Chap008 7e Editedsssssss

7/27/2019 Chap008 7e Editedsssssss

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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 8

Cost-Volume-Profit Analysis


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LearningObjective

1


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The Break-Even Point

The break-even point is the point in thevolume of activity where the organizations

revenues and expenses are equal.

Sales 250,000$

Less: variable expenses 150,000

Contribution margin 100,000Less: fixed expenses 100,000

Net income -$


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Equation Approach

Sales revenueVariable expensesFixed expenses = Profit

Unitsalesprice

Salesvolumein units

Unit

variableexpense

Salesvolumein units

($500 X) ($300 X) $80,000 = $0

($200X) $80,000 = $0

X = 400 surf boards


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LearningObjective

2


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Contribution-Margin Approach

Consider the following informationdeveloped by the accountant at Curl, Inc.:

Total Per Unit Percent

Sales (500 surf boards) 250,000$ 500$ 100%

Less: variable expenses 150,000 300 60%

Contribution margin 100,000$ 200$ 40%Less: fixed expenses 80,000

Net income 20,000$


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For each additional surf board sold, Curlgenerates $200 in contribution margin.




Contribution margin 100,000$ 200$ 40%Less: fixed expenses 80,000

Net income 20,000$


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Fixed expensesUnit contribution margin

=Break-even point

(in units)




Contribution margin 100,000$ 200$ 40%

Less: fixed expenses 80,000

Net income 20,000$

$80,000

$200

= 400 surf boards


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Here is the proof!


Sales (400surf boards) 200,000$ 500$ 100%



Less: fixed expenses 80,000Net income -$

400 $500 = $200,000400 $300 = $120,000


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Contribution Margin Ratio

Calculate the break-even point in sales dollarsrather than units by using the contributionmargin ratio.

Contribution marginSales

= CM

RatioFixed expense

CM RatioBreak-even point(in sales dollars)

=


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Sales (400surf boards) 200,000$ 500$ 100%Less: variable expenses 120,000 300 60%


Less: fixed expenses 80,000

Net income -$

Contribution Margin Ratio

$80,000

40%

$200,000 sales=


12/56Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

LearningObjective

3


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Graphing Cost-Volume-ProfitRelationships

Viewing CVP relationships in a graph givesmanagers a perspective that can be obtained inno other way.

Consider the following information for Curl, Inc.:

300units 400units 500units

Sales 150,000$ 200,000$ 250,000$

Less: variable expenses 90,000 120,000 150,000Contribution margin 60,000$ 80,000$ 100,000$

Less: fixed expenses 80,000 80,000 80,000

Net income (loss) (20,000)$ -$ 20,000$


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Cost-Volume-Profit Graph

Dollars

600 700 800

Units

200 300 400 500

450,000

100

200,000

150,000

100,000

50,000

400,000

350,000

300,000

250,000


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Dollars

600 700 800

Units

200 300 400 500

450,000

100

200,000

150,000

100,000

50,000

400,000

350,000

300,000

250,000

Fixed expenses


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Dollars

600 700 800

Units

200 300 400 500

450,000

100

200,000

150,000

100,000

50,000

400,000

350,000

300,000

250,000

Fixed expenses


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Dollars

600 700 800

Units

200 300 400 500

450,000

100

200,000

150,000

100,000

50,000

400,000

350,000

300,000

250,000

Fixed expenses


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Dollars

600 700 800

Units

200 300 400 500

450,000

100

200,000

150,000

100,000

50,000

400,000

350,000

300,000

250,000

Fixed expenses


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Dollars

600 700 800

Units

200 300 400 500

450,000

100

200,000

150,000

100,000

50,000

400,000

350,000

300,000

250,000

Fixed expenses


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Dollars

600 700 800

Units

200 300 400 500

450,000

100

200,000

150,000

100,000

50,000

400,000

350,000

300,000

250,000

Fixed expenses

Break-evenpoint


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Profit-Volume GraphSome managers like the profit-volume

graph because it focuses on profits and volume.

100 200 300 400 500 600 700Units

Profit

0

100,000

(20,000)

(40,000)

(60,000)

80,000

60,000

40,000

20,000

Break-evenpoint


22/56Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning

Objective4


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Target Net Profit

We can determine the number of surfboardsthat Curl must sell to earn a profit of $100,000

using the contribution margin approach.

Fixed expenses + Target profitUnit contribution margin

=Units sold to earnthe target profit

$80,000 + $100,000$200

= 900 surf boards


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Equation Approach

Sales revenueVariable expensesFixed expenses = Profit

($500 X) ($300 X) $80,000 = $100,000

($200X) = $180,000

X = 900 surf boards


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Applying CVP Analysis

Safety Margin The difference between budgeted sales

revenue and break-even sales revenue.

The amount by which sales can drop beforelosses begin to be incurred.


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Safety Margin

Curl, Inc. has a break-even point of $200,000.If actual sales are $250,000, the safety margin is$50,000or 100 surf boards.

Break-even

sales

400 units

Actual sales

500 units

Sales 200,000$ 250,000$

Less: variable expenses 120,000 150,000Contribution margin 80,000 100,000

Less: fixed expenses 80,000 80,000

Net income -$ 20,000$


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Changes in Fixed Costs

Curl is currently selling 500 surfboards peryear.

The owner believes that an increase of$10,000 in the annual advertising budget,would increase sales to 540 units.

Should the company increase the advertisingbudget?


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Current

Sales

(500 Boards)

Proposed

Sales

(540 Boards)

Sales 250,000$ 270,000$Less: variable expenses 150,000 162,000

Contribution margin 100,000$ 108,000$


Net income 20,000$ 18,000$


$80,000 + $10,000 advertising = $90,000

540 units $500 per unit = $270,000


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Current

Sales

(500 Boards)

Proposed

Sales

(540 Boards)

Sales 250,000$ 270,000$

Less: variable expenses 150,000 162,000Contribution margin 100,000$ 108,000$


Net income 20,000$ 18,000$


Sales will increase by$20,000, but net income

decreasedby $2,000.


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Changes in UnitContribution Margin

Because of increases in cost of raw materials,Curls variable cost per unit has increased

from $300 to $310 per surfboard. With nochange in selling price per unit, what will be

the new break-even point?

($500 X) ($310 X) $80,000 = $0

X = 422 units (rounded)


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Changes in UnitContribution Margin

Suppose Curl, Inc. increases the price of

each surfboard to $550. With no changein variable cost per unit, what will be the

new break-even point?

($550 X) ($300 X) $80,000 = $0

X = 320 units

P di ti P fit Gi E t d


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Predicting Profit Given ExpectedVolume


Target net profit

Find: {reqd sales volume}Given:


Expected sales volumeFind: {expected profit}Given:

P di ti P fit Gi


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Predicting Profit GivenExpected Volume

In the coming year, Curls owner expects to sell

525 surfboards. The unit contribution margin isexpected to be $190, and fixed costs are

expected to increase to $90,000.

($190 525) $90,000 = X

X = $9,750 profit

X = $99,750 $90,000

Total contribution - Fixed cost = Profit


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Learning

Objective5

CVP A l i ith M lti l


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CVP Analysis with MultipleProducts

For a company with more than one product,sales mixis the relative combination in which a

companys products are sold.

Different products have different selling prices,cost structures, and contribution margins.

Lets assume Curl sells surfboards and sailboards and see how we deal with break-

even analysis.



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Curl provides us with the followinginformation:

Description

Selling

Price

Unit

Variable

Cost

Unit

Contribution

Margin

Number

of

BoardsSurfboards 500$ 300$ 200$ 500

Sailboards 1,000 450 550 300

Total sold 800

DescriptionNumberof Boards

% ofTotal

Surfboards 500 62.5% (500 800)

Sailboards 300 37.5% (300 800)

Total sold 800 100.0%



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Weighted-average unit contribution margin

Description

Contribution

Margin % of Total

Weighted

ContributionSurfboards 200$ 62.5% 125.00$

Sailboards 550 37.5% 206.25

Weighted-average contribution margin 331.25$

$200 62.5%

$550 37.5%



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Break-even point

Break-even

point

=Fixed expenses

Weighted-average unit contribution margin

Break-evenpoint

=$170,000$331.25

Break-evenpoint

= 514 combined unit sales



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Break-even pointBreak-even

point= 514 combined unit sales

Description

Breakeven

Sales

% of

Total

Individual

Sales

Surfboards 514 62.5% 321

Sailboards 514 37.5% 193Total units 514


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Learning

Objective6

A ti U d l i


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Assumptions UnderlyingCVP Analysis

Selling price is constant throughoutthe entire relevant range.

Costs are linear over the relevant

range.In multi-product companies, the sales

mix is constant.

In manufacturing firms, inventories donot change (units produced = unitssold).


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Learning

Objective7

CVP R l ti hi d


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CVP Relationships andthe Income Statement

A. Traditional Format

Sales $500,000

Less: 380,000

Gross margin $120,000

Less: Operating expenses:

Selling expenses $35,000Administrative expenses 35,000 70,000

Net income $50,000

ACCUTIME COMPANY

Income Statement

For the Year Ended December 31, 20x1

CVP R l ti hi d


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CVP Relationships andthe Income Statement

B. Contribution Format

Sales $500,000Less: Variable expenses:

Variable manufacturing $280,000

Variable selling 15,000

Variable administrative 5,000 300,000

Contribution margin $200,000

Less: Fixed expenses:

Fixed manufacturing $100,000

Fixed selling 20,000

Fixed administrative 30,000 150,000

Net income $50,000

Income Statement

For the Year Ended December 31, 20x1

ACCUTIME COMPANY


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Learning

Objective8

Cost Structure and Operating


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Cost Structure and OperatingLeverage

The cost structure of an organization is therelative proportion of its fixed and variablecosts.

Operating leverage is . . . the extent to which an organization uses fixed

costs in its cost structure.

greatest in companies that have a highproportion of fixed costs in relation tovariable costs.


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Measuring Operating Leverage

Contribution marginNet income

Operating leveragefactor

=

Actual sales

500 BoardSales 250,000$

Less: variable expenses 150,000

Contribution margin 100,000

Less: fixed expenses 80,000Net income 20,000$

$100,000

$20,000

= 5


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A measure of how a percentage change insales will affect profits. If Curl increases itssales by 10%, what will be the percentage

increase in net income?

Percent increase in sales 10%

Operating leverage factor 5Percent increase in profits 50%


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A firm with proportionately high fixed costs hasrelatively high operating leverage On the otherhand, a firm with high operating leverage has a

relatively high break-even point.


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Learning

Objective9

CVP Analysis Activity Based Costing


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CVP Analysis, Activity-Based Costing,and Advanced Manufacturing Systems

An activity-based costing system can providea much more complete picture of cost-

volume-profit relationships and thus provide

better information to managers.

Break-evenpoint

= Fixed costsUnit contribution margin


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Learning

Objective10

A Move Toward JIT and


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Overhead costs like setup, inspection, and materialhandling are fixed with respect to sales volume,but they are not fixed with respect to other cost

drivers.

This is the fundamental distinction between atraditional CVP analysis and an activity-based

costing CVP analysis.

A Move Toward JIT andFlexible Manufacturing


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Learning

Objective11


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Effect of Income Taxes

Target after-tax net income1 - t =

Before-taxnet income

Income taxes affect a companys

CVP relationships. To earn aparticular after-tax net income, a

greater before-tax income will berequired.


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End of Chapter 8

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Chap008 7e Editedsssssss