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Cost-Volume-Profit Relationships: Chapter Six
Cost-Volume-Profit Relationships: Chapter Six
Relationships
Chapter Six
Learning Objective 1
Contribution
Contribution Margin
Margin (CM)
(CM) is
is the
the amount
amount
remaining
remaining from
from sales
sales revenue
revenue after
after variable
variable
expenses
expenses have
have been
been deducted.
deducted.
McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc.
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If Racing sells
430 bikes, its
net income will
be $6,000.
Learning Objective 2
Income
Income Income
Income Income
Income
300
300 units
units 400
400 units
units 500
500 units
units
Sales
Sales $$ 150,000
150,000 $$ 200,000
200,000 $$250,000
250,000
Less:
Less: variable
variable expenses
expenses 90,000
90,000 120,000
120,000 150,000
150,000
Contribution
Contribution margin
margin $$ 60,000
60,000 $$ 80,000
80,000 $$100,000
100,000
Less:
Less: fixed
fixed expenses
expenses 80,000
80,000 80,000
80,000 80,000
80,000
Net
Net operating
operating income
income $$ (20,000)
(20,000) $$ -- $$ 20,000
20,000
CVP Graph
Dollars
Units
CVP Graph
Dollars
Fixed Expenses
Units
CVP Graph
Dollars
Total Expenses
Fixed Expenses
Units
CVP Graph
Total Sales
Dollars
Total Expenses
Fixed Expenses
Units
CVP Graph
Break-even point
(400 units or $200,000 in sales)
re a
fi t A
Pro
Dollars
r e a
s A
L o s
Units
Learning Objective 3
$200 = 40%
$500
400
400 Bikes
Bikes 500
500 Bikes
Bikes
Sales
Sales $$200,000
200,000 $$250,000
250,000
Less:
Less: variable
variable expenses
expenses 120,000
120,000 150,000
150,000
Contribution
Contribution margin
margin 80,000
80,000 100,000
100,000
Less:
Less: fixed
fixed expenses
expenses 80,000
80,000 80,000
80,000
Net
Net operating
operating income
income $$ -- $$ 20,000
20,000
Quick Check
Quick Check
Learning Objective 4
Sales
Sales increased
increased by
by $20,000,
$20,000, but
but net
net operating
operating
income
income decreased
decreased byby $2,000
$2,000..
McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc.
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580
580units
units ××$310
$310variable
variable cost/unit
cost/unit ==$179,800
$179,800
Sales
Sales increase
increase by
by $40,000,
$40,000, and
and net
net operating
operating income income
McGraw-Hill/Irwin
increases
increases by
by $10,200
$10,200 ..
Copyright © 2008, The McGraw-Hill Companies, Inc.
6-29
Sales
Sales increase
increase by
by $62,000,
$62,000, fixed
fixed costs
costs increase
increase by
by
$15,000,
$15,000, and
and net
net operating
operating income
income increases
increases byby $2,000
$2,000..
McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc.
6-31
Sales
Sales increase
increase by
by $37,500,
$37,500, variable
variable costs
costs increase
increase byby
$31,125,
$31,125, but
but fixed
fixed expenses
expenses decrease
decrease by
by $6,000
$6,000..
McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc.
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$$ 3,000
3,000 ÷÷ 150
150 bikes
bikes == $$ 20
20 per
per bike
bike
Variable
Variable cost
cost per
per bike
bike == 300
300 per
per bike
bike
Selling
Selling price
price required
required == $$ 320
320 per
per bike
bike
150
150 bikes
bikes ×× $320
$320 per
per bike
bike == $$ 48,000
48,000
Total
Total variable
variable costs
costs == 45,000
45,000
Increase
Increase in
in net
net income
income == $$ 3,000
3,000
Learning Objective 5
Break-Even Analysis
Equation Method
Break-Even Analysis
Total
Total Per
PerUnit
Unit Percent
Percent
Sales
Sales(500
(500bikes)
bikes) $$250,000
250,000 $$ 500
500 100%
100%
Less:
Less:variable
variable expenses
expenses 150,000
150,000 300
300 60%
60%
Contribution
Contributionmargin
margin $$100,000
100,000 $$ 200
200 40%
40%
Less:
Less:fixed
fixedexpenses
expenses 80,000
80,000
Net
Netoperating
operatingincome
income $$ 20,000
20,000
Equation Method
We calculate the break-even point as follows:
Sales = Variable expenses + Fixed expenses + Profits
Where:
Q = Number of bikes sold
$500 = Unit selling price
$300 = Unit variable expense
$80,000 = Total fixed expense
Equation Method
We calculate the break-even point as follows:
Sales = Variable expenses + Fixed expenses + Profits
Equation Method
The equation can be modified to calculate the
break-even point in sales dollars.
X = 0.60X + $80,000 + $0
Where:
X = Total sales dollars
0.60 = Variable expenses as a % of sales
$80,000 = Total fixed expenses
Equation Method
The equation can be modified to calculate the
break-even point in sales dollars.
X = 0.60X + $80,000 + $0
0.40X = $80,000
X = $80,000 ÷ 0.40
X = $200,000
$80,000
= $200,000 break-even sales
40%
Quick Check
Quick Check
Quick Check
Quick Check
Learning Objective 6
$200Q = $180,000
Q = 900 bikes
$80,000 + $100,000
= 900 bikes
$200/bike
Quick Check
Quick Check
Unit sales
Fixed expenses + Target profit
to attain =
Coffee Klatch is an espresso stand Unit
in aCM
downtown
target profit
office building. The average
$1,300selling price of a cup of
+ $2,500
coffee is $1.49 and the= average variable expense
$1.49 - $0.36
per cup is $0.36. The average fixed expense per
month is $1,300. How $3,800cups of coffee would
many
=
$1.13
have to be sold to attain target profits of $2,500 per
month? = 3,363 cups
a. 3,363 cups
b. 2,212 cups
c. 1,150 cups
d. 4,200 cups
Learning Objective 7
Break-even
Break-even
sales
sales Actual
Actual sales
sales
400
400 units
units 500
500 units
units
Sales
Sales $$ 200,000
200,000 $$ 250,000
250,000
Less:
Less: variable
variable expenses
expenses 120,000
120,000 150,000
150,000
Contribution
Contribution margin
margin 80,000
80,000 100,000
100,000
Less:
Less: fixed
fixed expenses
expenses 80,000
80,000 80,000
80,000
Net
Net operating
operating income
income $$ -- $$ 20,000
20,000
Margin of $50,000
= = 100 bikes
Safety in units $500
Quick Check
Quick Check
CoffeeMargin
Klatchofissafety
an espresso
= Total stand
sales – inBreak-even
a downtownsales
office building. The average
= 2,100selling
cups – price ofcups
1,150 a cup of
coffee is $1.49 and the=average
950 cupsvariable expense
per cup is $0.36. The averageor
fixed expense per
month is Margin
$1,300.of2,100 cups are
safety 950 sold
cupseach month
on average.percentage = 2,100
What is the margin of cups = 45%
safety?
a. 3,250 cups
b. 950 cups
c. 1,150 cups
d. 2,100 cups
Learning Objective 8
Operating Leverage
Operating Leverage
$100,000 = 5
$20,000
McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc.
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Operating Leverage
Operating Leverage
Quick Check
Quick Check
Actual sales
Coffee Klatch is an espresso stand in a 2,100 cups
downtown office building.
Sales The average $ 3,129
selling price of a cupLess:
of coffee isexpenses
Variable $1.49 and 756
the average variableContribution
expense margin
per cup is 2,373
Less: Fixed expenses 1,300
$0.36. The average fixed expense per month
Net operating income $ 1,073
is $1,300. 2,100 cups are sold each month
on average. What is the operating leverage?
a. 2.21 Operating Contribution margin
b. 0.45 leverage = Net operating income
c. 0.34 $2,373
= $1,073 = 2.21
d. 2.92
McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc.
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Quick Check
Quick Check
Actual Increased
sales sales
2,100 cups 2,520 cups
Sales $ 3,129 $ 3,755
Less: Variable expenses 756 907
Contribution margin 2,373 2,848
Less: Fixed expenses 1,300 1,300
Net operating income $ 1,073 $ 1,548
% change in sales 20.0%
% change in net operating income 44.2%
Learning Objective 9
$265,000
= 48.2% (rounded)
$550,000
McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc.
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End of Chapter 6