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Chap 022
Chap 022
COST-VOLUME-PROFIT
ANALYSIS
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
22 - 2
C1
FIXED COSTS
C1
VARIABLE COSTS
C1
MIXED COSTS
Mixed costs contain a fixed portion that is incurred even when
the facility is unused, and a variable portion that increases with
usage. Utilities typically behave in this manner.
Total Utility Cost
o st
d c
i xe
l m
t a
To Variable
Cost per KW
Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
22 - 6
C1
STEP-WISE COSTS
C1
CURVILINEAR COSTS
P1
MEASURING COST BEHAVIOR
P1
SCATTER DIAGRAMS
Draw a line through the plotted data points so that about
equal numbers of points fall above and below the line.
20
* ** *
1,000’s of Dollars
* *
Total Cost in
**
10 * *
Estimated fixed cost = 10,000
0
0 1 2 3 4 5 6
Activity, 1,000’s of Units Produced
22 - 10
P1
SCATTER DIAGRAMS
Δ in cost
Unit Variable Cost = Slope =
Δ in units
20
* ** * Vertical
1,000’s of Dollars
* * distance
Total Cost in
** is the
10 * * change
in cost.
Horizontal distance is
the change in activity.
0
0 1 2 3 4 5 6
Activity, 1,000’s of Units Produced
22 - 11
P1
THE HIGH-LOW METHOD
The following relationships between units
produced and total cost are observed:
P1
THE HIGH-LOW METHOD
Units Cost
High activity level - December 67,500 $ 29,000
Low activity level - January 17,500 20,500
Change in activity 50,000 $ 8,500
P1
LEAST-SQUARES REGRESSION
Least-squares regression is usually covered
in advanced cost accounting courses. It is
commonly used with spreadsheet programs
or calculators.
A1
USING BREAK-EVEN ANALYSIS
The break-even point (expressed in
units of product or dollars of sales) is
the unique sales level at which a
company earns neither a profit nor
incurs a loss.
22 - 15
P2
COMPUTING THE BREAK-EVEN
POINT
Total Unit
Sales Revenue (2,000 units) $ 200,000 $ 100
Less: Variable costs 140,000 70
Contribution margin $ 60,000 $ 30
Less: Fixed costs 24,000
Net income $ 36,000
Fixed costs
Break-even point in units =
Contribution margin per unit
Fixed costs
Break-even point in dollars =
Contribution margin ratio
P3
PREPARING A CVP CHART
22 - 21
P3 MAKING ASSUMPTIONS IN
COST-VOLUME-PROFIT ANALYSIS
A limited range of activity called the relevant
range, where CVP relationships are linear.
Unit selling price remains constant.
Unit variable costs remain constant.
Total fixed costs remain constant.
Production = sales (no inventory changes).
22 - 22
C2 COMPUTING INCOME
FROM SALES AND COSTS
Income (pretax) = Sales – Variable costs – Fixed costs
C2 COMPUTING SALES
FOR A TARGET INCOME
C2
FOR A
TARGET NET INCOME
Rydell has a monthly target net income of $9,000. The
unit selling price is $100. Monthly fixed costs are
$24,000, the unit variable cost is $70, and the tax rate is
25 percent.
$9,000
Pretax income = = $12,000
1 - .25
COMPUTING SALES (DOLLARS)
22 - 27
C2
FOR A
TARGET NET INCOME
Rydell has a monthly target after-tax income of $9,000.
The unit selling price is $100. Monthly fixed costs are
$24,000, the unit variable cost is $70, and the tax rate is
25 percent. Let’s compute the sales revenue that Rydell
will need to earn $12,000 of pretax income?
$24,000 + $12,000
Dollar sales = = $120,000
30%
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$24,000 + $12,000
Unit sales = = 1,200
units $30 per unit
22 - 29
C2
COMPUTING THE MARGIN OF
SAFETY
Margin of safety is the amount by which sales can drop
before the company incurs a loss. Margin of safety may
be expressed as a percentage of expected sales.
C2
USING SENSITIVITY ANALYSIS
Rydell Company is considering buying a new machine
that would increase monthly fixed costs from $24,000 to
$30,000, but decrease unit variable costs from $70 to $60.
The $100 per unit selling price would remain unchanged.
What is the new break-even point in dollars?
P4 COMPUTING A MULTIPRODUCT
BREAK-EVEN POINT
The CVP formulas can be modified for use when a
company sells more than one product.
The unit contribution margin is replaced with the
contribution margin for a composite unit.
A composite unit is composed of specific numbers of
each product in proportion to the product sales mix.
Sales mix is the ratio of the volumes of the various
products.
22 - 32
P4 COMPUTING A MULTIPRODUCT
BREAK-EVEN POINT
Continue
22 - 33
P4 COMPUTING A MULTIPRODUCT
BREAK-EVEN POINT
Hair-Today offers three cuts as shown below. Annual fixed
costs are $192,000. Compute the break-even point in
composite units and in number of units for each haircut at the
given sales mix.
Haircuts
Basic Ultra Budget
Selling Price $ 20.00 $ 32.00 $ 16.00
Variable Cost 13.00 18.00 8.00
Unit Contribution $ 7.00 $ 14.00 $ 8.00
Sales Mix Ratio 4 2 1
A 4:2:1 sales mix means that if there are 500 budget cuts,
then there will be 1,000 ultra cuts, and 2,000 basic cuts.
22 - 34
P4 COMPUTING A MULTIPRODUCT
BREAK-EVEN POINT
Step 1: Compute contribution margin per
composite unit.
Haircuts
Basic Ultra Budget
Selling Price $20.00 $32.00 $16.00
Variable Cost 13.00 18.00 8.00
Unit Contribution $7.00 $14.00 $8.00
Sales Mix Ratio ×4 ×2 ×1
Weighted Contribution $ 28.00 + $ 28.00 + $ 8.00 = $ 64.00
P4 COMPUTING A MULTIPRODUCT
BREAK-EVEN POINT
Step 2: Compute break-even point in
composite units.
Break-even point Fixed costs
= Contribution margin
in composite units
per composite unit
P4 COMPUTING A MULTIPRODUCT
BREAK-EVEN POINT
Step 3: Determine the number of each haircut
that must be sold to break-even.
Sales Composite
Product Mix Cuts Haircuts
Basic 4 × 3,000 = 12,000
Ultra 2 × 3,000 = 6,000
Budget 1 × 3,000 = 3,000
Total 21,000
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P4 MULTIPRODUCT BREAK-EVEN
INCOME STATEMENT
Haircuts
Basic Ultra Budget Combined
Selling Price $ 20.00 $ 32.00 $ 16.00
Variable Cost 13.00 18.00 8.00
Unit Contribution $ 7.00 $ 14.00 $ 8.00
Sales Volume × 12,000 × 6,000 × 3,000
Total Contribution $ 84,000 $ 84,000 $ 24,000 $192,000
Fixed Costs 192,000
Income $ 0
22 - 38
GLOBAL VIEW
A2
DEGREE OF OPERATING LEVERAGE
AA measure
measure of
of the
the extent
extent to
to which
which fixed
fixed costs
costs are
are
being
being used
used in
in an
an organization.
organization.
AA measure
measure of
of how
how aa percentage
percentage change
change in
in
sales
sales will
will affect
affect profits.
profits.
A2
OPERATING LEVERAGE
Rydell Company
Sales (1,200 units) $120,000
Less: variable expenses 84,000
Contribution margin 36,000
Less: fixed expenses 24,000
Pretax income $ 12,000
ESTIMATE LEAST-SQUARES
REGRESSION
22 - 42
END OF CHAPTER 22