8-1
8-1
8-2
The Break-Even Point
The break-even point is the point in the volume of
activity where the organization’
s revenues and
expenses are equal.
Chapter Eight
Sales
$ 200,000
Less: variable expenses
120,000
Contribution margin
80,000
Less: fixed expenses
80,000
Net income
$
-
Cost-Volume-Profit
Analysis
McGraw-Hill/Irwin
McGraw-Hill/Irwin
8-3
Contribution-Margin Approach
Contribution-Margin Approach
Consider the following information developed
by the accountant at Curl, Inc.:
Sales (500 surf boards)
Less: variable expenses
Contribution margin
Less: fixed expenses
Net income
Total
$250,000
150,000
$100,000
80,000
$ 20,000
Per Unit
$
500
300
$
200
8-4
For each additional surf board sold, Curl
generates $200 in contribution margin.
Percent
100%
60%
40%
McGraw-Hill/Irwin
Sales (500 surf boards)
Less: variable expenses
Contribution margin
Less: fixed expenses
Net income
Total
$250,000
150,000
$100,000
80,000
$ 20,000
Per Unit
$
500
300
$
200
Percent
100%
60%
40%
McGraw-Hill/Irwin
8-5
Contribution-Margin Approach
Fixed expenses
Unit contribution margin
SSaale
less ((5500
00 ssuurrff bbooaarrddss))
LLeessss:: vvaarria
iabble
le eexp
xpeennsseess
CCoonnttrrib
u
ib uttio
ionn m
mar
arggin
in
LLeessss:: fix
fixed
ed eexxppen
ensseess
NNeett in
inccoom
mee
$80,000
$200
McGraw-Hill/Irwin
=
TToottaal l
$$22550,0
0,00000
11550,0
0,00000
$$11000,0
0,00000
880,0
0,00000
$$ 220,0
0,00000
8-6
Contribution-Margin Approach
Break-even point
(in units)
PPeerr UUnnitit
$$
50
5000
30
3000
$$
20
2000
PPeerrcceenntt
110000%
%
6600%
%
4400%
%
= 400 surf boards
Here is the proof!
Sales
Sales (400
(400 surf
surf boards)
boards)
Less:
Less: variable
variable expenses
expenses
Contribution
Contribution margin
margin
Less:
Less: fixed
fixed expenses
expenses
Net
Net income
income
400 × $500 = $200,000
McGraw-Hill/Irwin
Total
Total
$$200,000
200,000
120,000
120,000
$$ 80,000
80,000
80,000
80,000
$$
--
Per
Per Unit
Unit
$$ 500
500
300
300
$$ 200
200
Percent
Percent
100%
100%
60%
60%
40%
40%
400 × $300 = $120,000
8-2
8-7
8-8
Contribution Margin Ratio
Contribution Margin Ratio
Calculate the break-even point in sales dollars rather
than units by using the contribution margin ratio.
Contribution margin
Sales
Fixed expense
CM Ratio
= CM Ratio
Break-even point
(in sales dollars)
=
Total
$200,000
120,000
$ 80,000
80,000
$
-
Sales (400 surf boards)
Less: variable expenses
Contribution margin
Less: fixed expenses
Net income
$80,000
40%
McGraw-Hill/Irwin
Per Unit
$
500
300
$
200
Percent
100%
60%
40%
$200,000 sales
=
McGraw-Hill/Irwin
8-9
Equation Approach
Sales revenue –Variable expenses –Fixed expenses = Profit
Unit
Sales
sales × volume
price in units
Unit
Sales
variable × volume
expense in units
($500 × X) – ($300 × X)
8-10
Graphing Cost-Volume-Profit
Relationships
Viewing CVP relationships in a graph gives
managers a perspective that can be obtained in no
other way.
Consider the following information for Curl, Inc.:
Income
300 units
Sales
$ 150,000
Less: variable expenses
90,000
Contribution margin
$
60,000
Less: fixed expenses
80,000
Net income (loss)
$ (20,000)
– $80,000 = $0
($200X) – $80,000 = $0
Income
400 units
$ 200,000
120,000
$
80,000
80,000
$
-
Income
500 units
$ 250,000
150,000
$ 100,000
80,000
$
20,000
X = 400 surf boards
McGraw-Hill/Irwin
McGraw-Hill/Irwin
8-11
8-12
Cost-Volume-Profit Graph
Profit-Volume Graph
$100,000
450,000
$60,000
re a
fit a
Pro
300,000
Total expenses
250,000
$40,000
Profit
350,000
Sales in Dollars
Total sales
Break-even
point
400,000
Some managers like the profit-volume
graph$80,000
because it focuses on profits and volume.
200,000
Fixed expenses
150,000
100,000
ss
Lo
50,000
a
are
it
of
Pr
$20,000
$$$(20,000)
$50
$(40,000)
$(60,000)
Lo
ss
$100
$150
$200
$250
$300
ea
ar
$350
$400
ea
ar
Break-even
point
$(80,000)
McGraw-Hill/Irwin
100
200
300
400
Units Sold
500
600
700
800
$(100,000)
McGraw-Hill/Irwin
1
2
3
4
5
Units sold (00s)
6
7
8
8-3
8-13
8-14
Equation Approach
Target Net Profit
Sales revenue –Variable expenses –Fixed expenses = Profit
We can determine the number of
surfboards that Curl must sell to earn a
profit of $100,000 using the contribution
margin approach.
Fixed expenses + Target profit
Unit contribution margin
$80,000 + $100,000
$200
=
($500 × X) – ($300 × X) – $80,000 = $100,000
Units sold to earn
the target profit
($200X) = $180,000
X = 900 surf boards
= 900 surf boards
McGraw-Hill/Irwin
McGraw-Hill/Irwin
8-15
8-16
Applying CVP Analysis
Safety Margin
Safety Margin
Curl, Inc. has a break-even point of $200,000. If
actual sales are $250,000, the safety margin is
$50,000 or 100 surf boards.
The difference between budgeted sales
revenue and break-even sales revenue.
The amount by which sales can drop
before losses begin to be incurred.
Sales
Less: variable expenses
Contribution margin
Less: fixed expenses
Net income
McGraw-Hill/Irwin
Break-even
sales
400 units
$ 200,000
120,000
80,000
80,000
$
-
Actual sales
500 units
$ 250,000
150,000
100,000
80,000
$
20,000
McGraw-Hill/Irwin
8-17
8-18
Changes in Fixed Costs
Curl is currently selling 500 surf boards per
month.
The owner believes that an increase of $10,000
in the monthly advertising budget, would
increase bike sales to 540 units.
Should we authorize the requested increase in
the advertising budget?
Changes in Fixed Costs
Current
Current
Sales
Sales
(500
(500 Boards)
Boards)
Sales
$$ 250,000
Sales
250,000
Less:
150,000
Less: variable
variable expenses
expenses
150,000
Contribution
$$ 100,000
Contribution margin
margin
100,000
Less:
80,000
Less: fixed
fixed expenses
expenses
80,000
Net
$$
20,000
Net income
income
20,000
Proposed
Proposed
Sales
Sales
(540
(540 Borads)
Borads)
$$ 270,000
270,000
162,000
162,000
$$ 108,000
108,000
90,000
90,000
$$
18,000
18,000
540 units × $500 per unit = $270,000
$80,000 + $10,000 advertising = $90,000
McGraw-Hill/Irwin
McGraw-Hill/Irwin
8-4
8-19
8-20
Changes in Unit
Contribution Margin
Changes in Fixed Costs
Current
Current
Sales
Sales
(500
(500 Boards)
Boards)
Sales
$$ 250,000
Sales
250,000
Less:
variable
expenses
150,000
Less: variable expenses
150,000
Contribution
$$ 100,000
Contribution margin
margin
100,000
Less:
80,000
Less: fixed
fixed expenses
expenses
80,000
Net
$$
20,000
Net income
income
20,000
Sales will increase by
$20,000, but net income
decreased by $2,000.
Proposed
Proposed
Sales
Sales
(540
(540 Borads)
Borads)
$$ 270,000
270,000
162,000
162,000
$$ 108,000
108,000
90,000
90,000
$$
18,000
18,000
Because of increases in cost of raw materials,
Curl’
s variable cost per unit has increased
from $300 to $310 per surf board. With no
change in selling price per unit, what will be
the new break-even point?
($500 × X) – ($310 × X) – $80,000 = $0
X = 422 units (rounded)
McGraw-Hill/Irwin
McGraw-Hill/Irwin
8-21
8-22
Predicting Profit Given Expected
Volume
Given:
Fixed expenses
Unit contribution margin
Target net profit
Given:
Fixed expenses
Unit contribution margin
Expected sales volume
Predicting Profit Given
Expected Volume
Find: {required sales volume}
In the coming year, Curl’
s owner expects to sell
525 surfboards. The unit contribution margin
is expected to be $190, and fixed costs are
expected to increase to $90,000.
Total contribution
-
Fixed cost = Profit
($190 × 525) – $90,000 = X
Find: {expected profit}
X = $99,750 – $90,000
X = $9,750 profit
McGraw-Hill/Irwin
McGraw-Hill/Irwin
8-23
8-24
CVP Analysis with Multiple
Products
CVP Analysis with Multiple
Products
For a company with more than one product,
sales mix is the relative combination in which
a company’
s products are sold.
Different products have different selling prices,
cost structures, and contribution margins.
Curl provides us with the following information:
Description
Surfboards
Sailborads
Total sold
Let’
s assume Curl sells surf boards and sail
boards and see how we deal with breakeven analysis.
McGraw-Hill/Irwin
Unit
Unit
Number
Selling Variable Contribution
of
Price
Cost
Margin
Boards
$
500 $
300 $
200
500
1,000
450
550
300
800
Description
Surfboards
Sailborads
Total sold
McGraw-Hill/Irwin
Number
of Boards
500
300
800
% of
Total
62.5% (500 ÷ 800)
37.5% (300 ÷ 800)
100.0%
8-5
8-25
8-26
CVP Analysis with Multiple
Products
CVP Analysis with Multiple
Products
Weighted-average unit contribution margin
Break-even point
Contribution
Weighted
Description
Margin
% of Total Contribution
Surfboards $
200
62.5% $
125.00
Sailborads
550
37.5%
206.25
Weighted-average contribution margin $
331.25
Break-even
Fixed expenses
=
point
Weighted-average unit contribution margin
Break-even
=
point
$170,000
$331.25
Break-even
= 514 combined unit sales
point
$200 × 62.5%
McGraw-Hill/Irwin
McGraw-Hill/Irwin
8-27
8-28
CVP Analysis with Multiple
Products
Assumptions Underlying
CVP Analysis
Selling price is constant throughout
the entire relevant range.
Costs are linear over the relevant
range.
In multi-product companies, the
sales mix is constant.
In manufacturing firms, inventories
do not change (units produced =
units sold).
Break-even point
Break-even
= 514 combined unit sales
point
Description
Surfboards
Sailborads
Total units
Breakeven
Sales
514
514
% of
Individual
Total
Sales
62.5%
321
37.5%
193
514
McGraw-Hill/Irwin
McGraw-Hill/Irwin
8-29
Cost Structure and Operating
Leverage
The cost structure of an organization is the
relative proportion of its fixed and variable
costs.
Operating leverage is . . .
8-30
Measuring Operating Leverage
Operating leverage
factor
Contribution margin
Net income
Actual
Actual sales
sales
500
500 Board
Board
Sales
$$ 250,000
Sales
250,000
Less:
150,000
Less: variable
variable expenses
expenses
150,000
Contribution
100,000
Contribution margin
margin
100,000
Less:
80,000
Less: fixed
fixed expenses
expenses
80,000
Net
$$ 20,000
Net income
income
20,000
the extent to which an organization uses
fixed costs in its cost structure.
 greatest in companies that have a high
proportion of fixed costs in relation to variable
costs.

McGraw-Hill/Irwin
=
McGraw-Hill/Irwin
$100,000
$20,000
= 5
8-6
8-31
8-32
Measuring Operating Leverage
End of Chapter 8
We made
it!
A measure of how a percentage change in
sales will affect profits. If Curl increases its
sales by 10%, what will be the percentage
increase in net income?
Percent increase in sales
Operating leverage factor ×
Percent increase in profits
McGraw-Hill/Irwin
10%
5
50%
McGraw-Hill/Irwin