Transcript Cost-Volume-Profit Analysis
Chapter 7
Cost-Volume Profit Analysis
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 1
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
The Break-Even Point
The break-even point is the point in the volume of activity where the organization’s revenues and expenses are equal.
Sales Less: variable expenses Contribution margin Less: fixed expenses Net income $ 250,000 150,000 100,000 100,000 $ 7-3
Equation Approach
Sales revenue – Variable expenses – Fixed expenses = Profit Unit sales price × Sales volume in units Unit variable × expense Sales volume in units ($500 × X) – ($300 × X) ($200X) – $80,000 = $0 – $80,000 = $0 X = 400 surf boards 7-4
Learning Objective 2
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Contribution-Margin Approach
Consider the following information developed by the accountant at Curl, Inc.: For each additional surf board sold, Curl generates $200 in contribution margin.
Sales (500 surf boards) Less: variable expenses Contribution margin Less: fixed expenses Net income Total $ 250,000 150,000 $ 100,000 80,000 $ 20,000 Per Unit $ 500 300 $ 200 Percent 100% 60% 40% 7-6
Contribution-Margin Approach
Fixed expenses = Unit contribution margin Break-even point (in units)
Total Sales (500 surf boards) Less: variable expenses Contribution margin Less: fixed expenses Net income 150,000 80,000 $ 20,000 Per Unit $ 500 300 $ 200 Percent 100% 60% 40% $
80,000
$
200 = 400 surf boards
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Contribution-Margin Approach
Here is the proof!
Sales ( 400 surf boards) Less: variable expenses Contribution margin Less: fixed expenses Net income Total $ 200,000 120,000 $ 80,000 80,000 $ Per Unit $ 500 300 $ 200 Percent 100% 60% 40%
400 × $500 = $200,000 400 × $300 = $120,000
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Contribution Margin Ratio
Calculate the break-even point in
sales dollars
rather than units by using the contribution margin ratio.
Contribution margin Sales Fixed expense CM Ratio = = CM Ratio Break-even point (in sales dollars)
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Contribution Margin Ratio
Sales ( 400 surf boards) Less: variable expenses Contribution margin Less: fixed expenses Net income Total $ 200,000 120,000 $ 80,000 80,000 $ Per Unit $ 500 300 $ 200 Percent 100% 60% 40%
$80,000 40% = $200,000 sales
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Learning Objective 3
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Graphing Cost-Volume-Profit Relationships Viewing CVP relationships in a graph gives managers a perspective that can be obtained in no other way.
Consider the following information for Curl, Inc.:
Sales Less: variable expenses Contribution margin Less: fixed expenses Net income (loss) 300 units $ 150,000 90,000 $ 60,000 80,000 $ (20,000) 400 units $ 200,000 120,000 $ 80,000 80,000 $ 500 units $ 250,000 150,000 $ 100,000 80,000 $ 20,000 7-12
450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000
Cost-Volume-Profit Graph
Fixed expenses 100 200 300 400 Units 500 600 700 800
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450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000
Cost-Volume-Profit Graph
Fixed expenses 100 200 300 400 Units 500 600 700 800
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450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000
Cost-Volume-Profit Graph
Fixed expenses 100 200 300 400 Units 500 600 700 800
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450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000
Cost-Volume-Profit Graph
Fixed expenses 100 200 300 400 Units 500 600 700 800
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450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000
Cost-Volume-Profit Graph
Break-even point Fixed expenses 100 200 300 400 Units 500 600 700 800
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Profit-Volume Graph
Some managers like the profit-volume graph because it focuses on profits and volume.
100,000 80,000 60,000 40,000 20,000 0 (20,000) ` 100 Break-even point 200 300 (40,000) (60,000) 400 Units 500 600 700
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Learning Objective 4
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Target Net Profit
We can determine the number of surfboards that 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 earn the 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 7-21
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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Safety Margin
Curl, Inc. has a break-even point of $200,000. If actual sales are $250,000, the safety margin is $50,000 or 100 surf boards.
Sales Less: variable expenses Contribution margin Less: fixed expenses Net income Break-even sales 400 units $ 200,000 120,000 80,000 80,000 $ Actual sales 500 units $ 250,000 150,000 100,000 80,000 $ 20,000 7-23
Changes in Fixed Costs
• • Curl is currently selling 500 surfboards per year.
The owner believes that an increase of $10,000 in the annual advertising budget, would increase sales to 540 units.
Should the company increase the advertising budget?
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Changes in Fixed Costs
Sales Less: variable expenses Contribution margin Less: fixed expenses Net income Current Sales (500 Boards) $ 250,000 150,000 $ 100,000 80,000 $ 20,000 Proposed Sales (540 Boards) $ 270,000 162,000 $ 108,000 90,000 $ 18,000 540 units × $500 per unit = $270,000 $80,000 + $10,000 advertising = $90,000 7-25
Changes in Fixed Costs
Sales will increase by $20,000, but net income decreased Sales by $2,000
.
Less: variable expenses Contribution margin Less: fixed expenses Net income Current Sales (500 Boards) $ 250,000 150,000 $ 100,000 80,000 $ 20,000 Proposed Sales (540 Boards) $ 270,000 162,000 $ 108,000 90,000 $ 18,000 7-26
Changes in Unit Contribution Margin
Because of increases in cost of raw materials, Curl’s variable cost per unit has increased from $300 to $310 per surfboard. 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) 7-27
Changes in Unit Contribution Margin
Suppose Curl, Inc. increases the price of each surfboard to $550. With no change in variable cost per unit, what will be the new break-even point?
($550 × X)
–
($300 × X) –
$
80,000
= $0 X = 320 units 7-28
Predicting Profit Given Expected Volume
Given: Fixed expenses Unit contribution margin Target net profit Find: {req’d sales volume} Given: Fixed expenses Unit contribution margin Expected sales volume Find: {expected profit } 7-29
Predicting Profit Given Expected Volume
In the coming year, Curl’s owner expects to sell 525 surfboards. The unit contribution margin is expected to be $190, and fixed costs are expected to increase to $90,000.
Total contribution Fixed cost = Profit
($190 × 525) – $90,000 = X X = $99,750 – $90,000 X = $9,750 profit
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Learning Objective 5
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
CVP Analysis with Multiple Products
For a company with more than one product, sales mix is the relative combination in which a company’s products are sold.
Different products have different selling prices, cost structures, and contribution margins.
Let’s assume Curl sells surfboards and sail boards and see how we deal with break even analysis.
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CVP Analysis with Multiple Products
Curl provides us with the following
Description Surfboards Sailboards Total sold Selling Price $ 500 1,000 Unit Variable Contribution Cost $ 300 450 Margin $ 200 550 Number of Boards 500 300 800 Description Surfboards Sailboards Total sold Number of Boards 500 300 800 % of Total 62.5% (500 ÷ 800) 37.5% (300 ÷ 800) 100.0% 7-33
CVP Analysis with Multiple Products
Weighted-average unit contribution margin Description Surfboards Contribution Margin $ 200 % of Total 62.5% Sailboards 550 37.5% Weighted-average contribution margin Weighted Contribution $ 125.00
206.25
$ 331.25
$200 × 62.5% $550 × 37.5% 7-34
CVP Analysis with Multiple Products
Break-even point
Break-even point Fixed expenses = Weighted-average unit contribution margin Break-even point = $170,000 $331.25 Break-even point = 514 combined unit sales 7-35
CVP Analysis with Multiple Products
Break-even point
Break-even point = 514 combined unit sales Description Surfboards Sailboards Total units Breakeven Sales 514 514 % of Total 62.5% 37.5% Individual Sales 321 193 514 7-36
Learning Objective 6
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Assumptions Underlying CVP Analysis
1.
2.
3.
4.
Selling price is constant throughout the entire relevant range.
Costs are linear over the relevant range.
In multi-product companies, the sales mix is constant.
In manufacturing firms, inventories do not change (units produced = units sold).
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Learning Objective 7
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
CVP Relationships and the Income Statement A. Traditional Format ACCUTIME COMPANY Income Statement For the Year Ended December 31, 20x1 Sales Less: Gross margin Less: Operating expenses: Selling expenses Administrative expenses Net income $35,000 35,000 $500,000 380,000 $120,000 70,000 $50,000
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CVP Relationships and the Income Statement B. Contribution Format ACCUTIME COMPANY Income Statement For the Year Ended December 31, 20x1 Sales Less: Variable expenses: Variable manufacturing Variable selling Variable administrative Contribution margin Less: Fixed expenses: Fixed manufacturing Fixed selling Fixed administrative Net income $280,000 15,000 5,000 $100,000 20,000 30,000 $500,000 300,000 $200,000 150,000 $50,000
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Learning Objective 8
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Cost Structure and Operating Leverage
• • The cost structure of an organization is the relative proportion of its fixed and variable costs.
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
Operating leverage factor = Contribution margin Net income Sales Less: variable expenses Contribution margin Less: fixed expenses Net income Actual sales 500 Board $ 250,000 150,000 100,000 80,000 $ 20,000 $100,000 $20,000 = 5 7-44
Measuring Operating Leverage
A measure of how a percentage change in sales will affect profits. If Curl increases its sales by 10%, what will be the percentage increase in net income?
Percent increase in sales Operating leverage factor Percent increase in profits 10% × 5 50%
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Measuring Operating Leverage
A firm with proportionately high fixed costs has relatively high operating leverage On the other hand, a firm with high operating leverage has a relatively high break-even point.
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Learning Objective 9
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CVP Analysis, Activity-Based Costing, and Advanced Manufacturing Systems An activity-based costing system can provide a much more complete picture of cost volume-profit relationships and thus provide better information to managers.
Break-even point = Fixed costs Unit contribution margin
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Learning Objective 10
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
A Move Toward JIT and Flexible Manufacturing
Overhead costs like setup, inspection, and material handling are fixed with respect to sales volume , but they are not fixed with respect to other cost drivers.
This is the fundamental distinction between a traditional CVP analysis and an activity-based costing CVP analysis.
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Learning Objective 11
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Effect of Income Taxes
Income taxes affect a company’s CVP relationships. To earn a particular after-tax net income, a greater before-tax income will be required.
Target after-tax net income 1 -
t
= Before-tax net income
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End of Chapter 7
We made it!
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