Transcript Garrison and Noreen - University of San Francisco

Slide 1
6
Cost-Volume-Profit
Analysis
Main Concepts:
1. Basics of CVP Analysis
2. Contribution Approach
3. Break-Even Analysis
a. Equation Method
b. Contribution Margin Method
4. The Concept of Sales Mix
Chapter
6
Slide 2
6
Assumptions of CVP Analysis
Selling price is constant throughout
the entire relevant range.
Costs are linear throughout the
entire relevant range.
In multi-product companies, the
sales mix is constant.
Slide 3
6
The Basics of Cost-VolumeProfit (CVP) Analysis
Sales (500 bikes)
$ 250,000
Less: variable expenses
150,000
Contribution margin
100,000
Less: fixed expenses
80,000
Net income
$ 20,000
Contribution Margin (CM) is the amount
remaining from sales revenue after
variable cost have been deducted.
Slide 4
6
The Basics of Cost-VolumeProfit (CVP) Analysis
Sales (500 bikes)
$ 250,000
Less: variable expenses 150,000
Contribution margin
100,000
Less: fixed expenses
80,000
Net income
$ 20,000
CM goes to cover fixed costs.
Slide 5
6
The Basics of Cost-VolumeProfit (CVP) Analysis
Sales (500 bikes)
$ 250,000
Less: variable expenses 150,000
Contribution margin
100,000
Less: fixed expenses
80,000
Net income
$ 20,000
After covering fixed costs, any
remaining CM contributes to income.
Slide 6
6
The Contribution Approach
Consider the following information
developed by the accountant at Sakuraba
Co.:
Total
Sales (500 bikes)
$ 250,000
Less: variable expenses
150,000
Contribution margin
$ 100,000
Less: fixed expenses
80,000
Net income
$ 20,000
Per Unit
$
500
300
$
200
Percent
100%
60%
40%
Slide 7
6
The Contribution Approach
For each additional unit Sakuraba sells, $200
more in contribution margin will help to cover
fixed costs and profit.
Total
Sales (500 bikes)
$ 250,000
Less: variable expenses
150,000
Contribution margin
$ 100,000
Less: fixed expenses
80,000
Net income
$ 20,000
Per Unit
$
500
300
$
200
Percent
100%
60%
40%
Slide 8
6
The Contribution Approach
Each month Sakuraba must generate at least
$80,000 in CM to break even for the month.
Total
Sales (500 bikes)
$ 250,000
Less: variable expenses
150,000
Contribution margin
$ 100,000
Less: fixed expenses
80,000
Net income
$ 20,000
Per Unit
$
500
300
$
200
Percent
100%
60%
40%
Slide 9
6
The Contribution Approach
If Sakuraba sells 400 units in a month, it will
be operating at the break-even point.
Total
Sales (400 bikes)
$ 200,000
Less: variable expenses
120,000
Contribution margin
$ 80,000
Less: fixed expenses
80,000
Net income
$
-
Per Unit
$
500
300
$
200
Percent
100%
60%
40%
Slide 10
6
The Contribution Approach
If Sakuraba sells one additional unit (401
bikes), net income will increase by $200.
Total
Sales (401 bikes)
$ 200,500
Less: variable expenses
120,300
Contribution margin
$ 80,200
Less: fixed expenses
80,000
Net income
$
200
Per Unit
$
500
300
$
200
Percent
100%
60%
40%
Slide 11
6
The Contribution Approach
 The break-even point can be defined either
as:
The point where total sales revenue equals total
costs (variable and fixed).
The point where total contribution margin equals
total fixed costs.
Slide 12
6
Contribution Margin Ratio
 The contribution margin ratio is defined as
follows:
Contribution margin
Sales
= CM Ratio
Slide 13
6
Contribution Margin Ratio
 The contribution margin ratio is defined as
follows:
Contribution margin
Sales
= CM Ratio
 For Sakuraba, the contribution margin ratio
is:
$200
$500
= 40%
Slide 14
6
Contribution Margin Ratio
At Sakuraba, each $1.00 increase in sales
revenue results in a total contribution margin
increase of 40¢.
If sales increase by $50,000, what will be the
increase in total contribution margin?
$20,000 = $.40 x $50,000
Slide 15
6
Contribution Margin Ratio
400 Bikes
Sales
$ 200,000
Less: variable expenses
120,000
Contribution margin
80,000
Less: fixed expenses
80,000
Net income
$
-
500 Bikes
$ 250,000
150,000
100,000
80,000
$ 20,000
A $50,000 increase in
sales revenue
Slide 16
6
Contribution Margin Ratio
400 Bikes
Sales
$ 200,000
Less: variable expenses
120,000
Contribution margin
80,000
Less: fixed expenses
80,000
Net income
$
-
500 Bikes
$ 250,000
150,000
100,000
80,000
$ 20,000
A $50,000 increase in sales revenue
results in a $20,000 increase in CM.
($50,000 × 40% = $20,000)
Slide 17
6
Break-Even Analysis
 The break-even point is the point where
Total sales revenue = total costs or
Total contribution margin = total fixed costs.
 Break-even analysis can be approached in
two ways:
Equation method
Contribution margin method.
Slide 18
6
Equation Method
Sales – (Variable costs + Fixed costs) = Profits
OR
Sales = Variable costs + Fixed costs + Profits
OR
S/uX = VC/uX + Fixed costs + Profits
At the break-even point
profits equal zero.
Slide 19
6
Equation Method
Here is the information from the Sakuraba Co.:
Total
Sales (500 bikes)
$ 250,000
Less: variable expenses
150,000
Contribution margin
$ 100,000
Less: fixed expenses
80,000
Net income
$ 20,000
Per Unit
$
500
300
$
200
Percent
100%
60%
40%
Slide 20
6
Equation Method
We calculate the break-even point as follows:
S/uX = VC/uX + Fixed costs + Profits
Slide 21
6
Equation Method
We calculate the break-even point as follows:
S/uX = VC/uX + Fixed costs + Profits
$500X = $300X + $80,000 + 0
Where:
X
$500
$300
$80,000
= Number of bikes sold
= Unit sales price
= Unit variable cost
= Total fixed costs
Slide 22
6
Equation Method
We calculate the break-even point as follows:
S/uX = VC/uX + Fixed costs + Profits
$500X = $300X + $80,000 + 0
$200X = $80,000
Slide 23
6
Equation Method
We calculate the break-even point as follows:
S/uX = VC/uX + Fixed costs + Profits
$500X = $300X + $80,000 + 0
$200X = $80,000
X = 400 units
Slide 24
6
Contribution Margin Method
The contribution margin method is a variation
of the equation method.
Slide 25
6
Contribution Margin Method
The contribution margin method is a variation
of the equation method.
Fixed costs
Unit contribution margin
=
Break-even point
in units sold
Slide 26
6
Contribution Margin Method
The contribution margin method is a variation
of the equation method.
Fixed costs
Unit contribution margin
$80,000
$200
=
Break-even point
in units sold
= 400 bikes
Slide 27
6
Contribution Margin Method
We can calculate the break-even point in total
sales dollars as follows:
Slide 28
6
Contribution Margin Method
We can calculate the break-even point in total
sales dollars as follows:
Fixed costs
CM ratio
=
Break-even point in
total sales dollars
Slide 29
6
Contribution Margin Method
We can calculate the break-even point in total
sales dollars as follows:
Fixed costs
CM ratio
$80,000
40%
=
Break-even point in
total sales dollars
= $200,000 sales
Slide 30
6
CVP Relationships in Graphic Form
 Viewing CVP relationships in a graph gives
managers a perspective that can be obtained in no
other way.
 Consider the following information for Sakuraba
Co.:
Income
Income
Income
300 units
Sales
$ 150,000
Less: variable expenses
90,000
Contribution margin
$
60,000
Less: fixed expenses
80,000
Net income (loss)
$ (20,000)
400 units
$ 200,000
120,000
$
80,000
80,000
$
-
500 units
$ 250,000
150,000
$ 100,000
80,000
$ 20,000
Slide 31
CVP Graph
400,000
350,000
300,000
250,000
200,000
Fixed costs
150,000
100,000
$80,000
50,000
Units
800
700
600
500
400
300
200
100
-
-
6
Slide 32
CVP Graph
400,000
350,000
300,000
250,000
200,000
Variable
costs
150,000
100,000
50,000
$300/unit X
$90,000/300 units
Units
800
700
600
500
400
300
200
100
-
-
6
Slide 33
CVP Graph
400,000
350,000
Total costs
300,000
250,000
200,000
150,000
100,000
50,000
Units
800
700
600
500
400
300
200
100
-
-
6
Slide 34
CVP Graph
400,000
$150,000/300 units
350,000
$500/unit X
300,000
Total Sales
250,000
200,000
150,000
100,000
50,000
Units
800
700
600
500
400
300
200
100
-
-
6
Slide 35
CVP Graph
400,000
350,000
300,000
250,000
200,000
Break-even point
150,000
100,000
a + bX = Price X
50,000
Units
800
700
600
500
400
300
200
100
-
-
6
Slide 36
CVP Graph
400,000
350,000
300,000
250,000
200,000
$80,000 + $300/unit (400 units)
= $500/unit (400 units)
= $200,000
150,000
100,000
50,000
Units
800
700
600
500
400
300
200
100
-
-
6
Slide 37
CVP Graph
400,000
350,000
300,000
250,000
200,000
Break-even point
400 units or
$200,000 sales.
150,000
100,000
50,000
Units
800
700
600
500
400
300
200
100
-
-
6
Slide 38
6
Let’s Test Your Understanding!
Slide 39
6
Basics of CVP Analysis
1. What does CVP stand for?
Cost-Volume-Profit
2. Compare the Traditional and Contribution Income Statement.
Sales
-CGS
GM
-S&A
NI
Sales
-VarExp
CM
-Fixed Exp
NI
Slide 40
6
Break-Even Analysis
Total CM/Sales or CM per unit/Price
1. The Contribution Ratio = ________________________________.
Sales - Var Exp. = CM
2. At Break-Even, fixed costs = ________________________.
Total Exp = Fixed Exp. + Var. Exp
3. At Break-Even, sales = ________________________________.
Fixed Exp./CM per unit
4. Units at Break-Even = ________________________.
Fixed Exp./CM%
5. Sales at Break-Even = ________________________.
Slide 41
6
Exercise 1
Pringle Company manufactures and sells a single product. The
company’s sales and costs for a recent month follow:
Total
Per Unit
Sales
$600,000
$40
Less variable expenses
$420,000
$28
Contribution margin
$180,000
$12
Less fixed expenses
$150,000
Net income
$30,000
1. What is the monthly break-even point in units sold and in sales dollars?
2. Without resorting to computations, what is the total contribution margin at the
break-even point.
3. What is the company’s CM ratio? If monthly sales increase by $80,000 and
there is no change in fixed costs, by how much would you expect monthly net
income to increase.
Slide 42
6
Exercises 1
1. What is the monthly break-even point in units sold and in sales dollars?
S/uX = VC/uX + Fixed costs + Profits
$40X = $28X + $150,000 + $0
$12X = $150,000
X = $150,000/$12
X = 12,500 units
12,500 units x $40/u = $500,000
2. Without resorting to computations, what is the total contribution margin at the
break-even point.
The fixed cost of $150,000, which would yield a profit of zero.
3a. Determine the CM ratio?
CM ratio = CM/Sales = $180,000/$600,000 = 30%
3b. If monthly sales increase by $80,000, by how much would you expect monthly net
income to increase
CM ratio X Sales = 30% X $80,000 = $24,000
Slide 43
6
Exercise 2
Super Sales Company is the exclusive distribution for a new
product. The product sells for $60 per unit and has a CM ratio of 40%.
The company’s fixed costs are $360,000 per year.
1. What are the contribution margin & variable costs per unit?
CM per unit = $60 x 40% = $24
Variable exp. per unit : $60 x (100% - 40%) = $36
2. Using the equation method:
a. What is the break-even point in units and in sales dollars?
S/uX = VC/uX + Fixed costs + Profits
$60X = $36X + $360,000 + $0
X = 15,000 units
or
Fixed costs/CM per unit = $360,000/$24 per unit = 15,000 units
Sales@BE = PriceX = $60/unit (15,000 units) = $900,000
or
Sales@BE = Fixed costs/CM ratio = $360,000/40%= $900,000
Slide 44
6
Target Net Profit Analysis
Suppose Sakuraba Co. wants to know how
many bikes must be sold to earn a profit of
$100,000.
We can use our CVP formula to determine the
sales volume needed to achieve a target net
profit figure.
Slide 45
6
The CVP Equation
S/uX = VC/uX + Fixed costs + Profits
Slide 46
6
The CVP Equation
S/uX = VC/uX + Fixed costs + Profits
$500X = $300X + $80,000 + $100,000
Where:
X
$500
$300
$80,000
$100,000
=
=
=
=
=
Number of bikes sold
Unit sales price
Unit variable cost
Total fixed costs
Target net income
Slide 47
6
The CVP Equation
S/uX = VC/uX + Fixed costs + Profits
$500X = $300X + $80,000 + $100,000
$200X = $180,000
Slide 48
6
The CVP Equation
S/uX = VC/uX + Fixed costs + Profits
$500X = $300X + $80,000 + $100,000
$200X = $180,000
X = 900 bikes
Slide 49
6
The Contribution Margin Approach
We can determine the number of bikes that
must be sold to earn a profit of $100,000
using the contribution margin approach.
Slide 50
6
The Contribution Margin Approach
We can determine the number of bikes that
must be sold to earn a profit of $100,000
using the contribution margin approach.
Fixed costs + Target profit
Unit contribution margin
Units sold to attain
=
the target profit
Slide 51
6
The Contribution Margin Approach
We can determine the number of bikes that
must be sold to earn a profit of $100,000
using the contribution margin approach.
Fixed costs + Target profit
Unit contribution margin
$80,000 + $100,000
$200
Units sold to attain
=
the target profit
= 900 bikes
Slide 52
6
The Concept of Sales Mix
 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 Sakuraba sells bikes and carts
and see how we deal with break-even
analysis.
Slide 53
6
The Concept of Sales Mix
Sakuraba provides us with the following
information:
Price
VC/u
CM/u
Expected unit sales
Sales Mix
Fixed Costs
Bikes
$15.00
$8.00
$7.00
70,000
1/3
$1,320,000.00
Carts
$22.50
$9.50
$13.00
140,000
2/3
Slide 54
6
The Concept of Sales Mix
Find breakeven point in total units.
Price
VC/u
CM/u
Expected unit sales
Sales Mix
Fixed Costs
Bikes
$15.00
$8.00
$7.00
70,000
1/3
Carts
$22.50
$9.50
$13.00
140,000
2/3
$1,320,000.00
$1,320,000____ =120,000 units
(1/3)$7 + (2/3)$13
Slide 55
6
The Concept of Sales Mix
Separate total units by product mix.
Price
VC/u
CM/u
Expected unit sales
Sales Mix
Fixed Costs
Bikes
$15.00
$8.00
$7.00
70,000
1/3
Carts
$22.50
$9.50
$13.00
140,000
2/3
$1,320,000.00
Bikes: 120,000 x 1/3 = 40,000 units
Carts: 120,000 x 2/3 = 80,000 units
Total
120,000 units
Slide 56
6
The Margin of Safety or Safety
Margin
 Excess of budgeted (or actual) sales over
the break-even volume of sales
 Amount by which sales can drop before
losses begin to be incurred
Slide 57
6
The Margin of Safety
 Excess of budgeted (or actual) sales over
the break-even volume of sales.
 Amount by which sales can drop before
losses begin to be incurred.
Total sales - Break-even sales = Margin of safety
Slide 58
6
The Margin of Safety
 Excess of budgeted (or actual) sales over
the break-even volume of sales.
 Amount by which sales can drop before
losses begin to be incurred.
Total sales - Break-even sales = Margin of safety
Let’s calculate the margin of safety for
Sakuraba.
Slide 59
6
The Margin of Safety
Sakuraba has a break-even point of $200,000.
If actual sales are $250,000, the margin of
safety is $50,000 or 100 bikes.
Break-even
sales
400 units
Sales
$ 200,000
Less: variable expenses
120,000
Contribution margin
80,000
Less: fixed expenses
80,000
Net income
$
-
Actual sales
500 units
$ 250,000
150,000
100,000
80,000
$
20,000
Slide 60
6
The Margin of Safety
The margin of safety can be expressed as 20
percent of sales . . . ($50,000 ÷ $250,000)
Break-even
sales
400 units
Sales
$ 200,000
Less: variable expenses
120,000
Contribution margin
80,000
Less: fixed expenses
80,000
Net income
$
-
Actual sales
500 units
$ 250,000
150,000
100,000
80,000
$
20,000