Transcript Chapter 12 Cost-Volume-Profit Analysis

Chapter 12
Cost-Volume-Profit Analysis
Chapter 12: Objectives
•Define break-even point (BEP) and cost-volume-profit
(CVP) analysis and recognize their limiting underlying
assumptions.
Use CVP analysis in both single- and multi-product
companies.
Develop a break-even chart and profit-volume graph.
Use the margin of safety and operating leverage
concepts.
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CVP Assumptions
• Operating within Relevant Range
• All costs are Fixed or Variable
• All Revenue and Variable costs are constant per unit
• Constant contribution margin (Unit Sales price- Unit
Variable cost)
• Total fixed cost is constant.
Total Revenue
Total Cost
Sales price * units = Fixed Cost + variable cost * units
Solving for “units”:
Break even units =
Fixed cost
Sales – Variable cost/unit
or
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How many units do we need to sell to break even?
Total Revenues - Total Costs = Profit
R(X) - [VC(X) + FC] = P
R(X) - VC(X) - FC = P
where
R = revenue (selling price) per unit $50
X = number of units sold (volume)
R(X) = total revenues
VC = variable cost per unit $15
VC(X) = total variable costs
FC = total fixed costs
$647,500
P = pre-tax profit $0
Using CVP formula: 18,500 units = $647,500/$35
or
Setting profit equal to $0:
(1)$50X - ($9X + $6X) - $647,500
=
$0
(2)
$50X - $15X - $647,500 = $0
(3)
$35X = $647,500
(4)
X = $647,500÷$35
(5)
Chapter 12X = 18,500 units
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Desired Profit
To calculate sales necessary to earn a profit, treat the
profit as an additional fixed cost.
X units = $647,500 + $150,000
$35
X= 22,786 units
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After Tax Profit
To calculate the pretax earnings necessary to generate
after tax earnings:
Pre tax earnings =After tax earnings
1 – Tax rate
$250,000=$150,000
1-.40
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Multi Product Analysis
•Assume constant product mix
•Calculate contribution margin per basket
•Calculate break-even baskets
•Determine total units per product
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Additional Concepts
•Margin of Safety
•Operating Leverage
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Conclusions
• At break even, total cost = total revenue
•There are strict assumptions in CVP analysis
•CM ratio is CM per unit/SP per unit.
•Desired profit must be adjusted for taxes.
•Multi-product CVP analysis can be accomplished.
•Operating leverage can be used in sensitivity analysis
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