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8/11/2019 PP for Chapter 8 - Cost Volume Profit - Final
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Accounting: A Malaysian Perspective,
4
th
ed
(Adapted from Accounting 22
nd
ed
)
Warren, Reeve and
Duchac
Cost Behaviourand Cost-
Volume-ProfitAnalysis
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1. Classify costs by their behavior as variable costs,
fixed costs, or mixed costs.
2. Compute the contribution margin, the contribution
margin ratio, and the unit contribution margin, and
explain how they may be useful to managers.
After studying this chapter, you should be able to:
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3. Use the unit contribution margin, determine the
break-even point and the volume necessary to
achieve a target profit.
4. Use a cost-volume-profit chart and a profit-
volume chart, determine the break-even pointand the volume necessary to achieve a target
profit.
After studying this chapter, you should be able to:
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5. Compute the margin of safety and the operating
leverage, and explain how managers use these
concepts6. List the assumptions underlying cost-volume-
profit analysis.
After studying this chapter, you should be able to:
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Classify costs by theirbehavior as var iable
costs, f ixed costs, or
mixed costs.
Objective 1
8-1
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Cost Behavior 8-1
Cost behaviorrefers to the manner in
which a cost changes as a related
activity changes. Such activities arecalled activity base(or activity
drivers). The range of activity over
which the changes in the cost are of
interest is called the relevant range.
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Variable Costs 8-1
Variable costsare
costs that vary inproportion to
changes in the level
of activity.
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Syarikat Tah produces stereo sound systems
under the brand name of T-Sound. The parts forthe T-Sound stereos are purchased from outsidesuppliers for RM10 per unit (a variable cost) andassembled in Syarikat Tahs Sintok plant.
8-1Syarikat Tah
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Total Variable Cost Graph
TotalDirect
MaterialsCost
RM300,000
RM250,000
RM200,000
RM150,000
RM100,000
RM50,000
10 20 300Total Units (Model TS-12)
Produced (thousands)
Variable Cost Graphs 8-1
(Continued)
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Unit Variable Cost Graph
RM20
RM15
RM10
RM5
0
DirectMaterials
CostperUnit
10 20 30Total Units (Model TS-
12) Produced (thousands)
8-1
(Concluded)
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TotalCosts
RM300,000
RM250,000
RM200,000
RM150,000
RM100,000
RM50,000
10 20 300
RM20
RM15RM10
RM5
0CostperUnit
10 20 30
Number of
Units of Model
JS-12 Produced
Units Produced (000)
Units Produced (000)
Direct
Materials Cost
per Unit
Total Direct
Materials Cost
5,000 units RM10 RM 50,00010,000 10 l00,000
15,000 10 150,000
20,000 10 200,000
25,000 10 250,000
30,000 10 300,000
8-1Unit Cost Compared to Total Cost
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Fixed Costs 8-1
F ixed costsare costs that
remain the same in total
dollar amount as the level
of activity changes.
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The production supervisor for Syarikat
Mons Jitra plant is Siti Maimon. She ispaid RM75,000 per year. The plantproduces from 50,000 to 300,000 bottles ofLa Fleur Perfume.
Syarikat Mons Jitra Plant 8-1
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Number of
Bottles of Perfume
Produced
Total Salary for
Siti Maimon
50,000 bottles RM75,000 RM1.500
100,000 75,000 0.750
150,000 75,000 0.500
200,000 75,000 0.375
250,000 75,000 0.300300,000 75,000 0.250
Salary per Bottle
of Perfume
Produced
Fixed Versus Variable Cost of Siti
Maimons Salary
8-1
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TotalCosts
RM150,000RM125,000
RM100,000
RM75,000
RM50,000
RM25,000
100 200 3000Bottles Produced (000)
Number of
Bottles of Perfume
Produced
UnitCost
RM1.50RM1.25
RM1.00
RM.75
RM.50
RM.25
100 200 3000Units Produced (000)
Total Salary
for Siti Maimon
50,000 bottles RM75,000 RM1.500
100,000 75,000 0.750
150,000 75,000 0.500
200,000 75,000 0.375
Salary per Bottle
of Perfume
Produced
8-1
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Mixed Costs 8-1
A mixed cost(sometimes calledsemivariableor semifixedcosts) has
characteristics of both a variable and
a fixed cost. Over one range of
activity, the total mixed cost may
remain the same. Over another
range of activity, the mixed cost may
change in proportion to changes inlevel of activity.
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Syarikat Syed manufactures sails usingrented equipment. The rental chargesare RM15,000 per year, plus RM1 foreach machine hour used over 10,000hours.
Syarikat Syed Example 8-1
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TotalCosts
0
Total Machine Hours (000)
RM45,000
RM40,000
RM35,000
RM30,000
RM25,000
RM20,000
RM15,000
RM10,000
RM5,000
10 20 30 40
Mixed costs are
usually separated into
their fixed andvariable components
for management
analysis.
Mixed Cost Graph for Syarikat Syed
Equipment Rental Charges
8-1
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The high-low methodis asimple cost estimate
technique that may beused for separating mixedcosts into their fixed and
variable components.
High-Low Method 8-1
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First, select the
highest and lowest
levels of activity.
8-1
Variable Cost per Unit =Difference in Total cost
Difference in Production
Estimating Variable Cost Using High-Low
Production Total
(Units) Cost
June 1,000 RM45,550
July 1,500 52,000August 2,100 61,500
September 1,800 57,500
October 750 41,250
Actual costs incurred
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Production Total
(Units) Cost
June 1,000 RM45,550
July 1,500 52,000August 2,100 61,500
September 1,800 57,500
October 750 41,250
8
Then, fill in the
formula.
8-1
Variable Cost per Unit =Difference in Total Cost
Difference in Production
RM61,50041,250
RM20,250
Estimating Variable Cost Using High-Low
RM20,250
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8-1
Variable Cost per Unit =Difference in total cost
Difference in Production
2,100750
1,350
RM20,250
1,350
Estimating Variable Cost Using High-Low
Then, fill in the
formula.
Production Total
(Units) Cost
June 1,000 RM45,550
July 1,500 52,000August 2,100 61,500
September 1,800 57,500
October 750 41,250
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Variable cost per
unit is RM15
8-1Estimating Variable Cost Using High-Low
= RM15RM20,250
1,350Variable Cost per Unit =
Production Total
(Units) Cost
June 1,000 RM45,550
July 1,500 52,000August 2,100 61,500
September 1,800 57,500
October 750 41,250
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Next, insert the
variable cost of RM15into the formula.
Total cost = (RM15x Units of Production) + Fixed cost
8-1Estimating Fixed Cost Using High-Low
Total Cost = (Variable Cost per Unit x Units of Production)+ Fixed cost
Production Total
(Units) Cost
June 1,000 RM45,550
July 1,500 52,000August 2,100 61,500
September 1,800 57,500
October 750 41,250
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Using the highest
level of production,
we insert the total costand units produced in
the formula.
Total cost = (RM15 x Units of Production) + Fixed Cost
8-1Estimating Fixed Cost Using High-Low
RM61,500 2,100 units)
Production Total
(Units) Cost
June 1,000 RM45,550
July 1,500 52,000August 2,100 61,500
September 1,800 57,500
October 750 41,250
Total Cost = (Variable Cost per Unit x Units of Production)+ Fixed cost
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8-1Estimating Fixed Cost Using High-Low
RM61,500 = (RM15 x 2,100 units) + Fixed cost
RM61,500 = RM31,500 + Fixed cost
RM61,500RM31,500 = Fixed cost
RM30,000= Fixed cost
If the lowest level had been
chosen, the results of the
formula would provide the
same fixed cost of RM30,000.
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Example Exercise 8-1
8-1
The manufacturing cost of Perusahaan Alisa for
the first three months of the year are provided
below:
27
Using the high-low method, determine the(a) variable cost per unit, and (b) the total fixed
cost.
Total Cost ProductionJanuary RM80,000 1,000 units
February RM125,000 2,500
March RM100,000 1,800
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For Practice: PE8-1
Follow My Example 8-1
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8-1
b. RM50,000 = RM125,000(RM30 x 2,500)
or RM80,000(RM30 x 1,000)
a. RM30 per unit = RM125,000RM80,000
(2,5001,000)
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Total
Variable
Costs
Total Units Produced
Unit
VariableCosts
Total Units Produced
TotalCosts
PerUnitCo
st
Total costs
increase and
decrease
proportionately
with activity level.
8-1Summary of Cost Behavior Concepts
Unit costs remain
the same per unitregardless of
activity.
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Total Units ProducedT
otalCosts
Total Units ProducedPerUnitCost
Unit costs remain
the same
regardless of
activity.
Total costs
increase anddecrease with
activity level.
8-1Summary of Cost Behavior Concepts
Total
Fixed Costs
Unit
Fixed Costs
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Compute the contr ibution
margin, the contr ibution margin
ratio, and the unit contr ibution
margin, and explain how they
may be useful to managers.
Objective 2
8-2
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8-2Cost-Volume-Profit Relationships
Cost-volume-profitanalysisis the systematic
examination of the relationships among selling
prices, sales and production volume, costs,expenses, and profits.
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8-2
Thecontribution marginis the excess of sales
revenues over variable costs. It contributes
first toward covering fixed costs, then
contributes to profit.
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Sales (50,000 units) RM1,000,000
Variable costs 600,000Contribution margin RM 400,000
Fixed costs 300,000
Income from operations RM 100,000
8-2Contribution Margin
Income Statement4
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8-2Contribution Margin Ratio
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100%
60%
Contribution Margin Ratio = 40%
Sales (50,000 units) RM1,000,000
Variable costs 600,000
Contribution margin RM 400,000
Fixed costs 300,000
Income from operations RM 100,000
Contribution Margin Ratio =SalesVariable Costs
Sales
RM1,000,000RM600,000RM1,000,000Contribution Margin Ratio =
40%30%
10%
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8-2Unit Contribution Margin
The unit contr ibution margin
is also useful for analyzing the
profit potential of proposedprojects. The unit contribution
margin is the sales pr ice less
the var iable cost per unit.
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8-2Using Contribution Margin per
Unit as a Shortcut
The increase in income from operations ofRM120,000 could have been determined quickly
by multiplying the increase in unit sales (15,000)
by the contribution margin per unit (RM8).
Sales (RM20) RM1,000,000
Variable costs (RM12) 600,000
Contribution margin (RM8)RM400,000Fixed costs 300,000
Income from operations RM 100,000
50,000
units
65,000
units
RM1,300,000
780,000
RM 520,000300,000
RM220,000
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100%
60%
40%
30%10%
RM20
12
RM 8
Sales (50,000 units) RM1,000,000
Variable costs 600,000
Contribution margin RM 400,000
Fixed costs 300,000Income from operations RM 100,000
8-2
Unit contribution marginanalyses can provide useful
information for managers.
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100%
60%
40%
30%10%
1. Total contribution margin in dollars.
RM20
12
RM 8
Sales (50,000 units) RM1,000,000
Variable costs 600,000
Contribution margin RM 400,000
Fixed costs 300,000
Income from operations RM 100,000
2. Contribution margin ratio (percentage).
The contribution margin can be expressed three ways:
3. Unit contribution margin (dollars per unit).
Review 8-2
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Example Exercise 8-2
8-2
Syarikat Molly sells 20,000 units at RM12 per
unit. Variable costs are RM9 per unit, and
fixed costs are RM25,000. Determine the (a)contribution margin ratio, (b) unit contribution
margin, and (c) income from operations.
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For Practice: PE 8-2
Follow My Example 8-2
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8-
2
a. 25% = (RM12RM9)/RM12 or (RM240,000
RM180,000)/RM240,000
b. RM3 per unit = RM12RM9
c. Sales RM240,000 (20,000 x RM12)
Variable costs 180,000 (20,000 x RM9)
Contribution margin RM 60,000 [20,000 x (RM12RM9)]
Fixed costs 25,000
Income from operationsRM 35,000
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Using the unit contr ibution
margin, determine the break-even
point and the volume necessary to
achieve a target profi t.
Objective 3
8-3
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8-3Break-Even Point
The break-even pointis the level of
operations at which a businesss
revenues and expired costs areexactly equal.
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8-3
Syarikat Bakar fixed costs are estimated to
be RM90,000. The unit contribution margin
is calculated as follows:Unit selling price RM25
Unit variable cost 15
Unit contribution margin RM10
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8-3
The break-even point is calculated using thefollowing equation:
Break-Even Sales (units) =
Fixed Costs
Unit Contribution Margin
Break-Even Sales (units) =RM90,000
RM10
Break-Even Sales (units) = 9,000units
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8-3Proof of the Preceding
Computation
Sales (RM25 x 9,000) RM225,000
Variable costs (RM15 x 9,000) 135,000
Contribution margin RM 90,000
Fixed costs 90,000
Income from operations RM 0
Income from operations is zero when
9,000 units are soldhence, break-even is 9,000 units.
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8-3Effect of Changes in Fixed Costs
Fixed
CostsIfBreak-
EvenThen
Fixed
CostsIfThen Break-
Even
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8-3
Syarikat Lazer is evaluating a
proposal to budget an additional
RM100,000 for advertising. Fixedcosts before the additional
advertising are estimated at
RM600,000, and the unit
contribution margin is RM20.
Increasing Fixed Costs
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8-3
Without additional advertising:
Break-Even in Sales (units) =Fixed Costs
Unit Contribution Margin
Break-Even in Sales (units) =
RM600,000
RM20 =30,000
units
With additional advertising:
Break-Even in Sales (units) =
RM700,000
RM20 =
35,000
units
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8-3Effect of Changes in Unit
Variable Costs
Unit
Variable
Cost
If Break-
Even
Then
Unit
VariableCosts
If Then Break-
Even
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8-3
Syarikat Antah. is evaluating a proposal to pay anadditional 2% commission on sales to its
salespeople (a variable cost) as an incentive to
increase sales. Fixed costs are estimated at
RM840,000. The unit contribution margin beforethe additional 2% commission is determined as
follows:
Unit selling price RM250Unit variable cost 145
Unit contribution marginRM105
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8-3
Without additional 2% commission:
RM250[RM145 + (RM250 x 2%)]
= RM100
Break-Even in Sales (units) =
RM840,000
RM105 = 8,000 units
With additional 2% commission:
Break-Even in Sales (units) =
RM840,000
RM100 =8,400 units
Break-Even in Sales (units) =Fixed Costs
Unit Contribution Margin
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8-3Effect of Changes in the Unit
Selling Price
Unit
Selling
Price
If
Break-
Even
Then
Unit
Selling
Price
If Then
Break-
Even
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8-3
Syarikat Jendi is evaluating a proposal to increase
the unit selling price of a product from RM50 to
RM60. The following data have been gathered:
Unit selling price RM50 RM60
Unit variable cost 30 30
Unit contribution margin RM20 RM30
Current Proposed
Total fixed costs RM600,000RM600,000
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8-3
Without price increase:
Break-Even in Sales (units) =Fixed Costs
Unit Contribution Margin
Break-Even in Sales (units) =
RM600,000
RM20 =30,000
units
With price increase:
Break-Even in Sales (units) =
RM600,000
RM30 =
20,000
units
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8-3Summary of Effects of Changes
on Break-Even Point
Effect of Change
Direction of on Break-Even
Change Sales (Units)Type of Change
Fixed cost Increase IncreaseDecrease Decrease
Variable cost per unit Increase IncreaseDecreaseDecrease
Unit sales price Increase DecreaseIncreaseDecrease
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Example Exercise 8-3
8-3
Nik Enterprise sells a product for RM60 per unit. The
variable cost is RM35 per unit, while fixed costs are
RM80,000. Determine the (a) break-even point in sales
units, and (b) break-even point if the selling price wereincreased to RM67 per unit.
57For Practice: PE 8-3
Follow My Example 8-3
a. 3,200 units = RM80,000/(RM60RM35)
b. 2,500 units = RM80,000/(RM67RM35)
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8-3Target Profit
The sales volume required to earn a target profit is
determined by modifying the break-even equation.
Sales (units) =Fixed Costs + Target Profit
Unit Contribution Margin
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8-3Units Required for Target Profit
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Fixed costs are estimated at RM200,000, andthe desired profit is RM100,000. Unit
contribution margin is RM30.
Unit selling price RM75Unit variable cost 45
Unit contribution margin RM30
Sales (units) = Fixed Costs + Target ProfitUnit Contribution MarginRM30
Sales (units) = 10,000 units
RM200,000RM100,000
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Sales (10,000 units x RM75) RM750,000
Variable costs (10,000 x RM45) 450,000
Contribution margin (10,000
x RM30) RM300,000Fixed costs 200,000
Income from operations RM100,000
Proof that sales of 10,000 units will provide aprofit of RM100,000.
8-3
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Example Exercise 8-4
8-3
Syarikat Fika sells a product for RM140 per unit. The
variable cost is RM60 per unit, and fixed costs are
RM240,000. Determine the (a) break-even point in
sales units, and (b) break-even point in sales units if thecompany desires a target profit of RM50,000.
61For Practice: PE 8-4
Follow My Example 8-4
a. 3,000 units = RM240,000/(RM140RM60)
b. 3,625 units = (RM240,000 + RM50,000)/(RM140RM60)
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Using a cost-volume-profi t chart
and a prof i t-volume chart,
determine the break-even point
and the volume necessary to
achieve a target profi t.
Objective 4
8-4
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8-4Cost-Volume-Profit (Break-
Even) Chart
A cost-volume-profitchart,
sometimes called a break-even
chart, may assist management in
understanding relationships amongcosts, sales, and operating profit or
loss.
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Unit selling price RM 50Unit variable cost 30
Unit contribution margin RM 20
Total fixed costs RM100,000
The cost-volume-profit chart in Exhibit 5 (Slide 65)is
based on the following data:
8-4
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SalesandCosts(inthousands)
0
Units of Sales (in thousands)
RM500
RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
8-4Cost-Volume-ProfitChart
Dollar
amounts
are
indicatedalong the
vertical
axis.
65
1 2 3 4 5 6 7 8 9 10
(Continued)Volume is shown on the horizontal axis.
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8-4Cost-Volume-ProfitChart (Continued)
SalesandCosts(inthousands)
0
Units of Sales (in thousands)
RM500
RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
1 2 3 4 5 6 7 8 9 10
At sales of RM500,000 and knowing that each unit sells for RM50, we
can find the values of the two axis. Where the horizontal sales and
costs line intersects the vertical 10,000 unit of sales line is Point A.
Point A
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8-4
SalesandCosts(inthousands)
0
Units of Sales (in thousands)
RM500
RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
1 2 3 4 5 6 7 8 9 10
Now, beginning at zero on the left corner of the graph, connect
a straight line to the dot (Point A). Note: Point A could have
been plotted at any sales level because linearity is assumed.
Cost-Volume-Profit
Chart (Continued)
Point A
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8-4
SalesandCosts(inthousands)
0
Units of Sales (in thousands)
RM500
RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
Fixed cost of RM100,000 is a horizontal line.
1 2 3 4 5 6 7 8 9 10
Cost-Volume-Profit
Chart (Continued)
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8-4
SalesandCosts(inthousands)
0
Units of Sales (in thousands)
RM500
RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
Similar to the sales line, a point is determined on the cost
line (10,000 x RM30) + RM100,000 = RM400,000
1 2 3 4 5 6 7 8 9 10
Cost-Volume-Profit
Chart (Continued)
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8-4
SalesandCosts(inthousands)
0
Units of Sales (in thousands)
RM500
RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
Beginning with the total fixed cost at the vertical axis
(RM100,000), draw a line to the red dot. This is the total cost
line.
1 2 3 4 5 6 7 8 9 10
Cost-Volume-Profit
Chart (Continued)
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8-4
SalesandCosts(inthousands)
0
Units of Sales (in thousands)
RM500
RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
1 2 3 4 5 6 7 8 9 10
Cost-Volume-Profit
Chart (Continued)
Horizontal and vertical lines are drawn at the
intersection point of the sales lineand the costsline,
which is the break-even point.
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8-4
SalesandCosts(inthousands)
0
Units of Sales (in thousands)
RM500
RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
Break-even is sales of 5,000 units or RM250,000.
1 2 3 4 5 6 7 8 9 10
Cost-Volume-Profit
Chart (Continued)
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8-4
SalesandCosts(inthousands)
0
Units of Sales (in thousands)
RM500
RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
1 2 3 4 5 6 7 8 9 10
Profit area
Cost-Volume-Profit
Chart (Concluded)
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8-4Revised Cost-Volume-Profit Chart
Using the data in Slide 73, assume that
a proposal to reduce fixed cost byRM20,000 is to be evaluated. A cost-
volume-profit chart can be created to
assist in this evaluation.
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8-4
SalesandCosts(inthousands)
0
Units of Sales (in thousands)
RM500
RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
1 2 3 4 5 6 7 8 9 10
RM80,000
If fixed costs can be reduced to RM80,000, the new break-
even point is sales of RM200,000, or 4,000 units.
Revised Cost-Volume-
Profit Chart
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8-4Profit-Volume Chart
Another graphic approach to cost-volume-
profit analysis, the profit-volumechart,
plots only the difference between total
sales and total costs (or profits). Again, thedata from Exhibit 5 will be used.
Unit selling price RM 50
Unit variable cost 30
Unit contribution margin RM 20
Total fixed costs RM100,000
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Sales (10,000 units x RM50) RM500,000
Variable costs (10,000 units x RM30) 300,000
Contribution margin (10,000 units x RM20) 200,000
Fixed costs 100,000Operating profit RM100,000
8-4
The maximum operating loss is equal to the
fixed costs of RM100,000. Assuming that the
maximum unit sales within the relevant range is
10,000 units, the maximum operating profitis
RM100,000, computed as follows:
Maximum profit
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Units of Sales (in thousands)
1 2 3 4 5 6 7 8 9 10
Profit Line
Operating
loss
Operating
profit
RM100,000RM75,000
RM50,000
RM25,000
RM 0
RM(25,000)
RM(50,000)
RM(75,000)
RM(100,000)Operatin
gProfit(Loss)
Maximum loss is
RM100,000, the fixed costs.
8-4Profit-Volume Chart
Break-Even Point
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Compute the margin of safety and
the operating leverage, and
explain how managers use these
concepts.
Objective 5
8-2
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8-5
The relative mix of a businesss variable costs
and fixed costs is measured by the operating
leverage. It is computed as follows:
Operating Leverage =Contribution Margin
Income from Operations
Operating Leverage
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8189
Both companies have the same
contribution margin.
Syarikat Salam Syarikat Sinar
Sales RM400,000 RM400,000
Variable costs 300,000 300,000
Contribution margin RM100,000 RM100,000
Fixed costs 80,000 50,000
Income from operations RM 20,000 RM 50,000
Operating leverage ? ?
8-5Operating Leverage Example
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Contribution Margin
Income from Operations
RM100,000
RM20,000= 5Syarikat Salam
Syarikat Salam Syarikat Sinar
Sales RM400,000 RM400,000
Variable costs 300,000 300,000
Contribution margin RM100,000 RM100,000
Fixed costs 80,000 50,000
Income from operations RM 20,000 RM 50,000
Operating leverage ? ?
8-5
5
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Contribution Margin
Income from Operations
RM100,000
RM50,000= 2Syarikat Sinar:
Syarikat Salam Syarikat Sinar
Sales RM400,000 RM400,000
Variable costs 300,000 300,000
Contribution margin RM100,000 RM100,000
Fixed costs 80,000 50,000
Income from operations RM 20,000 RM 50,000
Operating leverage ? ?
8-5
25
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High Versus Low Operating Leverage 8-5
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Example Exercise 8-5
8 5
Syarikat Tariq reports the following data:
93For Practice: PE8-5
Follow My Example 8-5
4.0 = (RM750,000RM500,000)/(RM750,000RM500,000
RM187,500) = RM250,000/RM62,500
Sales RM750,000
Variable costs RM500,000
Fixed costs RM187,500
Determine Syarikat Tariqs operating leverage.
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Margin of Safety 8-5
The difference between the current sales
revenue and the sales revenue at the
break-even point is called the margin of
safety.
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Margin of Safety =
SalesSales at Break-Even Point
Sales
Margin of Safety = 20%
8-5
If sales are RM250,000, the unit selling price is RM25,and the sales at the break-even point are RM200,000, the
margin of safety is 20%, computed as follows:
Margin of Safety =RM250,000RM200,000
RM250,000
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The margin of safety may also be stated interms of units. In this illustration, for example,
the margin of safety of 20% is equivalent to
RM50,000 in sales (RM250,000 x 20%). In
units, the margin of safety is 2,000 units(RM50,000/RM25).
8-5
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Example Exercise 8-6
Syarikat Rafiq has sales of RM400,000, and the break-
even point in sales dollars is RM300,000. Determine
the companys margin of safety.
97For Practice: PE8-6
Follow My Example 8-6
25% = (RM400,000RM300,000)/RM400,000
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L ist the assumptions underlying
cost-volume-profit analysis.
Objective 6
8-2
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8-6Assumptions of Cost-Volume-Profit
Analysis
The primary assumptions are:
1. Total sales and total costs can be represented by a
straight line.
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 duringthe period.