BBA PROGRAM
Managerial Accounting
Slide 2-1
Cost-Volume-Profit Analysis
Purpose of Budgeting
▪ Planning
• How many units of input do I need to
support a budgeted output?
▪ Control
• Are operations effective and efficient?
▪ Decision making
• How do we decide on a price, and
choose quantity given constraints?
Common Cost Behavior Patterns
Variable Costs
▪ Costs which change directly in
proportion to changes in quantity or
activity
Fixed Costs
▪ Costs which do not change when
quantity or activity volume changes
Common Cost Behavior Patterns
Mixed Costs
▪ Costs that have both variable and fixed
elements
Step Costs
▪ Fixed for a range of output, but
increase when upper bound of range
is exceeded
Variable Costs
Total Variable Cost = $91 × Units produced
Fixed Costs
Total fixed cost = $94,000
Mixed Costs
Total cost = ($91 × Units produced) + $94,000
Cost-Volume-Profit Analysis
▪ The Profit Equation
Profit = SP(x) – VC(x) – TFC
Where:
x = Quantity of units produced and sold
SP = Selling price per unit
VC = Variable cost per unit
TFC = Total fixed cost
▪ Fundamental to CVP analysis
Break-Even Point
Loulou’s Cakes creates elaborate wedding
cakes. Each cake sells for $500. The
variable cost of baking the cakes is $200 and
the fixed cost per month is $6,000
1. Calculate the break-even point in units
$6,000 / ($500 - $200) = 20 cakes
2. How many cakes must be sold to earn a profit
of $9,000?
($9,000 + $6,000) / ($500 - $200) = 50 cakes
Margin of Safety
▪ The margin of safety is the
difference between the expected
level of sales and break-even sales
• If breakeven sales for car Model D35 is
$293,600 and expected sales are $350,000,
calculate the margin of safety.
• The margin of safety is:
$350,000 - $293,600 = $56,400.
3. At HANGBANG Corp., the selling price per lawn
mower is $120, variable cost per lawn mower is
$55. Fixed costs are $130,000. Expected sales are
4,200 units. The Margin of Safety is?
a. $264,000
b. $384,000
c. $143,000
d. $121,000
Answer a:
Expected sales =
4,200 units X $120 = $504,000
Break even sales =
2,000 units X $120 = $240,000
Margin of safety = $504,000 – $240,000 = $264,000
4. At HANGBANG Corp., the selling price per
lawn mower is $120, variable cost per lawn
mower is $55. Fixed costs are $130,000.
Expected sales are 4,200 units. What is profit
expected to be?
$143,000
Answer here: _________________
Margin of safety in units = 4,200 – 2,000 = 2,200
2,200 units × $65 unit CM = $143,000
Contribution Margin
Difference between revenue and
variable costs
▪ Contribution margin =
Total revenue minus total variable costs
▪ Unit contribution margin =
Selling price minus variable cost per unit
- The unit contribution margin measures
the amount of incremental profit
generated by selling an additional unit
Contribution Margin Ratio
The contribution margin ratio measures
the amount of incremental profit
generated by an additional dollar of sales
▪ Two methods to calculate the
contribution margin ratio
1. Contribution margin divided by sales
revenue (Sales – TVC) / Sales
2. Unit contribution margin divided by
selling price (SP – VC) / SP
HANGBANG, Inc. produces stereo speakers.
The selling price per pair of speakers is $800.
The variable cost of production is $300 and
the fixed cost per month is $50,000.
1. Calculate the unit contribution margin
associated with a pair of speakers
$800 – $300 = $500
2.Calculate the contribution margin ratio for
HANGBANG associated with a pair of
speakers
($800 – $300) / $800 = 0.625
Break-Even Point
The Theater-projections (single product)
USD
Fixed Expenses per month
Theater rental
Salaries & wages
Actors wages
Prodction crew wages
Playrights royalties for use of plays
Insurance
Utilities fixed expenses
Advertising and promotion
Administrative expenses
Total Fixed Expenses
10,000
8,000
15,000
5,600
5,000
1,000
1,400
800
1,200
48,000
Variable expenses per ticket sold:
City's charge per ticket for use of theater
Other miscellaneous expenses
Total variable cost per ticket sold
8
2
10
Price per ticket
16
Revenues
Break even tickets
TFC
CM/U
48000
6
8000 Tickets
Multiproduct Analysis
Contribution Margin Approach
▪ Identify number of units needed to be
sold to break even
• Calculate weighted average contribution margin
based on expected units sold and product mix
• Assume product mix to calculate break-even point
and target profit
Break-Even Point
The theater-projections (two products)
Seat
Price per ticket
Regular
Box
16
20
Total units sold
Sales mix
Regular
Box
Seats in
CM/U Theater
VC/U
10
10
6
10
Seats available per month (20
performance)
450
50
9000
1000
5000
90.00%
10.00%
4500
500
Weighted average contribution Margin
Break even tickets
TFC
WACM/U
$
6.40
48000
6.4
7500 Tickets
Regular
Box
6750
750
Questions ?