10/16/2013
Getting It Right: Using Cost/Volume/Profit Analysis in Strategic Decision Making
John J. Cergnul, JD, CPA
Saint Mary’s College
Notre Dame, IN
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10/16/2013
„
Common Cost/Volume/Profit Analysis
Terms:
Fixed Costs
Variable Costs
Relevant Range
Contribution Margin
Mixed Cost
Stepwise Cost
C ili
Curvilinear
C
Costt
(Un)Avoidable Costs
©
„
Fixed Costs are costs that remain unchanged as volume changes, within the relevant range of activity
„
Administrator’s Base Compensation
Depreciation
Rent
Insurance
Annual Maintenance Contract
„
„
„
„
©
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„
Variable Costs are costs that change in direct proportion with a change in volume, within the relevant range of activity
l
t
f ti it
„
X‐Ray Film
Technical and Clerical Payroll
Radiologist Reading Fees
Patient Supplies
Billing Costs
„
„
„
„
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• Mixed Cost:
• Costs that have some characteristics of both fixed and variable behaviors
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• Determining slope and y intercept of mixed costs
t
– High/low Method
– Regression
– Eyeball Estimate
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• Electric Usage
Month
Scans
Electric
January
1,000
$3,551
February
1,200
$3,695
March
1,400
$3,838
April
1,410
$3,846
May
1,800
$4,126
June 1,900
$4,197
July
2,000
$4,269
August
1,935
$4,222
September
2,300
$4,484
October
1,500
$3,910
November
1,850
$4,161
December
2,600
$4,700
Totals
20895
49000
Eyeball Method
Electric Usage
$5,000
$4,000
$3,000
Electric
$2,000
$1,000
$0
1
2
3
4
5
6
7
8
9
10
11
12
Months
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10/16/2013
High/Low Method
Hi h
High month costs less low month costs
th
t l
l
th
t
Divided by
High month volume less low month volume
Yields the variable electric cost per scan
Yields
the variable electric cost per scan
The total cost less the variable cost yields the fixed electric costs (TC‐VC=FC).
$4,700‐$3,551 = $0.7181 per scan
2,600‐1,000
$4,700‐(2,600*$0.7181)=$2,833 fixed cost/mo. 7
10/16/2013
Quiz: Calculate the variable cost per unit and the fixed cost using the following data:
Units Produced
Utilities
January
$4,500
1,000
February
4,600
900
March
3,600
800
April
3,400
700
May
4,800
1,500
June
5,000
3,000
July
6,000
3,500
August
6,200
4,200
September
5,000
2,000
October
4,500
1,800
November
b
4,250
1,500
December 4,400
1,000
Quiz Solution:
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„
The Relevant Range of Activity is the activity l l ithi hi h
level within which a cost estimate is valid. It t ti t i
lid It
is the “normal” operating level of activity. For example, at extreme high and low levels of activity, unit film costs change. Also, annual maintenance contracts will vary as additional machines are added when higher volume levels are assumed.
„
Contribution Margin is sales minus variable costs. It is the contribution sales make to t It i th
t ib ti
l
k t
cover fixed costs, when variable costs are subtracted. It is used in calculating breakeven point and targeted income.
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Contribution Margin Format Formula
Sales
Less Variable Costs
= Contribution Margin
= Contribution Margin
Less Fixed Costs
= Operating Income
Less Taxes
= Net Income
N tI
Contribution Margin Ratio is the contribution margin divided by sales
i di id d b
l
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Breakeven Formulas Using Contribution Margin
Fixed Costs
Fixed
Costs = Breakeven point in units
= Breakeven point in units
CM/unit
Fixed Costs = Breakeven point in $ sales
CM ti
CM ratio
Quiz: Calculate the breakeven in both sales d ll
dollars and number of units with the following d
b
f it ith th f ll i
facts:
Total Sales
$2,000,000
Variable Costs
1,500,000
Fixed Costs
Fixed Costs
200 000
200,000
Sales price per unit: $2,000
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Solution:
Fixed Costs + Targeted Pretax Income = CM/unit
Unit sales needed to achieve targeted pretax income
‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐
Fixed Costs+ Targeted Pretax Income =
CM ratio
Dollars sales needed to achieve targeted pretax income
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10/16/2013
Quiz: Using the information from the prior quiz, calculate the number of units needed to be l l t th
b
f it
d dt b
sold to generate a pre‐tax profit of $600,000.
Extra Credit: Using the contribution margin ratio, calculate the total sales dollars needed to generate a pre‐tax profit of $600,000.
g
p
p
$
,
Solution:
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10/16/2013
More CVP Formulas: Multiple products with different contribution margins
Fixed Costs
Composite unit CM
=
Composite unit sales needed to achieve
Breakeven
Super Rad Imaging Center, LLP
Contribution Margin Format Income Statement
For the Twelve Months Ending December 31, 2012
Number of Scans
REVENUE
P ti t Revenue
Patient
R
Variable Costs
Contractul Allowance/Bad Debt
Technologist/Nurse Wages
Clerical Wages
Employee Benefits
X-Ray and Medical Supplies
Image Storage
Office Supplies
Postage
Utilities-Variable
Other Maintenance
Billing Fees
Total Variable Costs
Contribution Margin
Mammography
8,780
$1 058 000
$1,058,000
CT
2,135
$1 322 500
$1,322,500
Ultra Sound
2,120
$395 000
$395,000
Plain Film
5,960
$361 000
$361,000
MRI
1,900
Totals
20,895
$2 380 000 $5,516,500
$2,380,000
$5 516 500
387,757
484,696
144,768
132,307
833,000 $1,982,527
210,666
51,227
50,867
143,004
142,800 $598,564
74,158
18,033
17,906
50,339
49,980 $210,416
58,674
14,267
14,167
39,829
38,864 $165,802
7,201
29,613
7,150
20,102
35,700
$99,767
21,967
5,342
5,304
14,911
5,500
$53,024
9,138
2,222
2,206
6,203
2,000
$21,770
2,893
703
699
1,964
2,600
$8,859
4,622
1,124
1,116
3,138
5,000
$15,000
1 000
1,000
2 000
2,000
1 000
1,000
500
6 000
6,000
$10 500
$10,500
42,312
52,891
15,797
14,437
23,205 $148,643
------------------ ------------------ ------------------ ------------------ ------------------ -----------------820,389
662,118
260,981
426,734
1,144,649 3,314,871
------------------ ------------------ ------------------ ------------------ ------------------ -----------------237,611
660,382
134,019
(65,734)
1,235,351 2,201,629
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Super Rad Imaging Center, LLP
Contribution Margin Format Income Statement
For the Twelve Months Ending December 31, 2012
Mammography
Fixed Costs
Supervisor Wages and Benefits
Radiology Equip Service Cont.
Office Equip. Service Contr.
Other Repair and Maintenance
Depreciation (or Lease, etc. costs)
Janitorial Services
Building Maintenance
Rent
PropertyTaxes
Insurance
Utilities Expense-Fixed
Marketing Expense
Miscellaneous Expense
Total Fixed Costs
NET PROFIT (LOSS)
Before Professional Fees
CT
Ultra Sound
Plain Film
MRI
Totals
58,705
14,275
14,175
39,850
20,000 $147,005
70,481
88,102
26,314
24,049
110,000 $318,946
2,079
2,599
776
709
700
$6,864
1,720
2,150
642
587
19,000
$24,098
50,000
180,000
50,000
12,000
315,000 $607,000
12500
12500
12500
12500
12000
$62,000
1,000
1,000
1,000
1,000
1,000
$5,000
15,000
15,000
15,000
15,000
15,000
$75,000
3,000
11,000
3,000
2,000
14,000
$33,000
2,842
10,421
2,842
1,895
15,000
$33,000
3,000
11,000
3,000
2,000
15,000
$34,000
10,000
10,000
10,000
10,000
10,000
$50,000
300
300
300
300
4,000
$5,200
--------------------- --------------------- --------------------- --------------------- --------------------- ----------------230,628
358,347
139,549
121,890
550,700 1,401,113
--------------------- --------------------- --------------------- --------------------- --------------------- ----------------6,984
302,035
(5,530)
(187,624)
684,651
800,516
========== ========== ========== ========== ========== ========
CVP Analysis: CT Breakeven
Fixed Cost =
$358,347
=
CM/Scan
($660,382/2,135)
1,159 Scans to breakeven
Fixed Costs =
$358,347
$
,
=
CM Ratio
($660,382/$1,322,500)
$717,636 Revenue to breakeven
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10/16/2013
How many CT scans do you need to perform to p y
pay a radiologist $200,000 and earn g $
,
$150,000?
FC+Target Revenue CM/Unit
$358,347+$350,000
($660,382/2,135)
2,290 Scans
How much revenue does your imaging center need to generate, as a whole, to pay a radiologist $400,000 and earn $500,000?
Fixed costs + Targeted Income
Composite Unit CM = the number of Composite Unit scans needed to achieve Targeted Income
to achieve Targeted Income
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Mammography CT
Ultra Sound Plain Film
MRI
Totals
Patient Revenue
$1,058,000 $1,322,500 $395,000 $361,000 $2,380,000 $5,516,500
Contribution Margin
$237,611 $660,382 $134,019 -$65,734 $1,235,351 $2,201,629.01
N b off SScans
Number
8 780
8,780
2 135
2,135
2 120
2,120
5 960
5,960
1 900 $20,895.00
1,900
$20 895 00
--------------------- --------------------- --------------------- --------------------- --------------------Contribution Margin per Scan
$27.06
$309.31
$63.22
-$11.03
$650.18
Scan Ratio
4.621
1.124
1.116
3.137
1.000
--------------------- --------------------- --------------------- --------------------- --------------------Contribution Margin per Composite Unit
$125.06
$347.57
$70.54
-$34.60
$650.18 $1,158.75
========== ========== ========== ========== ========== ==========
FC + Targeted Income
Contribution Margin per Composite Unit
Composite Units to Achieve TI
Scan Ratio
Composite Units to Break Even
Scans needed to Achieve TI
$2,301,113
$1,158.75
--------------------1,986
==========
Mammography
CT
Ultra Sound Plain Film
MRI
4.621
1.124
1.116
3.137
1.000
1,986
1,986
1,986
1,986
1,986
--------------------- --------------------- --------------------- --------------------- --------------------9 177
9,177
2 231
2,231
2 216
2,216
6 229
6,229
1 986
1,986
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Proof
Scans needed to Break Even
Contribution Margin per Scan
Less Fixed Costs
Net Profit (Loss)
Mammography CT
Ultra Sound Plain Film
MRI
9,177
2,231
2,216
6,229
1,986
$27.06 $309.31
$63.22
-$11.03 $650.18
------------------------------------------ --------------------- --------------------- --------------------$248,348 $690,222 $140,075 -$68,704 $1,291,172
$230,628 $358,347 $139,549 $121,890 $550,700
------------------------------------------ --------------------- --------------------- --------------------$17,720 $331,876
$526 ($190,594) $740,472
========== ========== ========== ========== ==========
$900,000
Using CVP to Calculate After‐Tax Income
Fixed Costs + ((After‐tax income/(1‐tax rate)) =BE in units
CM/unit
Fixed Costs + ((After‐tax income/(1‐tax rate)) =BE in Sales
CM ratio
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10/16/2013
Calculate the breakeven in both sales dollars and number of units with the following facts:
d
b
f it ith th f ll i f t
Sales price per unit
$2,000
Variable Costs per unit $1,500
Fixed Costs
$200,000
Targeted after tax income $360,000
$
Tax Rate 40%
Solution:
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Other Tools for Investment Decisions:
ƒ Internal rate of return
y
ƒ Pay back with discounted cash flow
Traditional pay back calculation:
Purchase price <$1,200,000> Cumulative Year 1 cash flow
300,000 <900,000>
Year 2 cash flow 300,000 <600,000>
Year 3 cash flow 400,000 <200,000> Year 4 cash flow 200,000 ‐0‐
Year 5 cash flo
Year 5 cash flow 200,000
200 000
Four year payback
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Discounted Cash Flow Pay Back calculation (10%):
Purchase price <$1,200,000> Discounted Cumulative
Year 1 cash flow 300,000 272,700 <927,300>
Year 2 cash flow 300,000 247,800 <679,500>
Year 3 cash flow 400,000 300,400 <379100> Y 4
Year 4 cash flow 200,000 136,600 <242,500>
h fl
200 000
136 600
<242 500>
Year 5 cash flow 200,000 124,200 <118,300>
Year 6 cash flow 200,000 109,200 <9,100>
Approximately six year payback
THANK YOU FOR YOUR ATTENTION!
Questions?
Contact: John J. Cergnul, JD, CPA
jcergnul@saintmarys.edu
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