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Hansen AISE IM Ch11
Hansen AISE IM Ch11
Gail B. Wright
Professor Emeritus of Accounting
Bryant University
MANAGEMENT
ACCOUNTING
8th EDITION
BY
HANSEN & MOWEN
11 COST-VOLUME-PROFIT ANALYSIS
1
LEARNING
OBJECTIVES
LEARNING
OBJECTIVES
LEARNING GOALS
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
1. Determine the number of units sold to break
even or earn a targeted profit.
2. Calculate the amount of revenue required to
break even or earn a targeted profit.
3. Apply cost-volume-profit analysis in a
multiple-product setting.
Continued
3
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
4. Prepare a profit-volume graph & a costvolume-profit graph, and explain the
meaning of each.
5. Explain the impact of risk, uncertainty, &
changing variables on cost-volume-profit
analysis.
6. Discuss the impact of activity-based costing
on cost-volume-profit analysis.
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Questions to Think About
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
LO 1
COST-VOLUME-PROFIT (CVP)
CVP expresses:
# units that must be sold to break even
Impact of a given reduction in fixed costs on
break-even point
Impact of an increase in price on profit
Sensitivity analysis of impact of various price or
cost levels on profit
10
LO 1
BREAK-EVEN
BREAK-EVEN POINT:
POINT: Definition
Definition
11
LO 1
UNIT: Examples
Examples of unit of measurement
Procter & Gamble: bar of Ivory soap
McFarland: jar of salsa
Southwest Air Lines
Passenger mile
One-way trip
12
LO 1
Operating Income
= Sales revenue
Variable expenses
Fixed expenses
13
LO 1
NET
NET INCOME:
INCOME: Definition
Definition
14
LO 1
WHITTIER
WHITTIER CO.:
CO.: Background
Background
Operating income for mulching lawn mower
Sales (1,000 units @ $400)
Less: Variable expenses
Contribution margin
Less: Fixed expenses
Operating income
$ 400,000
325,000
$ 75,000
45,000
$ 30,000
15
LO 1
FORMULA: Break-Even
Break-even is 0 profit.
Break-even:
0 = Sales revenue Variable expenses Fixed
expenses
0 = ($400 x Units) ($325 x Units) - $45,000
($75 x Units) = $45,000
Units = 600
16
LO 1
WHITTIER
WHITTIER CO.:
CO.: Income
Income Statement
Statement
Check-up on break-even
Sales (600 units @ $400)
$ 240,000
195,000
$ 45,000
45,000
$
17
LO 1
CONTRIBUTION
CONTRIBUTION MARGIN:
MARGIN:
Definition
Definition
18
LO 1
FORMULA: Break-Even
Break-even using contribution margin.
Break-even units:
# Units = Fixed cost / Unit contribution margin
# Units = $45,000 / ($400 - $325)
= 600
19
LO 1
WHITTIER
WHITTIER CO.:
CO.: Income
Income Statement
Statement
Check-up on break-even
Sales (600 units @ $400)
$ 240,000
195,000
$ 45,000
45,000
$
20
LO 1
= 1,400
21
LO 1
LO 1
WHITTIER
WHITTIER CO.:
CO.: Income
Income Statement
Statement
Check-up on target profit
Sales (600 units @ $400)
$ 560,000
455,000
$ 105,000
45,000
$
60,000
23
LO 1
24
LO 1
LO 1
26
LO 1
27
LO 1
WHITTIER
WHITTIER CO.:
CO.: Income
Income Statement
Statement
Check-up on target profit
Sales (1,600 units @ $400)
$ 640,000
520,000
$ 120,000
45,000
Operating income
$75,000
26,250
$
48,750
28
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
29
LO 2
VARIABLE
VARIABLE COST
COST RATIO:
RATIO:
Definition
Definition
30
LO 2
CONTRIBUTION
CONTRIBUTION MARGIN
MARGIN RATIO:
RATIO:
Definition
Definition
31
LO 2
32
LO 2
WHITTIER
WHITTIER CO.:
CO.: Background
Background
CMR for mulching lawn mower.
Sales (1,000 units @ $400)
Less: Variable expenses
Contribution margin
Less: Fixed expenses
Operating income
$ 400,000
100.00%
325,000
81.25%
$ 75,000
18.75%
45,000
$ 30,000
33
LO 2
Sales = $240,000
OR
Break-even Sales = Fixed cost / CMR
$240,000
= $45,000 / 0.1875
34
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
35
LO 3
36
LO 3
DIRECT
DIRECT FIXED
FIXED EXPENSES:
EXPENSES:
Definition
Definition
37
LO 3
WHITTIER
WHITTIER CO.:
CO.: Sales
Sales Background
Background
Operating income for multiple products.
Mulching
Sales (1,000 units @ $400)
Less: Variable expenses
Contribution margin
Less: Direct fixed exp.
Product margin
Less: Fixed expenses
Operating income
$ 480,000
Riding
Total
$640,000 $1,120,000
390,000
480,000
870,000
$ 90,000
$160,000
$ 250,000
30,000
40,000
70,000
$ 60,000
$120,000
$ 180,000
26,250
$ 153,750
38
LO 3
SALES
SALES MIX:
MIX: Definition
Definition
Is the relative
combination of products
being sold.
39
LO 3
WHITTIER
WHITTIER CO.:
CO.: Sales
Sales Mix
Mix &
& CVP
CVP
Background
Background
Unit
Price
VC
Mulching
$400
$325
$ 75
$ 225
800
600
200
400
Riding
Package Total
Package
CM Cont. Mix
Margin*
$ 625
40
LO 3
= $40,000 / $200
= 200 units
41
LO 3
42
LO 3
BREAK-EVEN SOLUTION
Mulching mower sales =
$400 x 3 x 154 packages.
EXHIBIT 11-1
43
LO 3
WHITTIER
WHITTIER CO.:
CO.: CMR
CMR Background
Background
Contribution margin ratio for multiple products
Total Percent
Sales (1,000 units @ $400) $1,120,000
Less: Variable expenses
Contribution margin
Less: Direct fixed exp.
Product margin
Less: Fixed expenses
Operating income
100.00%
870,000
.7767
$ 250,000
.2232
70,000
$ 180,000
26,250
$ 153,750
44
LO 3
45
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
Prepare a profit-volume
graph & a cost-volumeprofit graph, and explain
the meaning of each.
46
LO 4
EXHIBIT 11-2
PROFIT-VOLUME GRAPH
47
LO 4
48
LO 4
EXHIBIT 11-3
COST-PROFIT-VOLUME
GRAPH
49
LO 4
ASSUMPTIONS OF CVP
CVP analysis assumes
Linear revenue & cost functions
Price, total fixed costs, & unit variable costs can
be accurately identified & remain constant over the
relevant range
What is produced is sold
Sales mix is known
Selling prices & costs are known with certainty
50
LO 4
COST-PROFIT-VOLUME GRAPH
EXHIBIT 11-4a
51
LO 4
COST-PROFIT-VOLUME GRAPH
Yes. CVP will apply so
long as the cost &
revenue functions are
approximately linear over
the relevant range.
EXHIBIT 11-4b
52
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
53
LO 5
LO 5
ALTERNATIVES
For
Forthe
themulching
mulchingmower
mowerare:
are:
#1
#1IfIfadvertising
advertisingexpenditures
expendituresincrease
increaseby
by$8,000,
$8,000,
sales
saleswill
willincrease
increasefrom
from1,600
1,600toto1,725
1,725mowers.
mowers.
#2
#2AAprice
pricedecrease
decreasefrom
from$400
$400toto$375
$375per
permower
mower
will
willincrease
increasesales
salesfrom
from1,600
1,600toto1,900.
1,900.
#3
#3Decreasing
Decreasingprice
pricetoto$375
$375and
andincreasing
increasing
advertising
advertisingexpenditures
expendituresby
by$8,000
$8,000will
willincrease
increase
sales
salesfrom
from1,600
1,600toto2,600
2,600mowers.
mowers.
55
LO 5
ALTERNATIVE #1
Increasing
advertising
increases profit
by $1,325.
EXHIBIT 11-5
56
LO 5
ALTERNATIVE #2
Decreasing price
decreases profit
by $25,000.
EXHIBIT 11-6
57
LO 5
ALTERNATIVE #3
The combination of
increasing advertising
& decreasing price
increases profit by
$2,000.
EXHIBIT 11-7
58
LO 5
59
LO 5
60
LO 5
61
LO 5
MARGIN
MARGIN OF
OF SAFETY:
SAFETY: Definition
Definition
62
LO 5
OPERATING
OPERATING LEVERAGE:
LEVERAGE:
Definition
Definition
63
LO 5
SENSITIVITY
SENSITIVITY ANALYSIS:
ANALYSIS:
Definition
Definition
64
LO 5
SENSITIVITY ANALYSIS
Under 2 systems, the same
change in price will have
different effects on elements
of CVP, & response to risk
& uncertainty.
EXHIBIT 11-8
65
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
66
LO 6
67
LO 6
Break-even =
[Fixed cost + (Unit VC x # Units)
+ (Setup cost x # Setups)
+ Engineering cost x # Engineering hours)]
LO 6
ABC
ABC &
& CVP:
CVP: Background
Background
Data to compare conventional & ABC analysis.
Activity Driver
Units sold
Setups
Engineering hours
Level of Activity
Driver
Unit VC
$10
----
1,000
20
30
1,000
Other data:
Total fixed costs (conv.)
$ 100,000
50,000
20
69
LO 6
70
LO 6
71
LO 6
CHAPTER 11
THE
THE END
END
73