or  broken  down  appropriately
Everything  is  linear:
Revenue
Variable  costs
Fixed  costs

In  manufacturing  firms,  the  inventory  levels  at  the  beginning  and  

end  of  the  period  are  the  same.  This  implies  that  the  number  of  
units  produced  during  the  period  equals  the  number  of  units  sold.
ASSUMPTIONS UNDERLYING CVP ANALYSIS

Efficiency  and  productivity  of  

production  processes  remain  
constant
Sales  mix  remains  constant  over  
the  relevant  range
Product  mix  does  not  change
in  response  to  changes  in  
production/sales  volume
EXAMPLE 2 -­ TAXES

Taves Donuts  sells  donuts,  coffee,  and  other  related  food  items.  
The  following  information  is  available:    
Service  varies  from  a  single  coffee  to  multiple  dozen  donuts.  The  average  
revenue  earned  for  each  customer  is  $8.00.    
The  average  cost  of  food  and  other  variable  costs  for  each  customer  is  $3.00.    
Total  fixed  costs  for  the  year  is  $450,000.
The  income  tax  rate  is  30%.    
Target  (i.e.,  desired)  net  income  is  $105,000.
EXAMPLE 2

Data: SP = $8.00; VC = $3.00; FC = $450,000;

Target income = $105,000; Tax Rate = .30

How many customers are needed to break even?

EXAMPLE 2

Data: SP = $8.00; VC = $3.00; FC = $450,000;

Target income = $105,000; Tax Rate = .30

How many customers are needed to reach the desired profit?

EXAMPLE 2
EXAMPLE 2
EXAMPLE 2
WHAT WE’VE LEARNED
IN LESSON 4-­1

How  to  use  the  contribution  margin  

approach  to  facilitate
“what-­if” decisions

CVP  analysis  simply  fixes  four  of  the  

five  variables  in  the  profit  equation  
and  solves  for  the  fifth
Most  commonly,  we  fix  target  profit,  
selling  price,  variable  unit  costs,
and  fixed  costs,  and  solve  for  quantity
Multi-­Product  Scenarios
and  Related  Concepts
LESSON 4-­2 OBJECTIVES

You  will  understand  how  to:

Apply  CVP  analysis  in  more  complex

(i.e.,  multi-­product)  scenarios

Customize  analysis  to  correspond  with  

assumptions,  uncertainty,  and  managers’  
needs
EXAMPLE 3 – MULTIPLE PRODUCTS

HOSA  Company  manufactures  two  products  – Product  

X  and  Product  Y.  

Product X Product Y
Selling price $10 $15
Variable costs $6 $12
Fixed costs $10,000 $12,000

Compute  HOSA’s  break-­even  point.    

EXAMPLE 3 –
MULTIPLE PRODUCTS
EXAMPLE 3 – MULTIPLE PRODUCTS

HOSA  Company  manufactures  two  products  – Product  

X  and  Product  Y.  

Product X Product Y
Selling price $10 $15
Variable costs $6 $12
Fixed costs $10,000 $12,000

Let’s  also  assume  that  normally,  HOSA’s  sales  are  60%  

Product  X  and  40%  Product  Y.    
EXAMPLE 3 –
MULTIPLE PRODUCTS
WHAT WE’VE LEARNED
IN LESSON 4-­2

Multi-­product  scenarios
Assumptions  determine  method  and  
conclusions
WHAT WE’VE LEARNED
IN MODULE 4

Fundamentals  of  CVP  analysis

Assumptions
Setting-­specific