Managerial Accounting
by James Jiambalvo
Chapter 4:
Cost-Volume-ProfitAnalysis
Slides Prepared by:
Scott Peterson
Northern State
University
Objectives
1. Identify common cost behavior
patterns.
2. Estimate the relation between cost and
activity using account analysis and the
high-low method.
3. Perform cost-volume-profit-analysis for
single products.
4. Perform cost-volume-profit-analysis for
multiple products.
Objectives
(continued)
5. Discuss the effect of operating
leverage.
6. Use the contribution margin per unit of
the constraint to analyze situations
involving a resource constraint.
Common Cost Behavior
Patterns
1. Cost-Volume-Profit-Analysis (C-V-P)
2. Variable Costs
3. Fixed Costs
a. Discretionary Fixed Costs
b. Committed Fixed Costs
4. Mixed Costs
5. Step Costs
Variable Costs
Fixed Costs
Mixed Costs
Cost Estimation Methods
Cost Estimation Methods are frequently
required to separate the fixed and variable
components of a total cost pool. Methods
include:
1.
2.
3.
4.
5.
Account Analysis
Scattergraph
High-Low Method
Regression
Relevant Range
Scattergraph
High-Low Method
Example: Let total costs at 500 units of
output be $150,000 and at 3,000 units of
output be $400,000. Calculate variable and
fixed costs, respectively.
High-Low Method
Solution: High
Low
Change
Costs:
$400,000 $150,000 $250,000
Units:
3,000
500
2,500
Calculate Variable Cost Per Unit:
$250,000/2,500 = $100
Calculate Total Fixed Costs:
$400,000 – (3,000 x 100) = $100,000
High-Low Method
Regression Analysis
Relevant Range
Cost-Volume-Profit Analysis
1.
2.
3.
4.
5.
6.
The Profit Equation
Breakeven Point
Margin of Safety
Contribution Margin
Contribution Margin Ratio
What-if Analysis
The Profit Equation
Profit = SP(x) –VC(x) – TFC
X = Quantity of units produced and sold
SP = Selling price per unit
VC = Variable cost per unit
TFC = Total fixed cost
Break-Even Point
TFC/CM(per unit) = Break-Even (units)
X = Quantity of units produced and sold
SP = Selling price per unit
VC = Variable cost per unit
CM = Contribution margin
TFC = Total fixed cost
Break-Even Point
Contribution Margin
SP(u) – VC(u) = CM (u)
SP = Selling price per unit
VC = Variable cost per unit
CM = Contribution margin
u = per unit
Contribution Margin Ratio
(SP – VC) / SP = CM%
SP = Selling Price per unit
VC = Variable Cost per unit
CM = Contribution Margin
“What If” Analysis
Examples include analyzing changes in:
1. Selling price per unit
2. Variable cost per unit
3. Total fixed cost
Multiproduct Analysis
C-V-P applied to multiple products.
1. Contribution Margin Approach (used for
similar products).
2. Contribution Margin Ratio Approach
(used for substantially different
products).
Contribution Margin Approach
Example: the contribution margin of product
A is $8 and B is $5. Two units of B are sold
for each unit of A. The Weighted Average
Contribution Margin is $6.00.
Contribution Margin Ratio
Approach
Example: the contribution margin ratio of
product A is 20% and B is 50%. Two units
of B are sold for each unit of A. The
Weighted Average Contribution Margin
Ratio is 40%.
Assumptions in C-V-P Analysis
1. Costs can be accurately separated into
variable and fixed components.
2. Fixed costs remain fixed.
3. Variable costs per unit do not change
over the relevant range.
Operating Leverage
Example of Operating Leverage:
Firm 1
Firm 2
Sales
$10,000,000
$10,000,000
VC
5,000,000
7,000,000
CM
5,000,000
3,000,000
FC
3,000,000
1,000,000
Profit
$2,000,000
$2,000,000
Which firm has more?
Constraints
1. A reference to scarce resources.
2. Examples of constraints include
manufacturing space, labor, parts and
materials etc..
3. The focus shifts away from Contribution
Margin and to the scarce resource or
constraint.
Quick Review Question #1
1. At Winford Corp., the selling price per
unit for lawn mowers is $120, variable
cost per unit is $55. Fixed costs are
$130,000. Contribution Margin per unit
is?
a. $65
b. $75
c. $175
d. $30
Quick Review Answer #1
1. At Winford Corp., the selling price per
unit for lawn mowers is $120, variable
cost per unit is $55. Fixed costs are
$130,000. Contribution margin per unit
is?
a. $65
b. $75
c. $175
d. $30
Quick Review Question #2
2. At Winford Corp., the selling price per
unit for lawn mowers is $120, variable
cost per unit is $55. Fixed costs are
$130,000. Break-Even Point is?
a. 1,000 units
b. 1,083 units
c. 2,000 units
d. None of these
Quick Review Answer #2
2. At Winford Corp., the selling price per
unit for lawn mowers is $120, variable
cost per unit is $55. Fixed costs are
$130,000. Break-Even Point is?
a. 1,000 units
b. 1,083 units
c. 2,000 units
d. None of these
Quick Review Question #3
3. At Winford Corp., the selling price per
unit for lawn mowers is $120, variable
cost per unit is $55. Fixed costs are
$130,000. Expected sales are 4,200
units. The Margin of Safety is?
a. $264,000
b. $384,000
c. $143,000
d. $121,000
Quick Review Answer #3
3. At Winford Corp., the selling price per
unit for lawn mowers is $120, variable
cost per unit is $55. Fixed costs are
$130,000. Expected sales are 4,200
units. The Margin of Safety is?
a. $264,000
b. $384,000
c. $143,000
d. $121,000
Quick Review Question #4
4. At Winford Corp., the selling price per
unit for lawn mowers is $120, variable
cost per unit is $55. Fixed costs are
$130,000. Expected sales are 4,200
units. What is profit expected to be?
Answer here: _________________
Quick Review Answer #4
4. At Winford Corp., the selling price per
unit for lawn mowers is $120, variable
cost per unit is $55. Fixed costs are
$130,000. Expected sales are 4,200
units. What is profit expected to be?
Answer here: $143,000
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