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7/29/2019 Cost Volume Analysis.pptx
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Cost-Volume-ProfitAnalysis
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The Break-Even Point
The break-even point is the point in the volume of activity where the organizations revenues and
expenses are equal.
Sales 250,000$Less: variable expenses 150,000 Contribution margin 100,000
Less: fixed expenses 100,000 Net income -$
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Contribution-Margin Approach
Consider the following information developed bythe accountant at Curl, Inc.:
Total Per Unit PercentSales (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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Total Per Unit PercentSales (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$
Contribution-Margin Approach
For each additional surf board sold, Curlgenerates $200 in contribution margin.
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Contribution-Margin Approach
Fixed expensesUnit contribution margin =
Break-even point(in units)
Total Per Unit PercentSales (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$
$80,000
$200= 400 surf boards
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Contribution-Margin Approach
Here is the proof!
Total Per Unit PercentSales ( 400 surf boards) 200,000$ 500$ 100%Less: variable expenses 120,000 300 60%Contribution margin 80,000$ 200$ 40%Less: fixed expenses 80,000
Net income -$
400 $500 = $200,000 400 $300 = $120,000
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Contribution Margin Ratio
Calculate the break-even point in sales dollars rather thanunits by using the contribution margin ratio.
Contribution marginSales = CM Ratio
Fixed expenseCM Ratio
Break-even point(in sales dollars)=
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Contribution Margin Ratio
Total Per Unit PercentSales ( 400 surf boards) 200,000$ 500$ 100%Less: variable expenses 120,000 300 60%
Contribution margin 80,000$ 200$ 40%Less: fixed expenses 80,000 Net income -$
$80,00040%
$200,000 sales=
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Equation Approach
Sales revenue Variable expenses Fixed expenses = Profit
Unitsalesprice
Salesvolumein units
Unit
variableexpense
Salesvolumein units
($500 X) ($300 X) $80,000 = $0
($200X) $80,000 = $0
X = 400 surf boards
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Graphing Cost-Volume-Profit Relationships
Viewing CVP relationships in a graph gives managers aperspective that can be obtained in no other way.Consider the following information for Curl, Inc.:
Income300 units
Income400 units
Income500 units
Sales 150,000$ 200,000$ 250,000$Less: variable expenses 90,000 120,000 150,000 Contribution margin 60,000$ 80,000$ 100,000$Less: fixed expenses 80,000 80,000 80,000 Net income (loss) (20,000)$ -$ 20,000$
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-
50,000
00,000
50,000
00,000
50,000
00,000
50,000
00,000
50,000
- 100 200 300 400 500 600 700 800
Cost-Volume-Profit Graph
Fixed expenses
Units Sold
Total expenses
Total salesBreak-evenpoint
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$(100,000)
$(80,000)
$(60,000)
$(40,000)
$(20,000)
$-
$20,000
$40,000
$60,000
$80,000
$100,000
$- $50 $100 $150 $200 $250 $300 $350 $400
1 3 4 52 6 7 8
Units sold (00s)
Profit-Volume GraphSome managers like the profit-volume
graph because it focuses on profits and volume.
Break-evenpoint
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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 profit Unit contribution margin =
Units sold to earnthe target profit
$80,000 + $100,000 $200 = 900 surf boards
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Equation Approach
Sales revenue Variable expenses Fixed 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 before
losses begin to be incurred.
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Changes in Fixed Costs
Curl is currently selling 500 surf boards permonth.
The owner believes that an increase of $10,000 inthe monthly advertising budget, would increasebike sales to 540 units.
Should we authorize the requested increase inthe advertising budget?
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CurrentSales
(500 Boards)
ProposedSales
(540 Borads)Sales 250,000$ 270,000$
Less: variable expenses 150,000 162,000 Contribution margin 100,000$ 108,000$Less: fixed expenses 80,000 90,000 Net income 20,000$ 18,000$
Changes in Fixed Costs
$80,000 + $10,000 advertising = $90,000
540 units $500 per unit = $270,000
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Changes in UnitContribution Margin
Because of increases in cost of raw materials, Curlsvariable cost per unit has increased from $300 to
$310 per surf board. With no change 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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Predicting Profit Given ExpectedVolume
Fixed expensesUnit contribution marginTarget net profit
Find: {required sales volume}Given:
Fixed expensesUnit contribution marginExpected sales volume Find: {expected profit}
Given:
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Predicting Profit GivenExpected Volume
In the coming year, Curls owner expects to sell 525surfboards. The unit contribution margin is
expected 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 $90,000
Total contribution - Fixed cost = Profit
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CVP Analysis with Multiple Products
For a company with more than one product, salesmix is the relative combination in which a
companys products are sold.
Different products have different selling prices, coststructures, and contribution margins.
Lets assume Curl sells surf boards and sailboards and see how we deal with break-
even analysis.
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CVP Analysis with Multiple Products
Curl provides us with the following information:
DescriptionSellingPrice
UnitVariable
Cost
UnitContribution
Margin
Numberof
BoardsSurfboards 500$ 300$ 200$ 500 Sailborads 1,000 450 550 300 Total sold 800
DescriptionNumber
of Boards% of
TotalSurfboards 500 62.5% (500 800)Sailborads 300 37.5% (300 800)Total sold 800 100.0%
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CVP Analysis with Multiple Products
Weighted-average unit contribution margin
Description
Contribution
Margin % of Total
Weighted
ContributionSurfboards 200$ 62.5% 125.00$Sailborads 550 37.5% 206.25 Weighted-average contribution margin 331.25$
$200 62.5%
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CVP Analysis with Multiple Products
Break-even pointBreak-even
point= Fixed expenses
Weighted-average unit contribution margin
Break-evenpoint =
$170,000$331.25
Break-evenpoint =
514 combined unit sales
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CVP Analysis with Multiple Products
Break-even pointBreak-evenpoint =
514 combined unit sales
DescriptionBreakeven
Sales% ofTotal
IndividualSales
Surfboards 514 62.5% 321
Sailborads 514 37.5% 193 Total units 514
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Assumptions UnderlyingCVP Analysis
Selling price is constant throughout theentire relevant range.Costs are linear over the relevant range.In multi-product companies, the salesmix is constant.In manufacturing firms, inventories do
not change (units produced = unitssold).
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Cost Structure and Operating Leverage
The cost structure of an organization is therelative proportion of its fixed and variablecosts.
Operating leverage is . . . the extent to which an organization uses fixed costs
in its cost structure.
greatest in companies that have a high proportion of fixed costs in relation to variable costs.
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Measuring Operating Leverage
Contribution marginNet income
Operating leveragefactor =
Actual sales
500 BoardSales 250,000$Less: variable expenses 150,000 Contribution margin 100,000
Less: fixed expenses 80,000 Net income 20,000$
$100,000
$20,000= 5
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Measuring Operating Leverage
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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CVP Analysis, Activity-Based Costing, andAdvanced Manufacturing Systems
An activity-based costing system can providea much more complete picture of cost-
volume-profit relationships and thusprovide better information to managers.
Break-evenpoint
= Fixed costsUnit contribution margin
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A Move Toward JIT andFlexible Manufacturing
Overhead costs like setup, inspection, andmaterial handling are fixed with respect tosales volume , but they are not fixed with
respect to other cost drivers .
This is the fundamental distinction betweena traditional CVP analysis and an activity-
based costing CVP analysis.