Learning Objectives

C19 - 1

Learning Objectives

Power Notes

1. Cost Behavior

2. Cost-Volume-Profit Relationships

3. Mathematical Approach to Cost-Volume-Profit Analysis

4. Graphic Approach to Cost-Volume-Profit Analysis

5. Sales Mix Considerations

6. Special Cost-Volume-Profit Relationships

7. Assumptions of Cost-Volume-Profit Analysis

Chapter 19

C19

Cost Behavior and Cost-Volume-Profit AnalysisCost Behavior and Cost-Volume-Profit Analysis

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• Variable, Fixed, and Mixed Costs

• Contribution Margin Income Statement

• Break-Even Point, Planned Sales Level

• Cost-Volume-Profit Charts

• Sales Mix Considerations

• Margin of Safety, Operating Leverage

Slide # Power Note Topics

Note: To select a topic, type the slide # and press Enter.

Power Notes

3

21

25

35

49

55

Chapter 19

Cost Behavior and Cost-Volume-Profit Analysis Cost Behavior and Cost-Volume-Profit Analysis

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Variable CostsVariable Costs

Total Variable Cost GraphTotal Variable Cost GraphT

otal

Cos

ts

$300,000$250,000$200,000$150,000$100,000 $50,000

10 20 300

Unit Variable Cost GraphUnit Variable Cost Graph

$20$15$10$5

0Cos

t pe

r U

nit

10 20 30

5,000 $ 50,000 $10 10,000 100,000 10 15,000 150,000 10 20,000 200,000 10 25,000 250,000 10 30,000 300,000 10

Units Total CostProduced Cost per Unit

Units Produced (000)


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otal

Cos

ts

$300,000$250,000$200,000$150,000$100,000 $50,000

10 20 300


$20$15$10$5

0Cos

t pe

r U

nit

10 20 30

5,000 $ 50,000 $10 10,000 100,000 10 15,000 150,000 10 20,000 200,000 10 25,000 250,000 10 30,000 300,000 10




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otal

Cos

ts

$300,000$250,000$200,000$150,000$100,000 $50,000

10 20 300


$20$15$10$5

0Cos

t pe

r U

nit

10 20 30

5,000 $ 50,000 $10 10,000 100,000 10 15,000 150,000 10 20,000 200,000 10 25,000 250,000 10 30,000 300,000 10




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Fixed CostsFixed Costs

Total Fixed Cost GraphTotal Fixed Cost GraphT

otal

Cos

ts

0

Unit Fixed Cost GraphUnit Fixed Cost Graph

Cos

t pe

r U

nit

50,000 $75,000 $1.500 100,000 75,000 .750 150,000 75,000 .500 200,000 75,000 .375 250,000 75,000 .300 300,000 75,000 .250


Units Produced (000) Units Produced (000)

$150,000$125,000$100,000$75,000$50,000

$25,000

100 200 300

$1.50$1.25$1.00$.75$.50

$.25

100 200 3000

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otal

Cos

ts

0


Cos

t pe

r U

nit

50,000 $75,000 $1.500 100,000 75,000 .750 150,000 75,000 .500 200,000 75,000 .375 250,000 75,000 .300 300,000 75,000 .250


$150,000$125,000$100,000$75,000$50,000

$25,000

100 200 300

$1.50$1.25$1.00$.75$.50

$.25

100 200 3000


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otal

Cos

ts

0


Cos

t pe

r U

nit

50,000 $75,000 $1.500 100,000 75,000 .750 150,000 75,000 .500 200,000 75,000 .375 250,000 75,000 .300 300,000 75,000 .250


$150,000$125,000$100,000$75,000$50,000

$25,000

100 200 300

$1.50$1.25$1.00$.75$.50

$.25

100 200 3000


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Mixed CostsMixed Costs

Total Mixed Cost GraphTotal Mixed Cost Graph

Tot

al C

osts

0

Total Machine Hours (000)

$40,000$35,000$30,000$25,000$20,000$15,000$10,000 $5,000

10 20 30 40

Mixed costs are usually separated into their fixed and variable components for management analysis.

Mixed costs are usually separated into their fixed and variable components for management analysis.

Mixed costs are sometimes called semivariable or semifixed costs.

Mixed costs are sometimes called semivariable or semifixed costs.

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Mixed Costs: High-Low MethodMixed Costs: High-Low Method

Actual costs incurred

June 1,000 $45,550July 1,500 52,000August 2,100 61,500September 1,800 57,500October 750 41,250

Production TotalUnits Cost

Highest level Lowest level

Difference


Highest and lowest levels

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Highest level 2,100 $61,500Lowest level

Difference




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Highest level 2,100 $61,500Lowest level 750 41,250

Difference




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Variable costper unit

Difference in total costDifference in production

=


Difference 1,350 $20,250



11


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$20,2501,350 units

= = =



11 $15



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$20,2501,350 units

$15$15= = =

Totalcost= –

Fixedcost





Variable costper unit x

Units ofproduction

11

22

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$20,2501,350 units

$15$15= = =

Totalcost= –

Fixedcost






Units ofproduction

Highest level:Highest level: $61,500= – ( $15 x 2,100 ) = $30,000$30,000

11

22

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$20,2501,350 units

$15$15= = =

Totalcost= –

Fixedcost






Units ofproduction

Highest level:Highest level: $61,500= – ( $15 x 2,100 ) = $30,000$30,000

Lowest level:Lowest level: $41,250= – ( $15 x 750 ) = $30,000$30,000

11

22

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$20,2501,350 units

$15= = =

Totalcost= –

Fixedcost






Units ofproduction

Highest level:Highest level: $61,500= – ( $15 x 2,100 ) = $30,000

Lowest level:Lowest level: $41,250= – ( $15 x 750 ) = $30,000

11

22

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Total Fixed Costs

Total Units Produced

Tot

al C

osts

Unit Fixed Costs

Total Units ProducedP

er U

nit

Cos

t

Total Variable Costs


Unit Variable Costs


Tot

al C

osts

Per

Uni

t C

ost


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Total Fixed Costs


Tot

al C

osts

Unit Fixed Costs

Total Units ProducedP

er U

nit

Cos

t

Total Variable Costs


Unit Variable Costs


Tot

al C

osts

Per

Uni

t C

ost


Used for planning.Remains the same

regardless of activity

level.

$10 per unit

$75,000total

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Sales (50,000 units) $1,000,000Variable costs 600,000Contribution margin $400,000 Fixed costs300,000Income from operations $100,000

Contribution Margin Income StatementContribution Margin Income Statement

Total The contribution

margin is available to

cover the fixed costs and

income from operations.

The contribution

margin is available to

cover the fixed costs and

income from operations.

SalesSales

Variable costsVariable costs

Fixed costsFixed costs

Income from operationsIncome from operations

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Sales (50,000 units) $1,000,000 $20 100%Variable costs 600,000 12 60%Contribution margin $400,000 $ 8 40%Fixed costs 300,000Income from operations $100,000

Total Per Unit Percent

The statement can be extended to include per unit dollars and percentage numbers.

The statement can be extended to include per unit dollars and percentage numbers.

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Sales Sales VariableVariablecosts costs

FixedFixedcosts costs

Income Income fromfrom

operations operations = + +

Sales Sales VariableVariablecosts costs

ContributionContributionmarginmargin

– =

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Unit Contribution MarginUnit Contribution Margin

Contribution Margin RatioContribution Margin Ratio


The contribution margin can be expressed three ways:1. Total contribution margin in dollars.2. Unit contribution margin (dollars per unit).3. Contribution margin ratio (percentage).

The contribution margin can be expressed three ways:1. Total contribution margin in dollars.2. Unit contribution margin (dollars per unit).3. Contribution margin ratio (percentage).

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Sales (50,000 units) ? $20 100%Variable costs ? 12 60%Contribution margin $300,000 $ 8 40%Fixed costs 300,000Income from operations $ 0

Calculating the Break-Even PointCalculating the Break-Even Point


At the break-even point, fixed costs and the contribution margin are equal.

At the break-even point, fixed costs and the contribution margin are equal.

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Break-evenBreak-evensales sales FixedFixed

costs costs = /


Sales (50,000 units) ? $20 100%Variable costs ? 12 60%Contribution margin $ 300,000 $ 8 40%Fixed costs 300,000Income from operations $ 0

// oror

Divide by either: $8 per unit or 40%

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costs costs = /



oror

What is the break-even sales in units?What is the break-even sales in units?

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costs costs = /


Break-even sales = $300,000 / $8 = 37,500 unitsBreak-even sales = $300,000 / $8 = 37,500 units


What is the break-even sales in dollars?What is the break-even sales in dollars?

// oror

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costs costs = /


Break-even sales = $300,000 / $8 = 37,500 unitsBreak-even sales = $300,000 / $8 = 37,500 units

Break-even sales = $300,000 / 40% = $750,000Break-even sales = $300,000 / 40% = $750,000


// oror

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Calculating a Planned Sales LevelCalculating a Planned Sales Level


PlannedPlannedsales sales

Fixed Fixed

Target costs Target costs profit profit

= /ContributionContribution

marginmargin

Sales (50,000 units) ? $20 100%Variable costs ? 12 60%Contribution margin $ 400,000 $ 8 40%Fixed costs 300,000Income from operations $ 100,000

++

// oror

Fixed costs plus the target profit equals the required total contribution margin.

Fixed costs plus the target profit equals the required total contribution margin.

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Fixed TargetFixed Targetcosts profit costs profit = /



++

// oror

$8 per unit or 40% $8 per unit or 40%

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ContributionContributionmarginmargin++

// oror

What is the planned sales level in units?What is the planned sales level in units?

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Planned sales = ($300,000 + $100,000) / $8 = 50,000 unitsPlanned sales = ($300,000 + $100,000) / $8 = 50,000 units

++

What is the planned sales level in dollars?What is the planned sales level in dollars?


// oror

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Planned sales = ($300,000 + $100,000) / $8 = 50,000 unitsPlanned sales = ($300,000 + $100,000) / $8 = 50,000 units

++

Planned sales = ($300,000 + $100,000) / 40% = $1,000,000Planned sales = ($300,000 + $100,000) / 40% = $1,000,000

// oror

$1,000,000$1,000,000

Sales (50,000 units) $1,000,000 $20 100%Variable costs 600,000 12 60%Contribution margin $ 400,000 $ 8 40%Fixed costs 300,000Income from operations $ 100,000

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Cost-Volume-Profit ChartCost-Volume-Profit ChartS

ales

and

Cos

ts (

$000

)

0

Units of Sales (000)

$500$450$400$350$300$250$200$150$100$ 50

Unit selling price $ 50Unit variable cost 30Unit contribution margin $ 20

Total fixed costs $100,000



Total Sales

1 2 3 4 5 6 7 8 9 10

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ales

and

Cos

ts (

$000

)

0


$500$450$400$350$300$250$200$150$100$ 50

1 2 3 4 5 6 7 8 9 10





Total Sales

Variable Costs60%

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100% 60% 40%

100% 60% 40%


ales

and

Cos

ts (

$000

)

0


$500$450$400$350$300$250$200$150$100$ 50

1 2 3 4 5 6 7 8 9 10





Total Sales

Variable Costs

Contribution Margin40%

60%

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ales

and

Cos

ts (

$000

)

0


$500$450$400$350$300$250$200$150$100$ 50

1 2 3 4 5 6 7 8 9 10





Total Costs

Total Sales

Fixed Costs

Variable Costs

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ales

and

Cos

ts (

$000

)

0


$500$450$400$350$300$250$200$150$100$ 50

1 2 3 4 5 6 7 8 9 10





Total Costs

Total Sales

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ales

and

Cos

ts (

$000

)

0


$500$450$400$350$300$250$200$150$100$ 50

1 2 3 4 5 6 7 8 9 10





Operating Loss Area

Operating Profit AreaTotal Costs

Total Sales

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ales

and

Cos

ts (

$000

)

0


Break-Even Point





Total Costs

Total Sales

1 2 3 4 5 6 7 8 9 10

$500$450$400$350$300$250$200$150$100$ 50

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ales

and

Cos

ts (

$000

)

0


Break-Even Point

Unit selling price $ 50Unit variable cost 30Unit contribution margin $20


Unit selling price $ 50Unit variable cost 30Unit contribution margin $20


Total Costs

Total Sales

$100,000

$20= 5,000 units

1 2 3 4 5 6 7 8 9 10

$500$450$400$350$300$250$200$150$100$ 50

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Cost-Volume-Profit Chart (Break-Even)Cost-Volume-Profit Chart (Break-Even)S

ales

and

Cos

ts (

$000

)

0


Break-Even Point





Operating Loss Area

Operating Profit AreaTotal Costs

Total Sales

$100,000

$20= 5,000 units

1 2 3 4 5 6 7 8 9 10

$500$450$400$350$300$250$200$150$100$ 50

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Revised Cost-Volume-Profit ChartRevised Cost-Volume-Profit ChartS

ales

and

Cos

ts (

$000

)

0


Revised Break-Even Point





Operating Loss Area

Operating Profit Area

Total Costs

Total Sales

$80,000

$20= 4,000 units

1 2 3 4 5 6 7 8 9 10

$500$450$400$350$300$250$200$150$100$ 50

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Profit-Volume ChartProfit-Volume ChartO

pera

ting

Pro

fit(L

oss)

$00

0’s

$100$75$50$25$ 0

$(25)$(50)$(75)

$(100)

Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000

Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000

Operating profit $100,000




Units of Sales (000’s)

1 2 3 4 5 6 7 8 9 10

Relevant range is 10,000 units.

Relevant range is 10,000 units.

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pera

ting

Pro

fit(L

oss)

$00

0’s

$100$75$50$25$ 0

$(25)$(50)$(75)

$(100)








1 2 3 4 5 6 7 8 9 10

Maximum profit within the relevant range.

Maximum profit within the relevant range.

Maximum loss is equal to the total fixed costs.

Maximum loss is equal to the total fixed costs.

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pera

ting

Pro

fit(L

oss)

$00

0’s

$100$75$50$25$ 0

$(25)$(50)$(75)

$(100)







Profit Line


OperatingProfit

OperatingLoss

1 2 3 4 5 6 7 8 9 10

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pera

ting

Pro

fit(L

oss)

$00

0’s

$100$75$50$25$ 0

$(25)$(50)$(75)

$(100)







Profit Line


OperatingProfit

OperatingLoss Break-Even Point

1 2 3 4 5 6 7 8 9 10

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Sales Mix ConsiderationsSales Mix Considerations

Sales $ 90 $140 Variable costs 70 95 Contribution margin $ 20 $ 45 Sales mix 80% 20%

Contribution marginContribution margin Products A B

What is the average contribution for each product?

What is the average contribution for each product?

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Sales $ 90 $140Variable costs 70 95Contribution margin $ 20 $ 45Sales mix x 80% x 20%Product contribution $ 16 $ 9


What is the total product contribution?

What is the total product contribution?

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Total product contribution $ 25

Contribution marginContribution margin

Break-even sales unitsBreak-even sales units

Products A B


Product contribution $25

What is the break-even sales units?What is the break-even sales units?

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Products A B



Break-even sales units 8,000Product A units (80%) 6,400Product B units (20%) 1,600

= 8,000 units

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Sales $ 90 $ 140 Variable costs 70 95 Contribution margin $ 20 $ 45 Sales mix 60% 40%


If the sales mix is 60% for product A and 40% for product B, what is the break-even sales units?

If the sales mix is 60% for product A and 40% for product B, what is the break-even sales units?

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Products A B



Break-even sales units 6,667Product A units (60%) 4,000Product B units (40%) 2,667

= 6,667 units

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Margin of SafetyMargin of Safety

Sales – Sales at break-even point

Sales


Sales

Dollars Units

Sales $250,000 10,000

Break-even sales 200,000 8,000

Excess $ 50,000 2,000

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Sales


Sales

Dollars Units

AA Sales $250,000 10,000


Excess $ 50,000 2,000

Actual sales level.Actual sales level.

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Sales


Sales

Dollars Units

AA

BB

Sales $250,000 10,000


Excess $ 50,000 2,000

Margin of safety (B/A)

Excess of actual sales over the break-even sales.

Excess of actual sales over the break-even sales.

What is the margin of safety as a percentage?

What is the margin of safety as a percentage?

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Sales


Sales

Margin of safety indicates the decrease in sales that may occur before an operating loss results.

Margin of safety indicates the decrease in sales that may occur before an operating loss results.

Dollars Units

AA

BB

Sales $250,000 10,000


Excess $ 50,000 2,000

Margin of safety (B/A) 20%

Margin of safety

expressed in units.

Margin of safety

expressed in units.

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Operating LeverageOperating Leverage

Contribution margin

Operating income

Contribution margin

Operating income

Sales $400,000 $400,000Variable costs 300,000 300,000Contribution margin $100,000 $100,000Fixed costs 80,000 50,000Income from operations $20,000 $ 50,000

Jones Inc. Wilson Inc.

Operating leverage is a measure of the relative mix of variable costs and fixed costs.

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Contribution margin

Operating income

Contribution margin

Operating income



AA


Both companies have the same contribution margin.Both companies have the same contribution margin.

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Contribution margin

Operating income

Contribution margin

Operating income


Operating leverage (A/B)


AA

BB


What is the operating leverage?What is the operating leverage?

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Contribution margin

Operating income

Contribution margin

Operating income




AA

BB


What do these numbers mean?What do these numbers mean?

5 2

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Contribution margin

Operating income

Contribution margin

Operating income




AA

BB


Capitalintensive?

Laborintensive?

5 2

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Assumptions of Cost-Volume-Profit AnalysisAssumptions of Cost-Volume-Profit Analysis

1. Total sales and total costs can be represented by straight lines.

2. Within the relevant range of operating activity, the efficiency of operations does not change.

3. Costs can be accurately divided into fixed and variable components.

4. The sales mix is constant.

5. There is no change in the inventory quantities during the period.

The reliability of cost-volume-profit analysis depends upon several assumptions.

C19 - 65

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Power NotesChapter 19

Cost Behavior and Cost-Volume-Profit AnalysisCost Behavior and Cost-Volume-Profit Analysis

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