Slide 1
Cost-Volume-Profit AnalysisObjective 1Identify how changes in
volume affect costs.VariableFixedMixedTypes of CostsMinutes
TalkedTotal Long DistanceTelephone BillTotal variable costs
changewhen activity changes.Your total long distancetelephone bill
is basedon how many minutesyou talk.Raw materials are the typical
example of Variable Cost.
Total Variable CostMinutes TalkedPer MinuteTelephone
ChargeVariable Cost Per Unit ( UVC) Variable costs per unit do not
changeas activity increases. The cost per long distanceminute
talked is constant.For example, 10cents per minute.Variable Costs
Example012345$24
$18
$12
$6
Volume(Thousands of passengers)Total Variable
Costs(thousands)VolumeTotal Fixed CostTotal fixed costs remain
unchangedwhen activity changes.Insurance Premium for the Plant
.Rent of the officeTotal Fixed CostMixed CostsContain fixed portion
that is incurred even when facility is unused & variable
portion that increases with usage.Example: monthly electric utility
chargeFixed service feeVariable charge per kilowatt hour used Total
mixed costVariable Utility ChargeActivity (Kilowatt Hours) Total
Utility CostFixed MonthlyUtility ChargeMixed CostsObjective 2Use
CVP analysis to compute breakeven point.Assumptions of CVP
AnalysisExpenses can be classified as either variable or fixed.CVP
relationships are linear over a wide range of production and
sales.Sales prices, unit variable cost, and total fixed expenses
will not vary within the relevant range.Assumptions of CVP
AnalysisVolume is the only cost driver.The relevant range of volume
is specified.Inventory levels will be unchanged.The sales mix
remains unchanged during the period.Computing Break-Even PointThe
unique sales level at which a company earns neither a profit nor
incurs a loss.
Sales Variable Costs Fixed Costs = 0
Breakeven Point ExampleLets look back at Luis and Toms
manufacturing, assuming that the fixed cost are $90,000. Objective
3Use CVP analysis for profit planning and graph the
cost-volume-profit relationsVolume in UnitsCosts and Revenuein
DollarsTotal fixed costs Plot total fixed costs on the vertical
axis.Preparing a CVP ChartTotal costs Draw the total cost line with
a slopeequal to the unit variable cost.Volume in UnitsCosts and
Revenuein DollarsTotal fixed costsPreparing a CVP ChartTotal
costsSalesStarting at the origin, draw the sales line with a slope
equal to the unit sales price.Break-even PointVarious Sales Levels
ExampleWhat operating income is expected when sales are _____
units?
Target Operating Income ExampleSuppose that our business would
be content with operating income of _________________.How many
units must be sold?
Objective 4Use CVP method to perform sensitivity analysis.Change
in Sales Price ExampleSuppose that the sales price per device is
_____ rather than ____What is the revised breakeven sales in
units?
Change in Variable Costs ExampleSuppose that variable expenses
per device are ____ instead of ____Other factors remain
unchanged.
Change in Fixed Costs ExampleSuppose that fixed costs increased
by $30,000.What are the new fixed costs?What is the new breakeven
point?
Margin of Safety ExampleExcess of expected sales over breakeven
sales.
E22-7
Fixed expenseBreak even pointProfitLossBreak even in units =
1,200,000Break even in $ = 1,200,000 x 24 = $28,800,000Effect of
sales mix on CVP analysis.Computing MultiproductBreak-Even
PointUnit contribution margin is replaced with contribution margin
for a composite unit.A composite unit is composed of specific
numbers of each product in proportion to the product sales
mix.Sales mix is the ratio of the volumes of the various
products.Computing MultiproductBreak-Even PointThe resulting
break-even formulafor composite unit sales is:Break-even pointin
composite unitsFixed costsContribution marginper composite
unit=
Computing MultiproductBreak-Even Point A company sells windows
and doors. They sell 4 windows for every door.Step 1: Compute
contribution margin per composite unit.Computing
MultiproductBreak-Even Point
Break-even pointin composite unitsFixed costsContribution
marginper composite unit=Step 2: Compute break-even point in
composite units.Computing MultiproductBreak-Even PointBreak-even
pointin composite unitsFixed costsContribution marginper composite
unit=Break-even pointin composite units900,000450 per composite
unit=Step 2: Compute break-even point in composite units.Computing
MultiproductBreak-Even PointBreak-even pointin composite units=
2,000 composite units
Step 3: Determine the number of windows and doors that must be
sold to break even.Computing MultiproductBreak-Even Point
Step 4: Verify the results.Multiproduct Break-EvenIncome
StatementContribution Margin & Gross MarginManufacturing
SectorPages 8 - 82Contribution MarginFormat
Revenues1,000Variable
costs:Manufacturing250Non-manufacturing270520Contribution
margin480Fixed
costs:Manufacturing160Non-manufacturing138298Operating
income182
Gross MarginFormat
Revenues1,000Cost of goods sold (250+160)410Gross
margin590Non-manufacturing (270+138)408Operating income182
37Chart1024001200260024002800360030004800320060003400
RevenuesTotal Expense(in thousands)(in thousands)Atlanta
Braves
Sheet1Data
Chart0.050100150200250Revenues0.0$1,200$2,400$3,600$4,800$6,000Total
Expense$2,400$2,600$2,800$3,000$3,200$3,400
Sheet1
RevenuesTotal Expense(in thousands)(in thousands)Atlanta
Braves
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Sheet1WindowsDoorsSelling Price$200$500Variable Cost$125$350Unit
Contribution$75$150Sales Mix Ratio41
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Sheet1WindowsDoorsSelling Price$200$500Variable Cost$125$350Unit
Contribution$75$150Sales Mix RatioComposite C/M
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Sheet1SalesCompositeProductMixUnitsUnitsWindow42,000=8,000Door12,000=2,000
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Sheet1WindowsDoorsCombinedSelling Price$200$500Variable
Cost125.00350.00Unit Contribution$75.00$150.00Sales
Volume8,0002,000Total Contribution$600,000$300,000$900,000Fixed
Costs900,000Income$ 0
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