Short Term Decision Making Cost-Volume-Profit Analysis By:
Associate Professor Dr. GholamReza Zandi [email protected]
Slide 2
Cost Behavior Types of Cost Behavior Patterns
Slide 3
The Activity Base A measure of what causes the incurrence of a
variable cost. Units produced Miles driven Labor hours Machine
hours
Slide 4
Minutes Talked Total Long Distance Telephone Bill True Variable
Cost Example A variable cost is a cost whose total dollar amount
varies in direct proportion to changes in the activity level. Your
total long distance telephone bill is based on how many minutes you
talk.
Slide 5
Types of Cost Behavior Patterns Recall the summary of our cost
behavior discussion from Chapter 1.
Slide 6
Minutes Talked Per Minute Telephone Charge Variable Cost Per
Unit Example A variable cost remains constant if expressed on a per
unit basis. The per minute cost of long distance calls is constant,
for example, 10 per minute.
Slide 7
Extent of Variable Costs The proportion of variable costs
differs across organizations. For example... A public utility with
large investments in equipment will tend to have fewer variable
costs. A manufacturing company will often have many variable costs.
A merchandising company usually will have a high proportion of
variable costs like cost of sales. A merchandising company usually
will have a high proportion of variable costs like cost of sales. A
service company will normally have a high proportion of variable
costs. A service company will normally have a high proportion of
variable costs.
Slide 8
Examples of Variable Costs 1.Merchandising companies cost of
goods sold. 2.Manufacturing companies direct materials, direct
labor, and variable overhead. 3.Merchandising and manufacturing
companies commissions, shipping costs, and clerical costs such as
invoicing. 4.Service companies supplies, travel, and clerical.
1.Merchandising companies cost of goods sold. 2.Manufacturing
companies direct materials, direct labor, and variable overhead.
3.Merchandising and manufacturing companies commissions, shipping
costs, and clerical costs such as invoicing. 4.Service companies
supplies, travel, and clerical.
Slide 9
Volume Cost True Variable Cost Direct materials is a true or
proportionately variable cost because the amount used during a
period will vary in direct proportion to the level of production
activity.
Slide 10
Step-Variable Costs A resource that is obtainable only in large
chunks (such as maintenance workers) and whose costs increase or
decrease only in response to fairly wide changes in activity.
Volume Cost
Slide 11
Step-Variable Costs Small changes in the level of production
are not likely to have any effect on the number of maintenance
workers employed. Volume Cost
Slide 12
Step-Variable Costs Only fairly wide changes in the activity
level will cause a change in the number of maintenance workers
employed. Volume Cost
Slide 13
Relevant Range A straight line closely approximates a
curvilinear variable cost line within the relevant range. Activity
Total Cost Economists Curvilinear Cost Function The Linearity
Assumption and the Relevant Range Accountants Straight-Line
Approximation (constant unit variable cost)
Slide 14
Lets turn our attention to fixed cost behavior. Types of Cost
Behavior Patterns
Slide 15
Number of Local Calls Monthly Basic Telephone Bill Total Fixed
Cost Example Your monthly basic telephone bill is probably fixed
and does not change when you make more local calls. A fixed cost is
a cost whose total dollar amount remains constant as the activity
level changes.
Slide 16
Types of Cost Behavior Patterns Recall the summary of our cost
behavior discussion from Chapter 1.
Slide 17
Number of Local Calls Monthly Basic Telephone Bill per Local
Call Fixed Cost Per Unit Example Average fixed costs per unit
decrease as the activity level increases. The fixed cost per local
call decreases as more local calls are made.
Slide 18
Examples Advertising and Research and Development Examples
Advertising and Research and Development Examples Depreciation on
Buildings and Equipment and Real Estate Taxes Examples Depreciation
on Buildings and Equipment and Real Estate Taxes Types of Fixed
Costs Discretionary May be altered in the short-term by current
managerial decisions Discretionary May be altered in the short-term
by current managerial decisions Committed Long-term, cannot be
significantly reduced in the short-term. Committed Long-term,
cannot be significantly reduced in the short-term.
Slide 19
The Trend Toward Fixed Costs The trend in many industries is
toward greater fixed costs relative to variable costs. As machines
take over many mundane tasks previously performed by humans,
knowledge workers are demanded for their minds rather than their
muscles. Knowledge workers tend to be salaried, highly-trained and
difficult to replace. The cost to compensate these valued employees
is relatively fixed rather than variable.
Slide 20
Is Labor a Variable or a Fixed Cost? The behavior of wage and
salary costs can differ across countries, depending on labor
regulations, labor contracts, and custom. In France, Germany,
China, and Japan, management has little flexibility in adjusting
the size of the labor force. Labor costs are more fixed in nature.
Most companies in the United States continue to view direct labor
as a variable cost.
Slide 21
Rent Cost in Thousands of Dollars 0 1,000 2,000 3,000 Rented
Area (Square Feet) 0 30 60 Fixed Costs and Relevant Range 90
Relevant Range Total cost doesnt change for a wide range of
activity, and then jumps to a new higher cost for the next higher
range of activity.
Slide 22
Fixed Costs and Relevant Range The relevant range of activity
for a fixed cost is the range of activity over which the graph of
the cost is flat. Example: Office space is available at a rental
rate of $30,000 per year in increments of 1,000 square feet. As the
business grows, more space is rented, increasing the total
cost.
Slide 23
How does this type of fixed cost differ from a step-variable
cost? Step-variable costs can be adjusted more quickly and... The
width of the activity steps is much wider for the fixed cost. Fixed
Costs and Relevant Range
Slide 24
Quick Check Which of the following statements about cost
behavior are true? 1.Fixed costs per unit vary with the level of
activity. 2.Variable costs per unit are constant within the
relevant range. 3.Total fixed costs are constant within the
relevant range. 4.Total variable costs are constant within the
relevant range. Which of the following statements about cost
behavior are true? 1.Fixed costs per unit vary with the level of
activity. 2.Variable costs per unit are constant within the
relevant range. 3.Total fixed costs are constant within the
relevant range. 4.Total variable costs are constant within the
relevant range.
Slide 25
Which of the following statements about cost behavior are true?
1. Fixed costs per unit vary with the level of activity. 2.
Variable costs per unit are constant within the relevant range. 3.
Total fixed costs are constant within the relevant range. 4. Total
variable costs are constant within the relevant range. Which of the
following statements about cost behavior are true? 1. Fixed costs
per unit vary with the level of activity. 2. Variable costs per
unit are constant within the relevant range. 3. Total fixed costs
are constant within the relevant range. 4. Total variable costs are
constant within the relevant range. Quick Check
Slide 26
Fixed Monthly Utility Charge Variable Cost per KW Activity
(Kilowatt Hours) Total Utility Cost X Y A mixed cost has both fixed
and variable components. Consider your utility costs. Mixed Costs
Total mixed cost
Slide 27
Mixed Costs Fixed Monthly Utility Charge Variable Cost per KW
Activity (Kilowatt Hours) Total Utility Cost X Y Total mixed
cost
Slide 28
Mixed Costs Example If your fixed monthly utility charge is
$40, your variable cost is $0.03 per kilowatt hour, and your
monthly activity level is 2,000 kilowatt hours, the amount of your
utility bill is: Y = a + bX Y = $40 + ($0.03 2,000) Y = $100
Slide 29
Analysis of Mixed Costs Account analysis Each account is
classified as either variable or fixed based on the analysts
knowledge of how the account behaves. Account analysis Each account
is classified as either variable or fixed based on the analysts
knowledge of how the account behaves. Engineering Approach Cost
estimates are based on an evaluation of production methods, and
material, labor and overhead requirements. Engineering Approach
Cost estimates are based on an evaluation of production methods,
and material, labor and overhead requirements.
Slide 30
Plot the data points on a graph (total cost vs. activity). 0 1
2 3 4 * Maintenance Cost 1,000s of Dollars 10 20 0 * * * * * * * *
* Patient-days in 1,000s X Y The Scattergraph Method
Slide 31
0 1 2 3 4 * Maintenance Cost 1,000s of Dollars 10 20 0 * * * *
* * * * * Patient-days in 1,000s X Y Draw a line through the data
points with about an equal number of points above and below the
line.
Slide 32
The Scattergraph Method Use one data point to estimate the
total level of activity and the total cost. Intercept = Fixed cost:
$10,000 0 1 2 3 4 * Maintenance Cost 1,000s of Dollars 10 20 0 * *
* * * * * * * Patient-days in 1,000s X Y Patient days = 800 Total
maintenance cost = $11,000
Slide 33
The Scattergraph Method Make a quick estimate of variable cost
per unit and determine the cost equation. Variable cost per unit =
$1,000 800 $1.25/patient-day = $1.25/patient-day Y = $10,000 +
$1.25X Total maintenance cost Number of patient days
Slide 34
The High-Low Method Assume the following hours of maintenance
work and the total maintenance costs for six months.
Slide 35
The High-Low Method The variable cost per hour of maintenance
is equal to the change in cost divided by the change in hours. =
$8.00/hour $2,400 300
Slide 36
The High-Low Method Total Fixed Cost = Total Cost Total
Variable Cost Total Fixed Cost = $9,800 ($8/hour 800 hours) Total
Fixed Cost = $9,800 $6,400 Total Fixed Cost = $3,400
Slide 37
The High-Low Method Y = $3,400 + $8.00X The Cost Equation for
Maintenance
Slide 38
Quick Check Sales salaries and commissions are $10,000 when
80,000 units are sold, and $14,000 when 120,000 units are sold.
Using the high- low method, what is the variable portion of sales
salaries and commission? a. $0.08 per unit b. $0.10 per unit c.
$0.12 per unit d. $0.125 per unit Sales salaries and commissions
are $10,000 when 80,000 units are sold, and $14,000 when 120,000
units are sold. Using the high- low method, what is the variable
portion of sales salaries and commission? a. $0.08 per unit b.
$0.10 per unit c. $0.12 per unit d. $0.125 per unit
Slide 39
Sales salaries and commissions are $10,000 when 80,000 units
are sold, and $14,000 when 120,000 units are sold. Using the
high-low method, what is the variable portion of sales salaries and
commission? a. $0.08 per unit b. $0.10 per unit c. $0.12 per unit
d. $0.125 per unit Sales salaries and commissions are $10,000 when
80,000 units are sold, and $14,000 when 120,000 units are sold.
Using the high-low method, what is the variable portion of sales
salaries and commission? a. $0.08 per unit b. $0.10 per unit c.
$0.12 per unit d. $0.125 per unit Quick Check $4,000 40,000 units =
$0.10 per unit
Slide 40
Quick Check Sales salaries and commissions are $10,000 when
80,000 units are sold, and $14,000 when 120,000 units are sold.
Using the high- low method, what is the fixed portion of sales
salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d.
$12,000 Sales salaries and commissions are $10,000 when 80,000
units are sold, and $14,000 when 120,000 units are sold. Using the
high- low method, what is the fixed portion of sales salaries and
commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000
Slide 41
Sales salaries and commissions are $10,000 when 80,000 units
are sold, and $14,000 when 120,000 units are sold. Using the
high-low method, what is the fixed portion of sales salaries and
commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000 Sales
salaries and commissions are $10,000 when 80,000 units are sold,
and $14,000 when 120,000 units are sold. Using the high-low method,
what is the fixed portion of sales salaries and commissions? a. $
2,000 b. $ 4,000 c. $10,000 d. $12,000 Quick Check
Slide 42
The Contribution Format The contribution margin format
emphasizes cost behavior, by separating costs into fixed and
variable categories. Contribution margin covers fixed costs and
provides for income.
Slide 43
Uses of the Contribution Format The contribution income
statement format is used as an internal planning and decision
making tool. We will use this approach for: The contribution income
statement format is used as an internal planning and decision
making tool. We will use this approach for: 1.Cost-volume-profit
analysis. 2.Budgeting. 3.Special decisions such as pricing and
make-or- buy analysis. The contribution income statement format is
used as an internal planning and decision making tool. We will use
this approach for: The contribution income statement format is used
as an internal planning and decision making tool. We will use this
approach for: 1.Cost-volume-profit analysis. 2.Budgeting. 3.Special
decisions such as pricing and make-or- buy analysis.
Slide 44
The Contribution Format Used primarily for external reporting.
Used primarily by management.
Slide 45
Overview of Absorption and Variable Costing Direct Materials
Direct Labor Variable Manufacturing Overhead Fixed Manufacturing
Overhead Variable Selling and Administrative Expenses Fixed Selling
and Administrative Expenses Variable Costing Absorption Costing
Product Costs Period Costs Product Costs Period Costs
Slide 46
Quick Check Which method will produce the highest values for
work in process and finished goods inventories? a. Absorption
costing. b. Variable costing. c. They produce the same values for
these inventories. d. It depends. Which method will produce the
highest values for work in process and finished goods inventories?
a. Absorption costing. b. Variable costing. c. They produce the
same values for these inventories. d. It depends.
Slide 47
Which method will produce the highest values for work in
process and finished goods inventories? a. Absorption costing. b.
Variable costing. c. They produce the same values for these
inventories. d. It depends. Which method will produce the highest
values for work in process and finished goods inventories? a.
Absorption costing. b. Variable costing. c. They produce the same
values for these inventories. d. It depends. Quick Check
Slide 48
Unit Cost Computations Harvey Company produces a single product
with the following information available:
Slide 49
Unit Cost Computations Unit product cost is determined as
follows: Selling and administrative expenses are always treated as
period expenses and deducted from revenue as incurred.
Slide 50
Income Comparison of Absorption and Variable Costing Lets
assume the following additional information for Harvey Company.
20,000 units were sold during the year at a price of $30 each.
There is no beginning inventory. Now, lets compute net operating
income using both absorption and variable costing.
Slide 51
Absorption Costing
Slide 52
Variable manufacturing costs only. All fixed manufacturing
overhead is expensed. Variable Costing
Slide 53
Comparing Absorption and Variable Costing Lets compare the
methods.
Slide 54
Comparing Absorption and Variable Costing Fixed mfg. overhead
$150,000 Units produced 25,000 units = = $6.00 per unit We can
reconcile the difference between absorption and variable net
operating income as follows:
Slide 55
Extended Comparison of Income Data Here is information about
the operation of Harvey Company for the second year.
Slide 56
Unit Cost Computations Since there was no change in the
variable costs per unit, total fixed costs, or the number of units
produced, the unit costs remain unchanged.
Slide 57
Absorption Costing These are the 25,000 units produced in the
current period. These are the 25,000 units produced in the current
period.
Slide 58
Variable Costing All fixed manufacturing overhead is expensed.
Variable manufacturing costs only.
Slide 59
Comparing Absorption and Variable Costing Fixed mfg. overhead
$150,000 Units produced 25,000 units = = $6.00 per unit We can
reconcile the difference between absorption and variable net
operating income as follows:
Slide 60
Comparing Absorption and Variable Costing
Slide 61
Summary of Key Insights NOI = net operating income
Slide 62
Basics of Cost-Volume-Profit Analysis Contribution Margin (CM)
is the amount remaining from sales revenue after variable expenses
have been deducted.
Slide 63
Basics of Cost-Volume-Profit Analysis CM is used first to cover
fixed expenses. Any remaining CM contributes to net operating
income.
Slide 64
The Contribution Approach Sales, variable expenses, and
contribution margin can also be expressed on a per unit basis. If
RBC sells an additional bicycle, $200 more in contribution margin
will be generated to cover fixed expenses and profit.
Slide 65
The Contribution Approach To breakeven, RBC must generate
$80,000 in total CM each month to cover fixed costs.
Slide 66
The Contribution Approach 400 units If RBC sells 400 units a
month, it will be operating at the break-even point.
Slide 67
The Contribution Approach 401 bikes If RBC sells one more bike
(401 bikes), net operating income will increase by $200.
Slide 68
The Contribution Approach We do not need to prepare an income
statement to estimate profits at a particular sales volume. Simply
multiply the number of units sold above break-even by the
contribution margin per unit. If RBC sells 430 bikes, its net
operating income will be $6,000.
Slide 69
CVP Relationships in Graphic Form The relationship among
revenue, cost, profit and volume can be expressed graphically by
preparing a CVP graph. RBC developed contribution margin income
statements at 300, 400, and 500 units sold. We will use this
information to prepare the CVP graph.
Slide 70
CVP Graph Units Dollars In a CVP graph, unit volume is usually
represented on the horizontal (X) axis and dollars on the vertical
(Y) axis.
Slide 71
Dollars Units CVP Graph Fixed Expenses
Slide 72
CVP Graph Dollars Units Fixed ExpensesTotal Expenses
Slide 73
CVP Graph Fixed Expenses Dollars Total ExpensesTotal Sales
Units
Slide 74
CVP Graph Dollars Units Break-even point (400 units or $200,000
in sales) Profit Area Loss Area
Slide 75
Contribution Margin Ratio The contribution margin ratio is: For
Racing Bicycle Company the ratio is: Total CM Total sales CM Ratio
= Each $1.00 increase in sales results in a total contribution
margin increase of 40. = 40% $80,000 $200,000
Slide 76
Contribution Margin Ratio Or, in terms of units, the
contribution margin ratio is: For Racing Bicycle Company the ratio
is: $200 $500 = 40% Unit CM Unit selling price CM Ratio =
Slide 77
Contribution Margin Ratio A $50,000 increase in sales revenue
results in a $20,000 increase in CM. ($50,000 40% = $20,000) A
$50,000 increase in sales revenue results in a $20,000 increase in
CM. ($50,000 40% = $20,000)
Slide 78
Quick Check Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup of coffee is
$1.49 and the average variable expense per cup is $0.36. The
average fixed expense per month is $1,300. On average, 2,100 cups
are sold each month. What is the CM Ratio for Coffee Klatch? a.
1.319 b. 0.758 c. 0.242 d. 4.139 Coffee Klatch is an espresso stand
in a downtown office building. The average selling price of a cup
of coffee is $1.49 and the average variable expense per cup is
$0.36. The average fixed expense per month is $1,300. On average,
2,100 cups are sold each month. What is the CM Ratio for Coffee
Klatch? a. 1.319 b. 0.758 c. 0.242 d. 4.139
Slide 79
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is $1.49 and
the average variable expense per cup is $0.36. The average fixed
expense per month is $1,300. On average, 2,100 cups are sold each
month. What is the CM Ratio for Coffee Klatch? a. 1.319 b. 0.758 c.
0.242 d. 4.139 Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup of coffee is
$1.49 and the average variable expense per cup is $0.36. The
average fixed expense per month is $1,300. On average, 2,100 cups
are sold each month. What is the CM Ratio for Coffee Klatch? a.
1.319 b. 0.758 c. 0.242 d. 4.139 Quick Check Unit contribution
margin Unit selling price CM Ratio = = ($1.49-$0.36) $1.49 = $1.13
$1.49 = 0.758
Slide 80
What is the profit impact if RBC can increase unit sales from
500 to 540 by increasing the monthly advertising budget by $10,000?
Changes in Fixed Costs and Sales Volume
Slide 81
Sales increased by $20,000, but net operating income decreased
by $2,000. Changes in Fixed Costs and Sales Volume $80,000 +
$10,000 advertising = $90,000
Slide 82
The Shortcut Solution Changes in Fixed Costs and Sales
Volume
Slide 83
What is the profit impact if RBC can use higher quality raw
materials, thus, increasing variable costs per unit by $10, to
generate an increase in unit sales from 500 to 580? Changes in
Variable Costs and Sales Volume
Slide 84
Sales increase by $40,000, and net operating income increases
by $10,200. Changes in Variable Costs and Sales Volume 580 units
$310 variable cost/unit = $179,800
Slide 85
Change in Fixed Cost, Sales Price and Volume What is the profit
impact if RBC: (1) cuts its selling price $20 per unit, (2)
increases its advertising budget by $15,000 per month, and (3)
increases unit sales from 500 to 650 units per month?
Slide 86
Sales increase by $62,000, fixed costs increase by $15,000, and
net operating income increases by $2,000. Change in Fixed Cost,
Sales Price and Volume
Slide 87
What is the profit impact if RBC: (1) pays a $15 sales
commission per bike sold, instead of paying salespersons flat
salaries that currently total $6,000 per month, and (2) increases
unit sales from 500 to 575 bikes? Change in Fixed Cost, Sales Price
and Volume
Slide 88
Sales increase by $37,500, variable costs increase by $31,125,
but fixed expenses decrease by $6,000. Change in Fixed Cost, Sales
Price and Volume
Slide 89
Change in Regular Sales Price If RBC has an opportunity to sell
150 bikes to a wholesaler without disturbing sales to other
customers or fixed expenses, what price would it quote to the
wholesaler if it wants to increase monthly profits by $3,000?
Slide 90
Change in Regular Sales Price
Slide 91
Break-Even Analysis Break-even analysis can be approached in
two ways: Break-even analysis can be approached in two ways:
1.Equation method 2.Contribution margin method Break-even analysis
can be approached in two ways: Break-even analysis can be
approached in two ways: 1.Equation method 2.Contribution margin
method
Slide 92
Equation Method Profits = (Sales Variable expenses) Fixed
expenses Sales = Variable expenses + Fixed expenses + Profits OR At
the break-even point profits equal zero
Slide 93
Break-Even Analysis Here is the information from RBC:
Slide 94
Equation Method $500Q = $300Q + $80,000 + $0 Where: Q = Number
of bikes sold $500 = Unit selling price $300 = Unit variable
expense $80,000 = Total fixed expense We calculate the break-even
point as follows: Sales = Variable expenses + Fixed expenses +
Profits
Slide 95
Equation Method $500Q = $300Q + $80,000 + $0 $200Q = $80,000 Q
= $80,000 $200 per bike 400 bikes Q = 400 bikes Sales = Variable
expenses + Fixed expenses + Profits We calculate the break-even
point as follows:
Slide 96
Equation Method The equation can be modified to calculate the
break-even point in sales dollars. Sales = Variable expenses +
Fixed expenses + Profits X = 0.60X + $80,000 + $0 X = 0.60X +
$80,000 + $0 Where: X = Total sales dollars 0.60 = Variable
expenses as a % of sales $80,000 = Total fixed expenses
Slide 97
Equation Method X = 0.60X + $80,000 + $0 0.40X = $80,000 X =
$80,000 0.40 $200,000 X = $200,000 The equation can be modified to
calculate the break-even point in sales dollars. Sales = Variable
expenses + Fixed expenses + Profits
Slide 98
Contribution Margin Method The contribution margin method has
two key equations. Fixed expenses CM per unit = Break-even point in
units sold Fixed expenses CM ratio = Break-even point in total
sales dollars
Slide 99
Contribution Margin Method The contribution margin method can
be illustrated using data from RBC. $80,00040% = $200,000
break-even sales Fixed expenses CM ratio = Break-even point in
total sales dollars Fixed expenses CM per unit = Break-even point
in units sold$80,000 $200 per bike = 400 bikes to breakeven
Slide 100
Quick Check Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup of coffee is
$1.49 and the average variable expense per cup is $0.36. The
average fixed expense per month is $1,300. On average 2,100 cups
are sold each month. What is the break-even sales in units? a.872
cups b. 3,611 cups c. 1,200 cups d. 1,150 cups Coffee Klatch is an
espresso stand in a downtown office building. The average selling
price of a cup of coffee is $1.49 and the average variable expense
per cup is $0.36. The average fixed expense per month is $1,300. On
average 2,100 cups are sold each month. What is the break-even
sales in units? a.872 cups b. 3,611 cups c. 1,200 cups d. 1,150
cups
Slide 101
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is $1.49 and
the average variable expense per cup is $0.36. The average fixed
expense per month is $1,300. On average 2,100 cups are sold each
month. What is the break-even sales in units? a.872 cups b. 3,611
cups c. 1,200 cups d. 1,150 cups Coffee Klatch is an espresso stand
in a downtown office building. The average selling price of a cup
of coffee is $1.49 and the average variable expense per cup is
$0.36. The average fixed expense per month is $1,300. On average
2,100 cups are sold each month. What is the break-even sales in
units? a.872 cups b. 3,611 cups c. 1,200 cups d. 1,150 cups Quick
Check
Slide 102
Fixed expenses Unit CM Break-even = $1,300 $1.49/cup -
$0.36/cup $1,300 $1.13/cup = 1,150 cups = =
Slide 103
Quick Check Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup of coffee is
$1.49 and the average variable expense per cup is $0.36. The
average fixed expense per month is $1,300. On average 2,100 cups
are sold each month. What is the break-even sales in dollars? a.
$1,300 b. $1,715 c. $1,788 d. $3,129 Coffee Klatch is an espresso
stand in a downtown office building. The average selling price of a
cup of coffee is $1.49 and the average variable expense per cup is
$0.36. The average fixed expense per month is $1,300. On average
2,100 cups are sold each month. What is the break-even sales in
dollars? a. $1,300 b. $1,715 c. $1,788 d. $3,129
Slide 104
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is $1.49 and
the average variable expense per cup is $0.36. The average fixed
expense per month is $1,300. On average 2,100 cups are sold each
month. What is the break-even sales in dollars? a. $1,300 b. $1,715
c. $1,788 d. $3,129 Coffee Klatch is an espresso stand in a
downtown office building. The average selling price of a cup of
coffee is $1.49 and the average variable expense per cup is $0.36.
The average fixed expense per month is $1,300. On average 2,100
cups are sold each month. What is the break-even sales in dollars?
a. $1,300 b. $1,715 c. $1,788 d. $3,129 Quick Check Fixed expenses
CM Ratio Break-even sales $1,300 0.758 = $1,715 = =
Slide 105
Target Profit Analysis The equation and contribution margin
methods can be used to determine the sales volume needed to achieve
a target profit. Suppose Racing Bicycle Company wants to know how
many bikes must be sold to earn a profit of $100,000. The equation
and contribution margin methods can be used to determine the sales
volume needed to achieve a target profit. Suppose Racing Bicycle
Company wants to know how many bikes must be sold to earn a profit
of $100,000.
The Contribution Margin Approach Fixed expenses + Target profit
Unit contribution margin = Unit sales to attain the target profit
$80,000 + $100,000 $200/bike = 900 bikes The contribution margin
method can be used to determine that 900 bikes must be sold to earn
the target profit of $100,000.
Slide 108
Quick Check Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup of coffee is
$1.49 and the average variable expense per cup is $0.36. The
average fixed expense per month is $1,300. How many cups of coffee
would have to be sold to attain target profits of $2,500 per month?
a. 3,363 cups b. 2,212 cups c. 1,150 cups d. 4,200 cups Coffee
Klatch is an espresso stand in a downtown office building. The
average selling price of a cup of coffee is $1.49 and the average
variable expense per cup is $0.36. The average fixed expense per
month is $1,300. How many cups of coffee would have to be sold to
attain target profits of $2,500 per month? a. 3,363 cups b. 2,212
cups c. 1,150 cups d. 4,200 cups
Slide 109
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is $1.49 and
the average variable expense per cup is $0.36. The average fixed
expense per month is $1,300. How many cups of coffee would have to
be sold to attain target profits of $2,500 per month? a. 3,363 cups
b. 2,212 cups c. 1,150 cups d. 4,200 cups Coffee Klatch is an
espresso stand in a downtown office building. The average selling
price of a cup of coffee is $1.49 and the average variable expense
per cup is $0.36. The average fixed expense per month is $1,300.
How many cups of coffee would have to be sold to attain target
profits of $2,500 per month? a. 3,363 cups b. 2,212 cups c. 1,150
cups d. 4,200 cups Quick Check
Slide 110
Fixed expenses + Target profit Unit CM Unit sales to attain
target profit = 3,363 cups = $3,800 $1.13 $1,300 + $2,500 $1.49 -
$0.36 = =
Slide 111
The Margin of Safety Margin of safety = Total sales -
Break-even sales Lets look at RBC and determine the margin of
safety. The margin of safety is the excess of budgeted (or actual)
sales over the break-even volume of sales.
Slide 112
The Margin of Safety If we assume that RBC has actual sales of
$250,000, given that we have already determined the break-even
sales to be $200,000, the margin of safety is $50,000 as shown
Slide 113
The Margin of Safety The margin of safety can be expressed as
20% of sales. ($50,000 $250,000)
Slide 114
The Margin of Safety Margin of Safety in units = = 100 bikes
$50,000 $500 The margin of safety can be expressed in terms of the
number of units sold. The margin of safety at RBC is $50,000, and
each bike sells for $500.
Slide 115
Quick Check Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup of coffee is
$1.49 and the average variable expense per cup is $0.36. The
average fixed expense per month is $1,300. On average 2,100 cups
are sold each month. What is the margin of safety? a. 3,250 cups b.
950 cups c. 1,150 cups d. 2,100 cups Coffee Klatch is an espresso
stand in a downtown office building. The average selling price of a
cup of coffee is $1.49 and the average variable expense per cup is
$0.36. The average fixed expense per month is $1,300. On average
2,100 cups are sold each month. What is the margin of safety? a.
3,250 cups b. 950 cups c. 1,150 cups d. 2,100 cups
Slide 116
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is $1.49 and
the average variable expense per cup is $0.36. The average fixed
expense per month is $1,300. On average 2,100 cups are sold each
month. What is the margin of safety? a. 3,250 cups b. 950 cups c.
1,150 cups d. 2,100 cups Coffee Klatch is an espresso stand in a
downtown office building. The average selling price of a cup of
coffee is $1.49 and the average variable expense per cup is $0.36.
The average fixed expense per month is $1,300. On average 2,100
cups are sold each month. What is the margin of safety? a. 3,250
cups b. 950 cups c. 1,150 cups d. 2,100 cups Quick Check
Slide 117
Margin of safety = Total sales Break-even sales = 950 cups =
2,100 cups 1,150 cups or 950 cups 2,100 cups Margin of safety
percentage == 45%
Slide 118
The Concept of Sales Mix Sales mix is the relative proportion
in which a companys products are sold. Different products have
different selling prices, cost structures, and contribution
margins. Lets assume RBC sells bikes and carts and that the sales
mix between the two products remains the same. Sales mix is the
relative proportion in which a companys products are sold.
Different products have different selling prices, cost structures,
and contribution margins. Lets assume RBC sells bikes and carts and
that the sales mix between the two products remains the same.
Slide 119
Multi-product Break-even Analysis RBC provides the following
information: $265,000 $550,000 = 48.2% (rounded)
Slide 120
Fixed expenses CM Ratio Break-even sales $170,000 48.2% =
$352,697 = = Multi-product Break-even Analysis Rounding Error
Slide 121
Key Assumptions of CVP Analysis Selling price is constant.
Costs are linear. In multi-product companies, the sales mix is
constant. In manufacturing companies, inventories do not change
(units produced = units sold).
