Chapter 18
Identify how changes in volume affect costs
Variable
Fixed
Mixed
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
Total variable costs change in direct proportion to
changes in the volume of activity
◦ If activity increases, so does the cost

Unit variable cost remains constant
Units
produced
Direct
materials
cost per unit
Total direct
materials
cost
100
$25
$2,500
200
$25
5,000
300
$25
7,500
400
$25
10,000
500
$25
12,500
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

Do not change over wide ranges in volume
Examples:
◦ Straight-line depreciation
◦ Salaries for managers

Fixed cost per unit is inversely proportional to
activity
◦ The more activity, the less the fixed cost per unit
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

Have both a fixed and variable component
Example:
◦ Utilities that charge a set fee per month, plus a charge for
usage
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Sales Compensation
$4,500
$4,000
$3,500
$3,000
$2,500
Variable
$2,000
$1,500
$1,000
$500
$0
Fixed
$0
$10,000 $20,000 $30,000 $40,000
Total Sales


Method to separate mixed costs into variable and
fixed components
Select the highest level and the lowest level of
activity over a period of time
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Calculate
variable cost
per unit
Calculate total
fixed costs
Create
equation to
show cost
behavior
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Change in total cost
Variable cost
per unit
#1
Change in activity
Total mixed cost
Total fixed
costs
minus
#2
Total variable cost
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Total mixed
cost
Variable cost
per unit
Number of
units
Total fixed costs
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Variable cost
per unit
Variable cost
per unit
Variable cost
per unit
Change in total cost
Change in activity
$4,400 - $4,000
1,400 - 900
$0.80 per
inspection
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Total mixed cost
Total fixed
costs
minus
Total variable cost
$4,000
Total fixed
costs
minus
900 inspections x $0.80
Total fixed
costs
$3,280
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Total mixed
cost
$0.80 per
inspection
Number of
inspections
$3,280
$4,080
1,000
inspections
$0.80 per
inspection
$3,280
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
Band of volume:
◦ Where total fixed costs remain constant and variable cost
per unit remains constant

Outside the relevant range, costs can differ
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Use CVP analysis to compute breakeven points
Costs can be classified as fixed
or variable.
Volume is only factor that affects
costs. Fixed costs don’t change.
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
Sales level at which operating income is zero
◦ Sales above breakeven result in a profit
◦ Sales below breakeven result in a loss

Two methods:
◦ Income statement approach
◦ Contribution margin approach
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Sales – Variable costs – Fixed costs = Operating income
Selling price
per unit x
units sold
Variable
cost per unit
x units sold
Fixed
costs
Solve for
units sold
Operating
income
Set to
zero
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Sales
revenue
per unit
Variable
costs per
unit
Contribution
margin per
unit
Fixed costs
Breakeven
point in units
Contribution margin per unit
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Contribution
margin
Sales
revenue
Fixed costs
Contribution margin ratio
Contribution
margin ratio
Breakeven
point in
sales dollars
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1.
Which of the following is most likely a
variable cost?
A.
B.
C.
D.
Factory rent
Property taxes
Depreciation
Sales commissions
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1.
Which of the following is most likely a
variable cost?
A.
B.
C.
D.
Factory rent
Property taxes
Depreciation
Sales commissions
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2.
This type of cost per unit remains
constant, while the total cost increases
with activity.
A.
B.
C.
D.
Variable
Fixed
Mixed
Semi-variable
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2.
This type of cost per unit remains
constant, while the total cost increases
with activity.
A.
B.
C.
D.
Variable
Fixed
Mixed
Semi-variable
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3.
This type of unit cost decreases with
activity, but the total cost remains
constant.
A.
B.
C.
D.
Variable
Fixed
Mixed
Semi-variable
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3.
This type of unit cost decreases with
activity, but the total cost remains
constant.
A.
B.
C.
D.
Variable
Fixed
Mixed
Semi-variable
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4.
Which of the following would most likely
be a mixed cost?
A.
B.
C.
D.
Direct labor
Straight-line depreciation
Utilities
Office salaries
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4.
Which of the following would most likely
be a mixed cost?
A.
B.
C.
D.
Direct labor
Straight-line depreciation
Utilities
Office salaries
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Use CVP analysis for profit planning, and graph
the CVP relations
Fixed costs + Desired operating income
Contribution margin ratio
Target sales in dollars
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$20,000
Dollars
$15,000
•
$10,000
Revenues
$5,000
$0
0
500
1,000
Volume of Units
1,500
$20,000
Dollars
$15,000
Revenues
Fixed costs
$10,000
$5,000
$0
0
500
1,000 1,500
Volume of Units
$20,000
Dollars
$15,000
Revenues
Fixed costs
Total cost
$10,000
$5,000
$0
0
500
1,000 1,500
Volume of Units
$20,000
Breakeven point
Dollars
$15,000
Profit
$10,000
$5,000
Loss
$0
0
500
1,000
Volume of Units
1,500
Use CVP methods to perform sensitivity analysis


Management tool to predict how changes in sale
prices, cost or volume affects profits
“What-if?” analysis
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Change in
Change
variable
selling All
price
would impact
costs
breakeven point
Change in
fixed costs
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Cause
Effect
Result
Change
Contribution
margin
Breakeven
point
Selling price increases
Increase
Decrease
Selling price decreases
Decrease
Increase
Variable cost per unit increases
Decrease
Increase
Variable cost per unit decreases
Increase
Decrease
Fixed costs increase
No effect
Increase
Fixed costs decrease
No effect
Decrease
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

Excess of expected sales over breakeven sales
Cushion company can absorb without incurring a
loss
Expected sales
in units
Expected sales
in dollars
Breakeven
sales in units
Breakeven
sales in dollars
Margin of
safety in units
Margin of
safety in
dollars
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Sales price
per unit
Variable
costs per unit
Contribution
margin per unit
$230
$70
$160
Fixed costs
Contribution margin
per unit
$112,000
$160
Breakeven
point in
units
700
students
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Decreased
Sales price
per unit
Variable
costs per unit
Decreased
Contribution
margin per unit
$200
$70
$130
Fixed costs
Contribution margin
per unit
$112,000
$130
New
Breakeven
point in
units
862
students
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Sales price
per unit
Decreased
variable
costs per unit
Increased
Contribution
margin per unit
$230
$50
$180
Fixed costs
Contribution margin
per unit
$112,000
$180
New
Breakeven
point in
units
623
students
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Sales price
per unit
Variable
costs per unit
Contribution
margin per unit
$230
$70
$160
Decreased fixed costs
Contribution margin
per unit
$102,000
$160
Breakeven
point in
units
638
students
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Calculate the breakeven point for
multiple product lines or services

Selling prices and variable costs differ for each
product
◦ Different contribution to profits


Weighted-average contribution margin computed
Sales mix provides weights
◦ Combination of products that make up total sales
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
Calculate weighted average contribution margin
per unit
A company has two products with the sales prices
and variable costs per unit indicated in the table
Product A
Sales price per unit
Product B
$100
Variable cost per unit
58
Last year,
the company
Contribution
margin
per unit
42
sold 5,000 units of A and
Sales mix
per unit
3,000 units of B. This
Contribution
results in margin
a sale mix of 5:3
Weighted average contribution margin
Total
The$150
sales mix weights are
added as well as the
60
products’ contribution
90 margins
5
3
8
210
270
480
$60
The $480
sales divided
mix weight
by 8isresults in
multipliedaby
weighted
the product’s
average
contribution
contribution
margin
margin of $60
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
Calculate breakeven point for the package of
products
Fixed costs
Weighted average contribution
margin per unit
assumed
$600,000
$60
10,000
units
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
Calculate the breakeven point for each product
line
◦ Multiply the package breakeven point by each product
line’s proportion of the sales mix
Breakeven point
Product A
10,000 x 5/8
6,250 units
Breakeven point
Product B
10,000 x 3/8
3,750 units
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 Questions?
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5.
The simplest method to split a mixed
cost into its fixed and variable
components is called:
A.
B.
C.
D.
fixed-variable separation.
high-low method.
multiple regression.
breakeven analysis.
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5.
The simplest method to split a mixed
cost into its fixed and variable
components is called:
A.
B.
C.
D.
fixed-variable separation.
high-low method.
multiple regression.
breakeven analysis.
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6.
Which of the following is an assumption
of CVP analysis?
A.
Costs can be classified as either fixed
or variable.
Volume is the only factor that impacts
costs.
Fixed costs don’t change.
All of the above are true.
B.
C.
D.
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6.
Which of the following is an assumption
of CVP analysis?
A.
Costs can be classified as either fixed
or variable.
Volume is the only factor that impacts
costs.
Fixed costs don’t change.
All of the above are true.
B.
C.
D.
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7.
The sales level where net income
equals zero is called:
A.
B.
C.
D.
the breakeven point.
zero sum sales.
net loss.
deficit earnings.
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7.
The sales level where net income
equals zero is called:
A.
B.
C.
D.
the breakeven point.
zero sum sales.
net loss.
deficit earnings.
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8.
Excess sales over breakeven sales is
referred to as:
A.
B.
C.
D.
absorption potential.
margin of safety.
margin of error.
contribution margin.
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8.
Excess sales over breakeven sales is
referred to as:
A.
B.
C.
D.
absorption potential.
margin of safety.
margin of error.
contribution margin.
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9.
Indicate how the following changes
would impact the breakeven point:
Change
Impact on
breakeven point
Increase in fixed costs
Decrease in selling price
Increase in variable costs
Decrease in variable costs
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9.
Indicate how the following changes
would impact the breakeven point:
Change
Impact on
breakeven point
Increase in fixed costs
Increase
Decrease in selling price
Increase
Increase in variable costs
Increase
Decrease in variable costs
Decrease
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10. Contribution margin equals:
A.
B.
C.
D.
sales – variable costs.
sales – fixed costs.
fixed costs – variable costs.
sales – variable costs – fixed costs.
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10. Contribution margin equals:
A.
B.
C.
D.
sales – variable costs.
sales – fixed costs.
fixed costs – variable costs.
sales – variable costs – fixed costs.
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