Cost Behavior and Cost-VolumeProfit Analysis
Chapter 11
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Learning Objectives
After studying this chapter, you should be able to:
•
•
•
•
•
Classify costs as variable costs, fixed costs, or
mixed costs
Compute the contribution margin, the contribution
margin ratio, and the unit contribution margin
Determine the break-even point and sales
necessary to achieve a target profit
Using a cost-volume-profit chart and a profitvolume chart, determine the break-even point and
sales necessary to achieve a target profit
Compute the break-even point for a company
selling more than one product, the operating
leverage, and the margin of safety
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Learning Objective 1
Classify costs as variable costs, fixed
costs, or mixed costs
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Cost Behavior
• Refers to the manner in which a cost changes as
a ________ changes
• Can be variable, fixed, or _____
• Two factors to consider:
• ____________ – activities that causes a cost to
change (e.g., food service costs change with the
number of hospital patients)
• ____________ – changes in cost are of interest
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Variable Costs
• Costs that vary in proportion to changes in the
_________
• Normally activity base is units produced, direct
materials and direct labor costs
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Variable Costs
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Fixed Costs
• Costs that _____ in total over the relevant range
of activity, but ________ per unit with the level of
activity
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Fixed Costs
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Mixed Costs
• Mixed costs share characteristics of both a
variable and a fixed cost: fixed over a _____,
then increasing based on ______
• Sometimes called ________ or _______ costs
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High-Low Method
• Total maintenance costs during the last five months
• Total maintenance cost at highest and lowest levels
of production
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High-Low Method
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Learning Objective 2
Compute the contribution margin, the
contribution margin ratio, and the unit
contribution margin
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Cost-Volume-Profit Analysis
• The systematic examination of the relationships
among selling prices, sales and production
volume, costs, expenses, and profits
• Provides management with useful information
for decision making
$
•
•
•
•
_________________
_________________
_________________
_________________
Sales
Total Costs
units
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Contribution Margin
• Identifies revenues available to cover fixed costs
and to provide income from operations
______
____
Contribution Margin = _______ – ________
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Contribution Margin Income Statement
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Contribution Margin Ratio
• Percentage of each sales dollar available to
cover fixed costs and to provide income from
operations
• Sometimes referred to as the ________ ratio
• Measures the effect of an increase/decrease in
sales volume on income from operations
Contribution Margin Ratio = ________ – _________
_______
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Contribution Margin Ratio
Sales
$ 1,000,000
Variable Costs
600,000
Contribution Margin
400,000
CM Ratio =
Sales = $1
$1,000,000 – $______
$1,000,000
= __%
Variable costs = ¢60 Contribution margin = ¢__ or
__% of every dollar in sales
An $80,000 increase in sales volume would increase income from
operations by $32,000 ($80,000 × 40%)
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Contribution Margin Ratio
• 60% of $80,000 increase in sales will go to variable
costs and the remaining 40% will go to contribution
margin
• The increase in contribution margin will flow to
income from operations as ________ do not change
with increase in sales
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Unit Contribution Margin
• Useful when an increase/decrease in sales
volume is measured in _______ (not dollars)
• The change in sales volume (units) multiplied by
the _________________ equals the change in
income from operations
Unit Contribution Margin = _____________ – _____________
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Unit Contribution Margin
• If sales increases by 15,000 units, from 50,000 units
to 65,000 units:
Sales Price/Unit
Unit Variable Cost
Unit Contribution Margin
$20
12
$ 8
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Learning Objective 3
Determine the break-even point and sales
necessary to achieve a target profit
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Break-Even Point
• Level of operations where _______ and ______
are the same
• Useful in business planning, especially when
increasing or decreasing operations
_____________________
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Break-Even Point
Fixed Costs
= $90,000
Selling price
per unit
Variable cost
per unit
$25
$15
__________
_________
$10
Fixed Costs
$90,000 = 9,000 units
=
_________________ (Units) =
UCM
$10
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Break-Even Point
$______/$10 = _____ units needed to break even
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Effect of Changes in Fixed Costs
• There is a _____ relationship between total fixed
costs and break-even units
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Effect of Changes in Fixed Costs
• How would a $100,000 increase in fixed costs
affect the break-even sales units?
Now: $600,000/$20 UCM = 30,000 break-even
Proposed: $700,000/$20 UCM = 35,000 break-even
ITEM
NOW
PROPOSED
CHANGE
Selling Price
$90
$90
Same
Variable Cost per Unit
$70
$70
Same
Unit Contribution Margin
$20
$20
Same
$600,000
$700,000
$100,000
30,000
35,000
5,000 unit
Fixed Costs
Break-Even Sales (units)
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Effect of Changes in Unit Variable
Costs
• There is a _____ relationship between unit
variable costs and break-even units
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Effect of Changes in Unit Variable
Costs
• How would an extra 2% commission (increase in
variable cost per unit) affect the break-even sales
units?
Now: $840,000/$105 UCM = 8,000 break-even
Proposed: $840,000/$100 UCM = 8,400 break-even
ITEM
NOW
PROPOSED
CHANGE
Selling Price
$250
$250
Same
Variable Cost per Unit
$145
$150
2% of sales
Unit Contribution Margin
$105
$100
$5 per unit
$840,000
$840,000
Same
8,000
8,400
400 units
Fixed Costs
Break-Even Sales (units)
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Effect of Changes in Unit Selling Price
• There is an _____ relationship between unit
selling price and break-even units
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Effect of Changes in Unit Selling Price
• How would a $10 price increase affect the breakeven sales units?
Now: $600,000/$20 UCM = 30,000 break-even
Proposed: $600,000/$30 UCM = 20,000 break-even
ITEM
NOW
PROPOSED
CHANGE
Selling Price
$50
$60
$10
Variable Cost per Unit
$30
$30
Same
Unit Contribution Margin
$20
$30
$10
$600,000
$600,000
Same
30,000
20,000
10,000 units
Fixed Costs
Break-Even Sales (units)
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Target Profit
• To find units needed to attain a certain target
profit, add the target profit to the fixed costs in
the break-even formula
Break-Even Sales (Units) =
________ + ________
______
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Calculating Sales (units)
Fixed Costs = $200,000
Target Profit = $100,000
Selling price
Per unit
Variable Cost
Per unit
$75
$45
Contribution
Margin per unit
$30
Fixed Costs + Target Profit
$______ + $______
=
= _____ units
UCM
$__
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Verification of Units Required to
Achieve Target Profit
Target Profit
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Learning Objective 4
Using a cost-volume-profit chart and a
profit-volume chart, determine the breakeven point and sales necessary to
achieve a target profit
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Cost-Volume-Profit (CVP) Chart
• Cost-volume-profit charts assist management in
understanding relationships among costs, sales,
and operating profit or loss
• We’ll construct a CVP chart assuming:
•
•
•
•
$50 selling price
$30 unit variable cost
$20 unit contribution margin
$100,000 in fixed costs
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Cost-Volume-Profit (CVP) Chart
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Cost-Volume-Profit (CVP) Chart
• When fixed costs decrease by $20,000, break-even
decreases to 4,000 units ($200,000)
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Profit-Volume Chart
• Focuses on profits
• Plots the difference between total _____ and
total _____
• We’ll construct a profit-volume chart assuming:
•
•
•
•
$50 selling price
$30 unit variable cost
$20 unit contribution margin
$100,000 in fixed costs
Maximum loss is $100,000 in fixed costs (if no sales).
Assume maximum profit is $100,000 (based on 10,000
maximum sales)
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Profit-Volume Chart
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Learning Objective 5
Calculate the break-even point for a
business selling more than one product,
the operating leverage, and margin of
safety
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Sales Mix Considerations
• Most businesses sell more than one product,
and each product contributes _______ to overall
profit
• Sales mix: The relative distribution of _____
among the various products sold
• The sales volume necessary to break even
when more than one product is sold depends on
the ______
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Sales Mix
• Assume Burr Company sold 8,000 units of Product
A and 2,000 units of Product B last year
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Sales Mix
• Combining individual unit information to
represent one single product – Product E
• Assuming fixed costs are $200,000, 8,000 units
of Product E are needed to break even
($200,000/$25).
But how many of Products A and B does that
mean?
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Sales Mix
• Product A: 8,000 × 80% = 6,400 units
• Product B: 8,000 × 20% = 1,600 units
_________
_____
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Operating Leverage
• Companies with ____ fixed costs (capital intensive)
have high operating leverage
• Companies with ____ fixed costs (labor intensive)
have low operating leverage
• Managers use operating leverage to measure how
____________ affect changes in income from
operations
• The relative mix of _____ and _____ costs is
measured by operating leverage
Operating Levearge =
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Operating Leverage
High Operating Leverage
50%
Low Operating Leverage
Increase in operating income
__%
Increase in sales
Increase in sales
10%
Operating Leverage = __
10%
Operating Leverage = 2
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Margin of Safety
• Margin of safety measures how much sales
revenue can drop before _________ occurs
Margin of Safety =
_____ – __________
________
• Assume current sales are $250,000 and breakeven sales are $200,000.
Margin of safety = (250,000−200,000)/250,000
= 20%
• Sales would have to drop by more than __% before
an operating loss would result
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End of Chapter 11
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