Cost volume profit analysis

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Objective 1:
Contribution Margin Income Statement
Sales
- Variable Costs
Contribution Margin
- Fixed Costs
Operating Profit
Cost-Volume-Profit Analysis
Assumptions of CVP Analysis
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Contribution Margin Example
Expenses can be classified as either
variable or fixed.
CVP relationships are linear over a
wide range of production and sales.
Sales prices, unit variable cost, and
total fixed expenses will not vary
within the relevant range.
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Assumptions of CVP Analysis
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Contribution Margin Example
Volume is the only cost driver.
The relevant range of volume is
specified.
Inventory levels will be unchanged.
The sales mix remains unchanged
during the period.
©2005 Prentice Hall, Inc.
Business Publishing
Ann and Tom manufacture a device that
allows users to take a closer look at
icebergs from a ship.
The usual price for the device is $100.
Variable costs are $70 per unit.
They receive a proposal from a company
in Newfoundland to sell 20,000 units at a
price of $85.
There is sufficient capacity to produce the
order.
Accounting, 6/E
How do we analyze this situation?
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$85 – $70 = $15 contribution margin.
$15 × 20,000 units = $300,000 (total
increase in contribution margin)
Horngren/Harrison/Bamber
22 - 1
Contribution Margin Income
Statement
Sales (20,000 x $85)
Variable costs
(20,000 x $70)
Contribution margin
Objective 2
$1,700,000
(1,400,000)
$300,000
Computing Break-Even Point

Use CVP analysis for profit planning
and graph the cost-volume-profit
relations
Preparing a CVP Chart
The unique sales level at which a
company earns neither a profit nor
incurs a loss.
Sales – Variable Costs – Fixed Costs = 0
Or
Contribution required to break-even=
Fixed costs
Breakeven Point Example
Costs and Revenue
in Dollars
 Plot total fixed costs on the vertical axis.
Total fixed costs
Total costs
Draw the total cost line with a slope
equal to the unit variable cost.
Volume in Units
Preparing a CVP Chart
Let’s look back at Luis and Tom’s manufacturing, assuming
Costs and Revenue
in Dollars
that the fixed cost are $90,000.
Starting at the origin, draw the sales line
with a slope equal to the unit sales price.
Contribution margin Income statement:
Sales (20,000 x $85) $1,700,000
Variable costs
(20,000 x $70) (1,400,000)
Contribution margin
$300,000
Less
Fixed costs
$90,000
Profit
$210,000
Total fixed costs
Sales
Total costs
Breakeven
Point
Volume in Units
©2005 Prentice Hall, Inc.
Business Publishing
Accounting, 6/E
Horngren/Harrison/Bamber
22 - 2
Various Sales Levels Example
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Change in Sales Price Example
What operating profit is expected
when sales are 22000units?
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Target Operating Profit Example
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Suppose that our business would be
content with operating profit of
___$30 000_.
How many units must be sold?
Objective 4
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Change in Variable Costs Example
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Business Publishing
Suppose that variable expenses per
device are _$75___ instead of _$70
Other factors remain unchanged.
Change in Fixed Costs Example
Use CVP method to perform
sensitivity analysis.
©2005 Prentice Hall, Inc.
Suppose that the sales price per
device is _$60_ rather than __$85_
What is the revised breakeven sales
in units?
Accounting, 6/E
Suppose that fixed costs increased
by $30,000.
What are the new fixed costs?
What is the new breakeven point?
Horngren/Harrison/Bamber
22 - 3
Computing Multiproduct
Break-Even Point
Margin of Safety Example
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Excess of expected sales over
breakeven sales.
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E22-7
Computing Multiproduct
Break-Even Point
Atlanta Braves
(in thousands)
$7,000
$6,000
$5,000
$4,000
Break even in units = 1,200,000 Revenues
$3,000
Break
Total Expense
$2,000even in $ = 1,200,000 x 24 = $28,800,000
$1,000
$50
100 150 200 250
Fixed expense
(in thousands)
Unit contribution margin is replaced
with 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.
The resulting break-even formula
for composite unit sales is:
Break-even point
in composite units
=
Fixed costs
Contribution margin
per composite unit
Break even point
Effect of sales mix on CVP
analysis.
Computing Multiproduct
Break-Even Point
A company sells windows and doors. They
sell 4 windows for every door.
Selling Price
Variable Cost
Unit Contribution
Sales Mix Ratio
©2005 Prentice Hall, Inc.
Business Publishing
Accounting, 6/E
Windows Doors
$200
$500
125
350
$
75 $ 150
4
1
Horngren/Harrison/Bamber
22 - 4
Computing Multiproduct
Break-Even Point
Computing Multiproduct
Break-Even Point
Step 1: Compute contribution margin per
composite unit.
Selling Price
Variable Cost
Unit Contribution
Sales Mix Ratio
Composite C/M
Windows Doors
$200
$500
125
350
$
75 $ 150
Step 3: Determine the number of windows and
doors that must be sold to break even.
Sales
Composite
Product Mix
Units
Window
4
×
2,000
=
Door
1
×
2,000
=
Computing Multiproduct
Break-Even Point
Units
8,000
2,000
Multiproduct Break-Even
Income Statement
Step 4: Verify the results.
Step 2: Compute break-even point in
composite units.
Fixed costs
Break-even point =
in composite units Contribution margin
per composite unit
Windows
Selling Price
$200
Variable Cost
125.00
Unit Contribution
$
75.00
Sales Volume
×
8,000
Total Contribution
$ 600,000
Fixed Costs
Income
Doors
$500
350.00
$ 150.00
×
2,000
$ 300,000
Combined
$ 900,000
900,000
$ 0
Computing Multiproduct
Break-Even Point
Step 2: Compute break-even point in
composite units.
Break-even point
in composite units
=
Break-even point
in composite units
=
Break-even point
in composite units
=
©2005 Prentice Hall, Inc.
Fixed costs
Contribution margin
per composite unit
$900,000
$450 per composite
unit
2,000 composite units
Business Publishing
Accounting, 6/E
Horngren/Harrison/Bamber
22 - 5
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