Transcript hft3431_chapter7.ppt

HFT 3431
Chapter 7
Cost-Volume-Profit Analysis
Cost Volume Profit Analysis
What Is the Break-Even Point?
 What Is the Profit at Occupancy
Percentages Above Break-Even?
 How Do Increases in Fixed Charges
Affect Break-Even?
 How Many More Rooms Must Be Sold
to Recover Cost Increases?

Cost Volume Profit Analysis
How Many Rooms Must Be Sold to
Reach a Certain Profit?
 What Is the Effect of Profits When
Prices, Variable Costs, and Fixed
Costs Change?
 How Do Labor Rate Changes Affect
Profits?

Cost-Volume Profit
Assumptions
Fixed Costs Remain Constant During
the Period Being Analyzed.
 Variable Costs Fluctuate in a Linear
Fashion With Revenues.
 Variable Costs Are Constant on a Per
Unit Basis.

Cost-Volume Profit
Assumptions
Productivity Remains Constant.
 Revenues Are Proportional to
Variable Costs.
 There Are No Volume Discounts.

Cost-Volume Profit
Assumptions
All Costs Can Be Broken Down Into
Their Fixed and Variable
Components.
 Joint Costs Are Not Eliminated When
One Department Is.

CVP Basic Formula
How Much Should Be Charged to
Break-Even?
 10 Room Motel
 Variable Costs Are $5 Per Room
 Fixed Costs Are $2,500

CVP Basic Formula
250 Rooms Will Be Sold
 SP = VC Per Room + (Fixed Costs /
Number Rooms Sold)
 SP = $5 +( $2,500 / 250)
 SP = $15 Per Room

Most Common Expression
of CVP Analysis Is a Graph
Fixed Costs
7000
6000
5000
$
4000
Fixed Costs
3000
2000
1000
0
0
100
200
300
Rooms Sold
Most Common Expression
of CVP Analysis Is a Graph
Variable Costs
7000
6000
5000
$
4000
Variable
Costs
3000
2000
1000
0
0
100
200
300
Rooms Sold
Most Common Expression
of CVP Analysis Is a Graph
Total Costs
7000
6000
5000
$
4000
Total Costs
3000
2000
1000
0
0
100
200
300
Rooms Sold
Most Common Expression
of CVP Analysis Is a Graph
Revenue
5000
4500
4000
3500
3000
$ 2500
2000
1500
1000
500
0
Revenue
0
100
200
300
Rooms Sold
Most Common Expression
of CVP Analysis Is a Graph
Break - Even
Loss but cover FC
5000
Profit
4000
3000
Breakeven
$
2000
1000
Loss
0
0
100
200
300
Rooms
Fixed Costs
Variable Costs
Total Costs
Revenue
CVP Basic Formula
How Much Should Be Charged to
Earn $2,000 in a 30 Day Period?
 10 Room Motel
 Variable Costs Are $5 Per Room
 Fixed Costs Are $2,500

CVP Basic Formula
250 Rooms Will Be Sold
 SP = VC Per Room + (Profit + FC) /
Number Rooms Sold
 SP = $5 +( $2,000 + $2,500) / 250
 SP = $23 Per Room

Most Common Expression
of CVP Analysis Is a Graph
With $2,000 Profit
8000
7000
Fixed + Profit
6000
5000
Variable
Costs
Total Costs
$ 4000
3000
2000
Revenue
1000
0
0
100
200
300
Rooms Sold
CVP Formula for Single
Product Analysis
I = Net Income
 S = Selling Price
 X = Units Sold
 V = Variable Costs Per Unit
 F = Total Fixed Costs (Plus Profit)

CVP Formula for Single
Product Analysis
SX = Total Revenue
 VX = Total Variable Costs
 Basic Formula for Break-Even
(Income Equals 0)
 0 = SX - VX - F

Break-Even Formula
Variations
Units Sold at Break-Even
 X = F / (S - V)
 Fixed Costs at Break-Even
 F = SX - VX
 Selling Price at Break-Even
 S = (F / X) + V

Break-Even Formula
Variations
Variable Cost Per Unit at Break-Even
V = S - (F / X)
 Most Hospitality Operations Sell
Multiple Products. Therefore, We
Need Additional Tools.

Contribution Margin
Contribution Margin (CM) Is the
Selling Price, or Sales, Minus the
Variable Cost(s).
 Contribution Margin Percentage
(Ratio) Is the CM Divided by the
Selling Price (or Sales).

Contribution Margin
To Get Break-Even in Units, Divide
the Fixed Costs by the Contribution
Margin.
 To Get Break-Even in Sales Dollars,
Divide the Fixed Costs by the
Contribution Margin Percentage.

Contribution Margin

Since Our Products Have Different
CM, We Use CM Percent (Weighted) a
Lot.
Weighted Contribution
Margin Percent

The Contribution Margin Percent, or
Contribution Margin Ratio (CMR)
Says That the Amount Available to
Cover Fixed Costs Is the CMR Times
the Sales Dollars.
Weighted Contribution
Margin Percent
The Weighted CMR Is Computed As
Follows:
 (Total Revenue - Total Variable
Costs) / Total Revenue

Weighted Contribution
Margin Percent

Another Way of Looking at it is to
Take the Sales Mix Percentage for
Each Area (Which in Total Must Add
up to 100%) and Multiply That
Percentage by the CMR for the
Particular Area. Then Add All
Results to Get the Weighted CMR.
Weighted Contribution
Margin Percent

Divide the Weighted CMR Into the
Fixed Costs (and Profit if Applicable)
and the Result is the Required Sales
Level.
Margin of Safety
Excess of Budgeted or Actual Sales
Over Sales at Break-Even
 Expressed in Units or Dollars

Sensitivity Analysis
Study of the Sensitivity of Dependent
Variables to Changes in Independent
Variables
 Looks at the Incremental Number of
Units Required to Sold to Cover
Additional Costs

Operating Leverage
Extent to Which Expenses Are Fixed
Rather Than Variable
 Highly Levered When Fixed Costs to
Variable Costs Is High
 Highly Levered Means a Small
Increase in Sales Yields a Large
Profit (Above Break-Even)

Assignment

None