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Fundamentals of Cost Accounting 3/e by Lanen

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You are on page 1of 17

Fundamentals of

Cost-Volume-Profit Analysis

McGraw-Hill/Irwin

Cost-Volume-Profit Analysis

L.O. 1 Use cost-volume-profit (CVP) analysis

to analyze decisions.

revenue, cost, and volume and their effect on profits.

3-2

LO

1

Profit Equation

The Income Statement

Total revenues

Total costs

= Operating profit

The Income Statement written horizontally

Operating profit = Total revenues Total costs

Profit

=

TR

TC

3-3

LO

1

Contribution Margin

It is what is leftover to cover fixed costs and then add

to operating profit.

Contribution margin = Price per unit Variable cost per unit

PV

3-4

LO

1

Break-even volume

=

(units)

Fixed costs

Unit contribution margin

Break-even volume

Fixed costs

=

(sales dollars)

Contribution margin ratio

3-5

LO

1

Target volume

=

(units)

Target volume

=

(sales dollars)

Unit contribution margin

Fixed costs + Target profit

Contribution margin ratio

3-6

of Different Cost Structures

L.O. 2 Understand the effect of cost structure on decisions.

Cost structure:

The proportion of fixed and

variable costs to total costs.

Operating leverage:

The extent to which the cost structure

is comprised of fixed costs.

3-7

LO

2

Margin of Safety

The excess of projected or actual sales

volume over break-even volume

The excess of projected or actual sales

revenue over break-even revenue

Suppose U-Develop sells 8,000 prints.

At a break-even volume of 6,250, its

margin of safety is:

Sales Break-even = 8,000 6,250 = 1,750 prints

3-8

L.O. 3 Use Microsoft Excel to perform CVP analysis.

A spreadsheet program is ideally suited to performing CPV routinely.

1. Choose Tools: Goal Seek from the

menu bar.

2. In the Set cell edit field, enter the cell

address for the target profit calculation.

U-Develop

Price

$0.60

Variable cost

$0.36

Fixed cost

$1,500

Profit

($300)

target profit.

Volume

5,000

the cell address of the volume variable.

Price

$0.60

Variable cost

$0.36

break-even volume.

Profit

$0.00

Volume

6,250

U-Develop

Fixed cost

$1,500

3-9

Income Taxes

L.O. 4 Incorporate taxes, multiple products, and

alternative cost structures into the CVP analysis.

after-tax operating profits of $1,800.

The tax rate is 25%.

What is the target operating profit?

Target operating profit = TOP (1 Tax rate)

TOP = $1,800 (1 0.25) = $2,400

3 - 10

LO

4

Extensions of the CVP Model:

Multiproduct Analysis

each for every enlargement it sells at $1.00.

Selling price

Less: Variable cost

Contribution margin

Prints

Enlargements

$0.60

.36

$0.24

$1.00

.56

$0.44

3 - 11

LO

4

Multiproduct Analysis

What is the contribution margin of the mix?

(9 $0.24) + (1 $0.44) = $2.16 + $0.44 = $2.60

What is the weighted-average contribution

margin of the mix?

(.90 $0.24) + (.10 $0.44) = $0.26

What is the breakeven of the mix?

3 - 12

LO

4

Multiproduct Analysis

7000 90% =

7000 10% =

Total units

=

6,300 prints

700 enlargements

7,000

3 - 13

LO

4

Alternative Cost Structures

Given: Fixed costs of $1,500 are sufficient for monthly

volumes less than or equal to 5,000 prints.

For every additional 5,000 prints U-Develop must rent

a machine for $480 per month.

Original break-even was 6,250 units.

($0.24 x 6,250) ($1,500 + $480) = ($480)

3 - 14

LO

4

Alternative Cost Structures

What is the break-even using new fixed cost

containing the rental of the additional machine?

Break-even units = ($1,500 + $480) $0.24 = 8,250

3 - 15

of CVP Analysis

L.O. 5 Understand the assumptions and

limitations of CVP analysis.

the output is dependent upon the assumptions

made by cost analysts.

These assumptions include which costs are

fixed and which are variable.

3 - 16

End of Chapter 3

McGraw-Hill/Irwin

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