Cost Behavior and Cost-Volume-Profit Analysis: Principles of Managerial Accounting

Cost Behavior and Cost-Volume-Profit Analysis
11e
Principles of Managerial Accounting
Chapter 4
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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Reeve Warren Duchac
Learning Objectives
1. Classify costs as variable costs, fixed costs, or
mixed costs.
2. Compute the contribution margin, the contribution
margin ratio, and the unit contribution margin.
3. Determine the break-even point and sales necessary
to achieve a target profit.
4. Using a cost-volume-profit chart and a profit-
volume chart, determine the break-even point and
sales necessary to achieve a target profit.
Learning Objectives
5. Compute the break-even point for a company
selling more than one product, the operating
leverage, and the margin of safety.
Learning Objective 1
Classify costs as
variable costs, fixed
costs, or mixed
costs.
LO 1
Cost Behavior
 Cost behavior is the manner in which a cost
changes as a related activity changes.
Understanding the behavior of a cost depends on:
 Identifying the activities that cause the cost to
change, called activity bases (or activity drivers).
 Specifying the range of activity over which the
changes in the cost are of interest. This range of
activity is called the relevant range.
LO 1
Variable Costs
 Variable costs are costs that vary in proportion to
changes in the level of activity.
LO 1
Variable Costs Jason

JasonSound
Sound
Jason Sound Inc. produces stereo systems. The

parts for the stereo systems are purchased from
suppliers for $10 per unit (a variable cost) and are
assembled by Jason Sound Inc. For Model JS-12,
the direct materials costs for the relevant range of
5,000 to 30,000 units of production are shown on
the next slide.
LO 1
Variable Costs Jason

JasonSound
Sound
LO 1
Variable Costs
 As shown in the previous slides, the variable costs
have the following characteristics:
 Cost per unit remains the same regardless of changes
in the activity base.
 Total cost changes in proportion to changes in the
activity base.
LO 1
Variable Costs
Total Direct Materials Cost
$300,000 $20
Cost per Unit

$250,000 $15
$200,000 $10
$150,000 $5
$100,000
0 10 20 30
$50,000
Units Produced (000)
0 10 20 30
Units Produced (000)
Number of Direct
Units of Model Materials Cost Total Direct
JS-12 Produced per Unit Materials Cost
5,000 units $10 $ 50,000
10,000 10 l00,000
15,000 10 150,000
20,000 10 200,000
Note:
Note: Fixed Fixedper per 25,000 10 250,000
unit;
unit;variable
variableinin 30,000 10 300,000
total
total
LO 1
Fixed Costs
 Fixed costs are costs that remain the same in total dollar
amount as the activity base changes.
LO 1
Fixed Costs
Minton Inc. manufactures, bottles, and distributes
perfume. The production supervisor is Jane Sovissi.
She is paid $75,000 per year. The plant produces
from 50,000 to 300,000 bottles of perfume.
LO 1
Fixed Costs
The more units

produced, the lower
the fixed cost per unit.
LO 1
Fixed Costs
 Fixed costs have the following characteristics:
 Cost per unit changes inversely to changes in the
activity base.
 Total cost remains the same regardless of changes in
the activity base.
LO 1
Fixed Costs
$150,000 $1.50
Salary per Unit

$125,000 $1.25
Total Salary
$100,000 $1.00
$75,000 $.75
$50,000 $.50
$25,000 $.25
0 100 200 300 0 100 200 300

Units Produced (000) Units Produced (000)
Number of Total Salary Salary per Bottle

Bottles of Perfume for Jane of Perfume
Produced Sovissi Produced
50,000 bottles $75,000 $1.500

100,000 75,000 0.750
150,000 75,000 0.500
200,000 75,000 0.375
LO 1
Mixed Costs
 Mixed costs have characteristics of both a
variable and a fixed cost. Mixed costs are
sometimes called semivariable or semifixed costs.
 Over one range of activity, the total mixed cost
may remain the same. Over another range of
activity, the mixed cost may change in proportion
to changes in the level of activity.
LO 1
Mixed Costs
Simpson Inc. manufactures sails, using rented
equipment. The rental charges are $15,000 per
year, plus $1 for each machine hour used over
10,000 hours.
LO 1
Mixed Costs
The rental charges for various hours used within
the relevant range of 8,000 hours to 40,000 hours
are as follows:
LO 1
Mixed Costs
LO 1
Mixed Costs
 The high-low method is a cost estimation method
that may be used to separate mixed costs into
their fixed and variable components.
LO 1
Mixed Costs
The Equipment Maintenance Department of
Kason Inc. incurred the following costs during the
past five months:
LO 1
Mixed Costs
The number of units produced is the activity base,
and the relevant range is the units produced
between June and October. The next series of
slides for Kason Inc. illustrate how the high-low
method is used to determine the fixed and variable
costs.
LO 1
Mixed Costs
Production Total
(Units) Cost Actual costs incurred
June 1,000 $45,550

July 1,500 52,000 First,
First,select
selectthe
the
August 2,100 61,500
highest
highest and
andlowest
lowest
September 1,800 57,500
October 750 41,250 levels
levels of
ofactivity.
activity.
Difference in Total Cost

Variable Cost per Unit =
Difference in Production
LO 1
Mixed Costs
Production Total
(Units) Cost Next,
Next,fill
fillin
inthe
the
June 1,000 $45,550 formula
formulaforfordifference
difference
July 1,500 52,000 in
intotal
total cost.
cost.
August 2,100 61,500
September 1,800 57,500 $61,500
October 750 41,250 41,250
$20,250
Difference
$20,250
in Total Cost
Difference in Production
LO 1
Mixed Costs
Production Total
(Units) Cost Then,
Then, fill
fill in
in the
the
formula
formulafor for
June 1,000 $45,550 difference
differencein in
July 1,500 52,000 production.
August 2,100 61,500 production.
September 1,800 57,500 2,100
October 750 41,250 750
1,350
Difference
$20,250
in Total cost
Difference1,350
in Production
LO 1
Mixed Costs
Production Total
(Units) Cost
June 1,000 $45,550

Variable
Variablecost
cost
July 1,500 52,000
August 2,100 61,500 per
perunit
unitis
is$15
$15
September 1,800 57,500
October 750 41,250
$20,250
Variable Cost per Unit = = $15
1,350
LO 1
Mixed Costs
The fixed cost is estimated by subtracting the total

variable costs from the total costs for the units
produced as shown below:
Fixed Cost = Total Costs – (Variable Cost per Unit x Units
Produced)
LO 1
Mixed Costs
The fixed cost is the same at the highest and the

lowest levels of production as shown below for
Kason Inc.
Highest
Highest Level
Level
Produced)
Fixed Cost = $61,500 – ($15 x 2,100 units)
Fixed Cost = $61,500 – $31,500
Fixed Cost = $30,000
LO 1
Mixed Costs
The fixed cost is the same at the highest and the

lowest levels of production as shown below for
Kason Inc.
Lowest
Lowest Level
Level
Produced)
Fixed Cost = $41,250 – ($15 x 750 units)
Fixed Cost = $41,250 – $11,250
Fixed Cost = $30,000
LO 1
Mixed Costs
With fixed costs and variable costs estimated at
$30,000 plus $15 per unit, a formula is in place to
estimate production at any level. If the company is
expected to produce 2,000 units in November, the
estimated total cost would be calculated as
follows:
Total Cost = ($15 x Units Produced) + $30,000
Total Cost = ($15 x 2,000) + $30,000

Total Cost = $30,000 + $30,000
Total Cost = $60,000
EE 4-1
LO 1
Summary of Cost Behavior Concepts

Total variable
Total Costs
Total costs increase
Variable and decrease
Costs proportionately
with activity
level.
Total Units Produced
Per-unit
Unit variable costs
Per-Unit Cost
Variable remain the

Costs same
regardless of
activity level.
LO 1
Total Costs
Total fixed
Total costs remain
Fixed Costs the same
regardless of
activity level.
Per-unit fixed
Per-Unit Cost
Unit Fixed costs

Costs decrease as
activity level
increases.
LO 1

 Some examples of variable, fixed, and mixed costs
for the activity base units produced are as follows:
LO 1

 One method of reporting variable and fixed costs
is called variable costing or direct costing.
 Under variable costing, only the variable
manufacturing costs are included in the product
cost.
 The fixed factory overhead is treated as an
expense of the period in which it is incurred.
Compute the
contribution margin,
the contribution
margin ratio, and the
unit contribution
margin.
LO 2
Cost-Volume-Profit Relationships
 Cost-volume-profit analysis is the examination of
the relationships among selling prices, sales and
production volume, costs, expenses, and profits.
LO 2
 Some of the ways cost-volume-profit analysis
may be used include:
1. Analyzing the effects of changes in selling prices on
profits
2. Analyzing the effects of changes in costs on profits
(continued)
LO 2
3. Analyzing the effects of changes in volume on
profits
4. Setting selling prices
5. Selecting the mix of products to sell
6. Choosing among marketing strategies
LO 2
Contribution Margin
 Contribution margin is the excess of sales over
variable costs, as shown in the formula below.
Contribution Margin = Sales – Variable Costs
LO 2
Contribution Margin Lambert
Assume the following data for Lambert, Inc.:
LO 2
Contribution Margin Lambert
LO 2
Contribution Margin Ratio

 The contribution margin ratio, sometimes called
the profit-volume ratio, indicates the percentage of
each sales dollar available to cover fixed costs and
to provide income from operations. It is
computed as follows:
Contribution Margin
Contribution Margin Ratio =
Sales
LO 2
Contribution Margin Ratio Lambert
The contribution margin ratio is 40% for Lambert

Inc., computed as follows:
Contribution Margin
Sales
$400,000
$1,000,000
Contribution Margin Ratio = 40%
LO 2
100%
60%
40%
30%
10%
Sales – Variable Costs

Sales
$1,000,000 – $600,000
$1,000,000
LO 2
If Lambert Inc. adds $80,000 in sales from the sale

of an additional 4,000 units, its income will increase
by $32,000, as computed below.
Change in Income Change in Sales Dollars x
from Operations
= Contribution Margin Ratio
Change in Income
from Operations
= $80,000 x 40% = $32,000
LO 2
Proof
Proof
LO 2
Unit Contribution Margin

 The unit contribution margin is useful for
analyzing the profit potential of proposed
decisions. The unit contribution margin is
computed as follows:
Unit
Contribution = Sales Price – Variable Cost
Margin per Unit per Unit
LO 2

 The unit contribution margin is most useful when
the increase or decrease in sales volume is
measured in sales units (quantities).
 The change in income from operations can be
determined using the following formula:
Change in Unit
Change in x Contribution
Income from =
Sales Units Margin
Operations
LO 2
Unit Contribution Margin Lambert
Lambert Inc.’s sales could be increased by 15,000

units, from 50,000 to 65,000 units. Lambert’s income
from operations would increase by $120,000 (15,000 x
$8), as shown below.
Change in Unit
Change in x Contribution
Income from =
Sales Units Margin
Operations
Change in
Income from = 15,000 units x $8 = $120,000
Operations
LO 2
Unit Contribution Margin Lambert
Lambert Inc.’s contribution margin income

statement, shown below, confirms that income
increased to $220,000 when 65,000 units are sold.
LO 2
Review
Sales (50,000 units) $1,000,000 100% $20

Variable costs 600,000 60% 12
Contribution margin $ 400,000 40% $ 8
Fixed costs 300,000 30%
Income from operations $ 100,000 10%
Unit contribution margin

analyses can provide useful
information for managers.
LO 2
Review
Sales (50,000 units) $1,000,000 100% $20

Variable costs 600,000 60% 12
Contribution margin $ 400,000 40% $ 8
Fixed costs 300,000 30%
Income from operations $ 100,000 10%
The contribution margin can be expressed in three ways:

1. Total contribution margin in dollars.
2. Contribution margin ratio (percentage).
3. Unit contribution margin (dollars per unit).
EE 4-2
Determine the
break-even point
and sales
necessary to
achieve a target
profit.
LO 3
Break-Even Point
 The break-even point is the level of operations at
which a company’s revenues and expenses are
equal.
LO 3
Break-Even Point
Assume the following data for Baker Corporation:

Fixed costs $90,000
Unit selling price $25
Unit variable cost 15
Unit contribution margin $10
LO 3
Break-Even Point
The break-even point (in sales units) is calculated
using the following equation:
Fixed Costs
Break-Even Sales (units) =
$90,000
$10
Break-Even Sales (units) = 9,000 units
LO 3
Break-Even Point
Income
Incomefrom
fromoperations
operationsisiszero
zero
when
when9,000
9,000units
unitsare
aresold—
sold—
hence,
hence,the
thebreak-even
break-evenpoint
pointis
is
9,000
9,000units.
units.
LO 3
Break-Even Point
The break-even point (in sales dollars) is calculated

using the following equation:
Fixed Costs
Break-Even Sales (dollars) =
$90,000
Break-Even Sales (dollars) =
.40
Break-Even Sales (dollars) = $225,000 $10

$25
LO 3
Effect of Changes in Fixed Costs
Fixed
Fixed Break-
Break-
If Costs
then Even
Costs Even
Fixed
Fixed
If then Break-
Break-
Costs
Costs Even
Even
LO 3

Bishop Co. is evaluating a proposal to budget an additional
$100,000 for advertising. The data for Bishop Co. are as
follows:
LO 3
Fixed Costs
Without additional advertising:

$600,000 30,000
Break-Even Sales (units) = =
$20 units
With additional advertising:
$700,000 35,000
Break-Even Sales (units) = =
$20 units
LO 3
Effect of Changes in Unit Variable Costs
Unit
Unit
If then Break-
Break-
Variable
Variable Even
Even
Cost
Cost
Unit
Unit
If then Break-
Break-
Variable
Variable Even
Even
Costs
Costs
LO 3
Park Co. is evaluating a proposal to pay an

additional 2% commission on sales to its
salespeople (a variable cost) as an incentive to
increase sales. Fixed costs are estimated at
$840,000. The other data for Park Co. are as
follows:
LO 3
Fixed Costs
Without additional 2% commission:

Break-Even Sales (units) = $840,000 = 8,000 units
$105
With additional 2% commission:

$840,000
Break-Even Sales (units) = = 8,400 units
$100
$250 – [$145 + ($250 x 2%)] = $100

LO 3
Effect of Changes in Unit Selling Price
Break-
Break-
Unit
Unit
If then Even
Even
Selling
Selling
Price
Price
Unit
Unit
If Selling
Selling then
Price
Price Break-
Break-
Even
Even
LO 3
Graham Co. is evaluating a proposal to increase

the unit selling price of a product from $50 to
$60. The estimated fixed costs are $600,000.
The following additional data have been
gathered:
LO 3
Fixed Costs
Without price increase:

$600,000
$20
With price increase:

$600,000
$30
LO 3
Summary of Effects of Changes on B/E Point
EE 4-3
LO 3
Target Profit
 The sales volume required to earn a target profit
is determined by modifying the break-even
equation.
Fixed Costs + Target Profit
Sales (units) =
LO 3
Target Profit WALTHAM

WALTHAM
Assume the following data for Waltham Co.:
What would be the necessary sales to earn the

target profit of $100,000?
LO 3

WALTHAM

Sales (units) =
$200,000 + $100,000
Sales (units) =
$30
Sales (units) = 10,000 units
WALTHAM
Proof
Proof
LO 3

WALTHAM

Unit Selling Price
$30 From an
Contribution Margin Ratio = earlier slide
$75

Sales (dollars) =
$200,000 + $100,000
Sales (dollars) = = $750,000
40%
Necessary sales to earn
a $100,000 target profit
EE 4-4
Using a cost-volume-
profit chart and a profit-
volume chart, determine
the break-even point and
sales necessary to
achieve a target profit.
LO 4
Cost-Volume-Profit (Break-Even) Chart
 A cost-volume-profit chart, sometimes called a

break-even chart, graphically shows sales, costs,
and the related profit or loss for various levels of
units sold.
LO 4
The cost-volume-profit charts in this section are

based on Exhibit 5, which was constructed using
the following data:
To go to Exhibit 5, left-click your mouse on this button.

(continued)
To return to this slide, type 80 and press Enter.
LO 4
$500
Sales and Costs (in thousands)

$450
Dollar $400
amounts $350
are $300
indicated $250
along
$200
the
$150
vertical
$100
axis.
$ 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)
Volume is shown along the horizontal axis.

LO 4
Using maximum sales of $500,000 and knowing

that each unit sells for $50, we can find the values
on the two axes. Where the horizontal sales and
costs line intersects the vertical 10,000 units of
sales line is Point A in the next slide. This is
designated with horizontal and vertical red lines.
(continued)
LO 4

Sales and Costs (in thousands) $500 Point A
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
0 1 2 3 4 5 6 7 8 9 10
Point A could have been plotted at any

sales level, because linearity is assumed.
LO 4
Beginning at zero in the lower-left corner of the

graph, connect a straight line to the dot (Point A).
This the total revenue or total sales line.
(continued)
LO 4

$500 Point A
$450
$400
$350
u e
$300
v en
$250 Re
$200 t al
$150 To
$100
$ 50
0 1 2 3 4 5 6 7 8 9 10
LO 4

$500
$450
$400
$350
$300
$250
$200
$150
$100 Fixed Cost
$ 50
0 1 2 3 4 5 6 7 8 9 10
Fixed cost of $100,000 is a horizontal line.
LO 4
A point on the chart is needed to establish the cost

line. An arbitrary sales amount is picked of 10,000
units. At this sales level, the cost should be
$400,000, calculated as follows: [(10,000 x $30)
+ $100,000] = $400,000.
(continued)
LO 4

$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
0 1 2 3 4 5 6 7 8 9 10
A point is marked at $400,000,

where 10,000 units are sold.
LO 4

$500
$450
$400
$350
$300
$250
os ts
$200
t alC
$150 T o
$100
$ 50
0 1 2 3 4 5 6 7 8 9 10
A line is drawn from fixed costs at zero sales ($100,000)

to this point. This is the total costs line.
LO 4
The line would be the same if another point had

been picked. For example, assume that 8,000
units had been chosen. At this sales level, the cost
should be $340,000 [(8,000 x $30) + $100,000].
(continued)
LO 4

$500
$450
$400
$350
$300
$250
$200 $340,000
$150
$100
$ 50
0 1 2 3 4 5 6 7 8 9 10
The 8,000 units line drawn vertically intersects

the total costs line at $340,000.
LO 4

$500
$450
$400 Break-even
$350 Point
$300
$250
$200
$150
$100
$ 50
0 1 2 3 4 5 6 7 8 9 10
The point where the revenue (blue) line and the total costs
(orange) line intersect is the break-even point.
(continued)
LO 4

$500
$450
$400 Break-even
$350 Point
$300
$250
$200
$150
$100
$ 50
0 1 2 3 4 5 6 7 8 9 10
Break-even is sales of 5,000 units or $250,000.
LO 4

$500
$450
$400 Operating Break-even
$350 Loss Area Point
$300
$250
$200
$150 Operating
$100 Profit Area
$ 50
0 1 2 3 4 5 6 7 8 9 10
LO 4
LO 4
A proposal to reduce fixed costs by $20,000 is to be

evaluated. The cost-volume-profit chart in Exhibit 6
(next slide) was designed to assist in this
evaluation. Note that the total costs line has been
drawn from fixed costs at zero sales of $80,000,
reducing the break-even point to dollar sales of
$200,000, or 4,000 units.
LO 4
LO 4
Profit-Volume Chart
Another graphic approach to cost-volume-profit
analysis, the profit-volume chart, plots only the
difference between total sales and total costs (or
profits). Again, the following data from Exhibit 5
are used.
Unit
Unitselling
sellingprice
price $$50
50
Unit
Unitvariable
variablecost
cost 30
30
Unit
Unitcontribution
contributionmargin
margin $$20
20
Total
Totalfixed
fixedcosts
costs $100,000
$100,000
LO 4
Profit-Volume Chart
The maximum operating loss is equal to the fixed
costs of $100,000. Assuming that the maximum unit
sales within the relevant range is 10,000 units, the
maximum operating profit is $100,000, as shown
below.
Maximum profit
LO 4
Profit-Volume Chart
LO 4
Profit-Volume Chart
Assume that an increase in fixed costs of $20,000
is to be evaluated. The maximum operating profit
would be $80,000, as shown below:
Sales
Sales(10,000
(10,000units
unitsxx$50)
$50) $500,000
$500,000
Variable
Variablecosts
costs(10,000
(10,000units
unitsxx$30)
$30) 300,000
300,000
Contribution
Contributionmargin
margin(10,000
(10,000units
unitsxx$20)
$20) $200,000
$200,000
Fixed
Fixedcosts
costs 120,000
120,000
Operating
Operatingprofit
profit $$ 80,000
80,000
Revised
Maximum profit
LO 4
Profit-Volume Chart
(continued)
Units of Sales
LO 4
Profit-Volume Chart
LO 4
Assumptions of Cost-Volume-Profit Analysis

 The primary assumptions are:
1. Total sales and total costs can be represented by straight
lines.
2. Within the relevant range of operating activity, the
efficiency of operations does not change.
3. Costs can be divided into fixed and variable components.
4. The sales mix is constant.
5. There is no change in the inventory quantities during the
period.
Compute the break-even

point for a company selling
more than one product, the
operating leverage, and the
margin of safety.
LO 5
Sales Mix Considerations

 Many companies sell more than one product at
different selling prices. In addition, the products
normally have different unit contribution
margins.
 The sales mix is the relative distribution of sales
among the various products sold by a company.
LO 5

Cascade Company sold Products A and B during
the past year as follows:
LO 5

It is useful to think of the individual products as
components of one overall enterprise product. For
Cascade Company, the overall enterprise product is
called E. The unit selling price, unit variable cost,
and unit contribution margin for E are computed as
follows:
LO 5
Fixed Costs
Unit Contribution
Margin
$200,000
$25
Break-Even Sales (units) = 8,000 units
LO 5
Break-even point
EE 4-5
LO 5
Operating Leverage
 The relationship of a company’s contribution
margin to income from operations is measured by
operating leverage. A company’s operating
leverage is computed as follows:
Contribution Margin
Operating Leverage =
Income from
Operations
LO 5
Operating Leverage
Both companies have

the same contribution
margin.
LO 5
Operating Leverage
5
Jones Inc.: Contribution Margin
Income from Operations
$100,000
=5
$20,000
LO 5
Operating Leverage
5 2
Wilson Inc.: Contribution Margin
Income from Operations
$100,000
=2
$50,000
LO 5
Operating Leverage
 Operating leverage can be used to measure the
impact of changes in sales on income from
operations. This measure can be computed as
follows:
Percent Change in
Income from Percent Change in Operating
= Sales
x Leverage
Operations
LO 5
Operating Leverage
Assume that sales increased 10%, or $40,000
($400,000 x 10%), for Jones Inc. and Wilson Inc.
Jones Inc.:
Percent Change
in Income from = 10% x 5 = 50%
Operations
Wilson Inc.:
Percent Change
in Income from = 10% x 2 = 20%
Operations
LO 5
Operating Leverage
50% increase
($10,000/$20,000)
LO 5
Operating Leverage
20% increase
($10,000/$50,000)
LO 5
Operating Leverage
 The impact of a change in sales on income from
operations for companies with high and low
operating leverage can be summarized as
follows:
EE 4-6
LO 5
Margin of Safety
 The margin of safety indicates the possible
decrease in sales that may occur before an
operating loss results.
 The margin of safety may be expressed in the
following ways:
 Dollars of sales
 Units of sales
 Percent of current sales
LO 5
Margin of Safety
If sales are $250,000, the unit selling price is $25,

and the sales at the break-even point are
$200,000, the margin of safety is 20%, computed
as follows:
Sales – Sales at Break-Even Point
Margin of Safety =
Sales
$250,000 – $200,000
Margin of Safety =
$250,000
Margin of Safety = 20%
EE 4-7
Appendix
Variable
Costing
Appendix
Variable Costing
 The cost of manufactured products consists of
direct materials, direct labor, and factory
overhead. The reporting of all these costs in
financial statements is called absorption costing.
 Absorption costing is required by GAAP.
Appendix
Variable Costing
 In variable costing, also called direct costing, the
cost of goods manufactured consists of direct
materials, direct labor, and variable factory
overhead.
 In a variable costing income statement, fixed
factory overhead costs do not become a part of
the cost of goods manufactured.
Appendix
Variable Costing
 Instead, fixed factory overhead costs are treated
as a period expense.
Appendix
Variable Costing
 The form of a variable costing income statement
is as follows:
Appendix
Variable Costing
Assume that 15,000 units are manufactured and sold
at a price of $50. The related costs and expenses are
as follows:
Appendix
Variable Costing
Appendix
Variable Costing
Appendix
Variable Costing
Appendix
Variable Costing
Appendix
Variable Costing
Cost Behavior and Cost-Volume-Profit Analysis
The
The End
End
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© 2012 Cengage
permitted Learning. All distributed
in a license Rights Reserved.
with aMay notproduct
certain be copied,
or scanned,
service ororotherwise
duplicated,
on ainpassword-protected
whole or in part, except for for
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as use.

Cost Behavior and Cost-Volume-Profit Analysis: Principles of Managerial Accounting

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Cost Behavior and Cost-Volume-Profit Analysis

Principles of Managerial Accounting

Variable Costs Jason

Jason Sound Inc. produces stereo systems. The

Variable Costs Jason

Cost per Unit

The more units

Salary per Unit

0 100 200 300 0 100 200 300

Number of Total Salary Salary per Bottle

50,000 bottles $75,000 $1.500

June 1,000 $45,550

Difference in Total Cost

June 1,000 $45,550

The fixed cost is estimated by subtracting the total

The fixed cost is the same at the highest and the

The fixed cost is the same at the highest and the

Total Cost = ($15 x 2,000) + $30,000

Summary of Cost Behavior Concepts

Variable remain the

Summary of Cost Behavior Concepts

Unit Fixed costs

Total Units Produced

Summary of Cost Behavior Concepts

Summary of Cost Behavior Concepts

Contribution Margin = Sales – Variable Costs

Contribution Margin Lambert

Assume the following data for Lambert, Inc.:

Contribution Margin Lambert

Contribution Margin Ratio

Contribution Margin Ratio Lambert

The contribution margin ratio is 40% for Lambert

Contribution Margin Ratio = 40%

Contribution Margin Ratio Lambert

Sales – Variable Costs

Contribution Margin Ratio = 40%

Contribution Margin Ratio Lambert

If Lambert Inc. adds $80,000 in sales from the sale

Contribution Margin Ratio Lambert

Unit Contribution Margin

Unit Contribution Margin

Unit Contribution Margin Lambert

Lambert Inc.’s sales could be increased by 15,000

Unit Contribution Margin Lambert

Lambert Inc.’s contribution margin income

Sales (50,000 units) $1,000,000 100% $20

Unit contribution margin

Sales (50,000 units) $1,000,000 100% $20

The contribution margin can be expressed in three ways:

Assume the following data for Baker Corporation:

Break-Even Sales (units) = 9,000 units

The break-even point (in sales dollars) is calculated

Break-Even Sales (dollars) = $225,000 $10

Effect of Changes in Fixed Costs

Effect of Changes in Fixed Costs

Effect of Changes in Fixed Costs

Without additional advertising:

Effect of Changes in Unit Variable Costs

Effect of Changes in Unit Variable Costs

Park Co. is evaluating a proposal to pay an

Effect of Changes in Unit Variable Costs

Without additional 2% commission:

With additional 2% commission: