Cost B Ehavi or and Cost-Volum E-Pro Fit An Alysis

C o s t -
r a n d
h a v i o y s i s
s t B e A n a l
Co ro fi t
m e -P
t e r 4
V o l u a p Ch
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
5. Compute the break-even point for a company selling more
than one product, the operating leverage, and the margin of
safety.
Learn
i ng O
bject
i ve
1
Class
ify co
sts as
v ariab
costs le costs,
, or m fixed
ixed
costs
.
Cost Behavior
o 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.
Variable Costs
o Variable costs are costs that vary in proportion to

changes in the level of activity.
Variable Costs
o 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.
VARIABLE COSTS
Variable Costs
o 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.
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
25,000 10 250,000
30,000 10 300,000
Fixed Costs
o Fixed costs are costs that remain the same in total dollar
amount as the activity base changes.
Fixed Costs
o 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.
FIXED COSTS
The more units

produced, the lower
the fixed cost per unit.
Fixed Costs
o 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.
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
Mixed Costs
o Mixed costs have characteristics of both a variable

and a fixed cost. Mixed costs are sometimes called
semivariable or semifixed costs.
o 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.
Mixed Costs
o 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.
Mixed Costs
o The rental charges for various hours used within the

relevant range of 8,000 hours to 40,000 hours are as
follows:
MIXED COSTS
Mixed Costs
o The high-low method is a cost estimation method that

may be used to separate mixed costs into their fixed
and variable components.
Mixed Costs
o The Equipment Maintenance Department of Kason

Inc. incurred the following costs during the past five
months:
Mixed Costs
o The number of units produced is the activity base,

and the relevant range is the units produced between
June and October. The next four slides illustrate how
the high-low method is used to determine the fixed
and variable costs.
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
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
$20,250
Difference in Total Cost
Variable Cost per Unit =
Difference in Production
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
Variable Cost per Unit = Difference1,350
in Production
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
Mixed Costs
o 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)
Mixed Costs
o 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
Mixed Costs
o 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
Mixed Costs
o 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
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.
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.

o Some examples of variable, fixed, and mixed costs

for the activity base units produced are as follows:
o One method of reporting variable and fixed costs is

called variable costing or direct costing.
o Under variable costing, only the variable
manufacturing costs are included in the product cost.
o The fixed factory overhead is treated as an expense of
the period in which it is incurred.
Learn
i ng O
bject
Comp i ve
contr u
ibu
t e t he co
ntri
t i on m
argin
ibutio
ratio,
n ma
rgin,
2
and t the
contr
ibutio he unit
n ma
rgin.
Cost-Volume-Profit Relationships
o Cost-volume-profit analysis is the examination of the

relationships among selling prices, sales and
production volume, costs, expenses, and profits.
Cost-Volume-Profit Relationships
o Some of the ways cost-volume-profit analysis may be

used include the following:
 Analyzing the effects of changes in selling prices on profits
 Analyzing the effects of changes in costs on profits
 Analyzing the effects of changes in volume on profits
 Setting selling prices
 Selecting the mix of products to sell
 Choosing among marketing strategies
Contribution Margin
o Contribution margin is the excess of sales over

variable costs, as shown in the formula below.
Contribution Margin = Sales – Variable Costs
CONTRIBUTION
MARGIN
Assume the following data for Lambert, Inc.:

CONTRIBUTION
MARGIN
Contribution Margin Ratio
o 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
o The contribution margin ratio is 40% for Lambert

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

Sales
$1,000,000 – $600,000
$1,000,000
o 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
CONTRIBUTION
MARGIN RATIO
Proof
Proof
Unit Contribution Margin
o 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
o The unit contribution margin is most useful when the

increase or decrease in sales volume is measured in
sales units (quantities).
o 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
o 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
o Lambert Inc.’s contribution margin income statement,

shown below, confirms that income increased to
$220,000 when 65,000 units are sold.
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.
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:

• Total contribution margin in dollars.
• Contribution margin ratio (percentage).
• Unit contribution margin (dollars per unit).
Learn
i ng O
Deter bjectiv
mine
neces
the b
r e ak-ev
e 3
s ar y t v
o ach en point a
i ev e a nd sa
targe les
t prof
i t.
Break-Even Point
o The break-even point is the level of operations at

which a company’s revenues and expenses are equal.
Break-Even Point
o Assume the following data for Baker Corporation:
Fixed costs $90,000

Unit selling price $25
Unit variable cost 15
Unit contribution margin $10
Break-Even Point
o 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
BREAK-EVEN
POINT
Income
Incomefrom
fromoperations
operationsis
iszero
zerowhen
when9,000
9,000units
unitsare
are
sold—hence,
sold—hence,the
thebreak-even
break-evenpoint
pointis
is9,000
9,000units.
units.
Break-Even Point
o 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
Effect of Changes in Fixed Costs
o Bishop Co. is evaluating a proposal to budget an

additional $100,000 for advertising. The data for
Bishop Co. are as follows:
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
Effect of Changes in Unit Variable Costs
o 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:
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

Effect of Changes in Unit Selling Price
o 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:
Fixed Costs
Without price increase:

$600,000
$20
With price increase:

$600,000
$30
Summary of Effects of Changes on B/E Point
Target Profit
o The sales volume required to earn a target profit is

determined by modifying the break-even equation.
Fixed Costs + Target Profit

Sales (units) =
Target Profit
o Assume the following data for Waltham Co.:
What would be the necessary sales to earn the target

profit of $100,000?
TARGET PROFIT

Sales (units) =
$200,000 + $100,000
Sales (units) =
$30
Sales (units) = 10,000 units

TARGET PROFIT
Proof
Proof
)
TARGET PROFIT

Unit Selling Price
$30 From an
$75 earlier slide

Sales (dollars) =
$200,000 + $100,000
Sales (dollars) = = $750,000
40%
Necessary sales to earn a
$100,000 target profit
Learn
i ng O
bject
Using
i ve
profi
even
a
t-volu cost-volu
me
n poin
t and
me-
chart
s al e s
, d e te
-profi
rmine
t char
t and
4
neces the b a
s ar y t re
o ach ak-
a targ ie
et pro ve
fit.
Cost-Volume-Profit (Break-Even) Chart
o 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.
o The cost-volume-profit charts in this section are

based on Exhibit 5, which was constructed using the
following data:
(continued)
COST-VOLUME-
PROFIT (BREAK-
EVEN) CHART
$500
Sales and Costs (in thousands)

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

o 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.
(continued)
COST-VOLUME-
PROFIT (BREAK-
EVEN) CHART
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.
COST-VOLUME-
PROFIT (BREAK-
EVEN) CHART
Point A
$500
$450
$400
$350
u e
$300
v en
$250 R e
t a l
$200
To
$150
$100
$ 50
0 1 2 3 4 5 6 7 8 9 10
Beginning at zero on the left corner of the graph, connect a straight line
to the dot (Point A). This is the total revenue or total sales line.
COST-VOLUME-
PROFIT (BREAK-
EVEN) CHART
$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.

o 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)
COST-VOLUME-
PROFIT (BREAK-
EVEN) CHART
$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. (continued)
COST-VOLUME-
PROFIT (BREAK-
EVEN) CHART
$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. (continued)
o 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)
COST-VOLUME-
PROFIT (BREAK-
EVEN) CHART
$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.
COST-VOLUME-
PROFIT (BREAK-
EVEN) CHART
$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)
COST-VOLUME-
PROFIT (BREAK-
EVEN) CHART
$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.

COST-VOLUME-
PROFIT (BREAK-
EVEN) CHART
$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
COST-VOLUME-
PROFIT (BREAK-
EVEN) CHART
o 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.
COST-VOLUME-
PROFIT (BREAK-
EVEN) CHART
Profit-Volume Chart
o 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, 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
Profit-Volume Chart
o 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
PROFIT-VOLUME
CHART
Profit-Volume Chart
o 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
PROFIT-VOLUME
CHART
Assumptions of Cost-Volume-Profit Analysis
o The primary assumptions are as follows:

 Total sales and total costs can be represented by straight
lines.
 Within the relevant range of operating activity, the
efficiency of operations does not change.
 Costs can be divided into fixed and variable components.
 The sales mix is constant.
 There is no change in the inventory quantities during the
period.
Learn
i ng O
bj e ctive
5
Comp
comp ut e t h
the any s e br e
el
opera li ak k
ting l ng more t -even poin
evera h
ge, an an one pr t for a
d the oduc
marg t,
in of
safety
.
Sales Mix Considerations
o Many companies sell more than one product at

different selling prices. In addition, the products
normally have different unit contribution margins.
o The sales mix is the relative distribution of sales
among the various products sold by a company.
o Cascade Company sold Products A and B during the

past year as follows:
o 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:
Fixed Costs
Unit Contribution
Margin
$200,000
$25
Break-Even Sales (units) = 8,000 units
SALES MIX
CONSIDERATION
S
Break-even point
Operating Leverage
o 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
OPERATING
LEVERAGE
Both companies have the

same contribution margin.
OPERATING
LEVERAGE
5
Contribution Margin
Jones Inc.:
Income from Operations
$100,000
=5
$20,000
OPERATING
LEVERAGE
5 2
Contribution Margin
Wilson Inc.:
Income from Operations
$100,000
=2
$50,000
Operating Leverage
o 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
Operating Leverage
o 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
OPERATING
LEVERAGE
50% increase
($10,000/$20,000)
OPERATING
LEVERAGE
20% increase
($10,000/$50,000)
Operating Leverage
o The impact of a change in sales on income from

operations for companies with high and low
operating leverage can be summarized as follows:
Margin of Safety
o The margin of safety indicates the possible decrease

in sales that may occur before an operating loss
results.
o The margin of safety may be expressed in the
following ways:
 Dollars of sales
 Units of sales
 Percent of current sales
Margin of Safety
o 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%
e n d i x
p p
A e Cossttingg
i abl le
Varr
V
Variable Costing
o 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.
o Absorption costing is required by GAAP.
Variable Costing
o In variable costing, also called direct costing, the cost

of goods manufactured consists of direct materials,
direct labor, and variable factory overhead.
o In a variable costing income statement, fixed factory
overhead costs do not become a part of the cost of
goods manufactured.
Variable Costing
o Instead, fixed factory overhead costs are treated as a

period expense.
Variable Costing
o The form of a variable costing income statement is as

follows:
Variable Costing
o Assume that 15,000 units are manufactured and sold

at a price of $50. The related costs and expenses are
as follows:
VARIABLE
COSTING
VARIABLE
COSTING
VARIABLE
COSTING
VARIABLE
COSTING
C o s t -
r a nd
ha v io s i s
st B e n a l y
Co r ofi t A
Vol u m e - P
E n d
Th ee

Cost B Ehavi or and Cost-Volum E-Pro Fit An Alysis

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Cost B Ehavi or and Cost-Volum E-Pro Fit An Alysis

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C o s t -

1. Classify costs as variable costs, fixed costs, or mixed costs.

o Cost behavior is the manner in which a cost changes

o Variable costs are costs that vary in proportion to

o Jason Sound Inc. produces stereo systems. The parts

o As shown in the previous slides, the variable costs

Cost per Unit

5,000 units $10 $ 50,000

o Minton Inc. manufactures, bottles, and distributes

The more units

o Fixed costs have the following characteristics:

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

o Mixed costs have characteristics of both a variable

o Simpson Inc. manufactures sails, using rented

o The rental charges for various hours used within the

o The high-low method is a cost estimation method that

o The Equipment Maintenance Department of Kason

o The number of units produced is the activity base,

June 1,000 $45,550

Difference in Total Cost

June 1,000 $45,550

o The fixed cost is estimated by subtracting the total

Fixed Cost = Total Costs – (Variable Cost per Unit x Units

o The fixed cost is the same at the highest and the

o The fixed cost is the same at the highest and the

o With fixed costs and variable costs estimated at

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

Variable remain the

Unit Fixed costs

Total Units Produced

o Some examples of variable, fixed, and mixed costs

o One method of reporting variable and fixed costs is

o Cost-volume-profit analysis is the examination of the

o Some of the ways cost-volume-profit analysis may be

o Contribution margin is the excess of sales over

Contribution Margin = Sales – Variable Costs

Assume the following data for Lambert, Inc.:

o The contribution margin ratio, sometimes called the

o The contribution margin ratio is 40% for Lambert

Contribution Margin Ratio = 40%

Sales – Variable Costs

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

Change in Income Change in Sales Dollars x

o The unit contribution margin is useful for analyzing

o The unit contribution margin is most useful when the

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

o Lambert Inc.’s contribution margin income statement,

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:

o The break-even point is the level of operations at

o Assume the following data for Baker Corporation:

Fixed costs $90,000

o The break-even point (in sales units) is calculated

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

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

o Bishop Co. is evaluating a proposal to budget an

Without additional advertising:

With additional advertising: