Transcript MGT430 LECTURE 29.ppt
• • • • • • •
Chapter 19: Cost-Volume-Profit Analysis Questions Addressed by Cost-Volume-Profit Analysis Cost Behavior Variable Cost Fixed Cost Mixed Costs High-low Method
• • • • • • • •
Stair-Step Costs Curvilinear Costs Cost Behavior Summary Cost-Volume-Profit Relationships Contribution Margin Income Statement Contribution Margin Ratio Cost-Volume-Profit (CVP) Analysis Computing Break-Even Point
• • • • •
Formula for Computing Break-Even Sales in Units & In Dollar Preparing a CVP Graph Computing Sales Needed to Achieve Target Operating Income What is our Margin of Safety?
What Change in Operating Income Do We Anticipate?
Chapter 19
Sales Mix Considerations
Sales Mix Considerations
Cascade Company sold 8,000 units of Product A and 2,000 units of Product B during the past year. Cascade Company’s fixed costs are $200,000. Other relevant data are as follows: Sales Variable costs Contribution margin Sales mix
Products A B
$ 90 $140 70 95 $ 20 $ 45 80% 20%
Sales Mix Considerations
Sales Variable costs Contribution margin Sales mix Product contribution margin
Products A B
$ 90 $140 70 $ 20 $ 45 80% $16 Fixed costs, $200,000
$25
95 20% $ 9
Sales Mix Considerations
Product contribution margin
Products A
$16
B
$ 9
$25 Break-even sales units
$200,000 $25 Fixed costs, $200,000
Sales Mix Considerations
Product contribution margin
Products A
$16
B
$ 9
Break-even sales units
$200,000 = 8,000 units $25
$25
Fixed costs, $200,000
Sales Mix Considerations
Product contribution margin
Products A
$16
B
$ 9 A: B: 8,000 units x Sales Mix (80%) = 8,000 units x Sales Mix (20%) =
$25
6,400 1,600
Sales: 6,400 units x $90 1,600 units x $140 Total sales Variable costs: 6,400 x $70 1,600 x $95 Total variable costs Contribution margin Fixed costs
Income from operations Product A Product B Total
$576,000 $576,000 $448,000 $448,000 $128,000 $224,000 $224,000 $576,000 224,000 $800,000 $152,000 $152,000 $ 72,000 $448,000 152,000 $600,000 $200,000
Break-even point
200,000
$ 0
PROOF
Margin of Safety
Margin of Safety = Sales – Sales at break-even point Sales $250,000 – $200,000 Margin of Safety = $250,000 Margin of Safety = 20%
The margin of safety indicates the possible decrease in sales that may occur before an operating loss results.
Operating Leverage
Operating Leverage
Sales Variable costs Contribution margin Fixed costs Income from operations Contribution margin
Jones Inc. Wilson Inc.
$400,000 300,000 $100,000 80,000 $ 20,000
?
$400,000 300,000 $100,000 50,000 $ 50,000
?
Both companies have the same contribution margin.
Contribution margin Income from operations
Operating Leverage
Sales Variable costs Contribution margin Fixed costs Income from operations Contribution margin
Jones Inc. Wilson Inc.
$400,000 300,000 $100,000 80,000 $ 20,000
5.0
$400,000 300,000 $100,000 50,000 $ 50,000
? Jones Inc.:
=
5.0
Operating Leverage
Sales Variable costs Contribution margin Fixed costs Income from operations Contribution margin
Jones Inc. Wilson Inc.
$400,000 300,000 $100,000 80,000 $ 20,000
5.0
$400,000 300,000 $100,000 50,000 $ 50,000
? Jones Inc.
=
5.0
Operating Leverage
Sales Variable costs Contribution margin Fixed costs Income from operations Contribution margin
Jones Inc. Wilson Inc.
$400,000 300,000 $100,000 80,000 $ 20,000
5.0
$400,000 300,000 $100,000 50,000 $ 50,000
2.0
Wilson Inc.:
Capital Labor intensive?
Contribution margin =
2.0
intensive?
Income from operations
Assumptions of Cost-Volume-Profit Analysis
The reliability of cost-volume-profit analysis depends upon several assumptions.
1.
Total sales and total costs can be represented by straight lines.
2.
3.
4.
5.
Within the not change.
relevant range of operating activity, the efficiency of operations does Costs can be accurately divided into
fixed
and
variable
components.
The sales mix is constant.
There is no change in the inventory quantities during the period.
Business Applications of CVP
Business Applications of CVP
Consider the following information developed by the accountant at CyclCo, a bicycle retailer:
Sales (500 bikes) Less: variable expenses Contribution margin Less: fixed expenses Operating income Total $ 250,000 150,000 $ 100,000 80,000 $ 20,000 Per Unit $ 500 300 $ 200 Percent 100% 60% 40%
Business Applications of CVP
Should CyclCo spend $12,000 on advertising to increase sales by 10 percent?
Sales (500 bikes) Less: variable expenses Contribution margin Less: fixed expenses Operating income Total $ 250,000 150,000 $ 100,000 80,000 $ 20,000 Per Unit $ 500 300 $ 200 Percent 100% 60% 40%
Business Applications of CVP Should CyclCo spend $12,000 on advertising to increase sales by 10 percent?
Sales Less: variable expenses Contribution margin Less: fixed expenses Operating income 500 Bikes $ 250,000 150,000 $ 100,000 80,000 $ 20,000 550 × $500 550 × $300 $80K + $12K 550 Bikes $ 275,000 165,000 $ 110,000 92,000 $ 18,000 No, income is decreased.
Business Applications of CVP
Now, in combination with the advertising, CyclCo is considering a 10 percent price reduction that will increase sales by 25 percent. What is the income effect?
Sales Less: variable expenses Contribution margin Less: fixed expenses Operating income 500 Bikes $ 250,000 150,000 $ 100,000 80,000 $ 20,000
Business Applications of CVP
Now, in combination with the advertising, CyclCo is considering a 10 percent price reduction that will increase sales by 25 percent. What is the income effect?
1.25 × 500 Sales Less: variable expenses Contribution margin Less: fixed expenses Operating income 500 Bikes $ 250,000 150,000 $ 100,000 80,000 $ 20,000 625 × $450 625 × $300 $80K + $12K 625 Bikes $ 281,250 187,500 $ 93,750 92,000 $ 1,750 Income is decreased even more.
Business Applications of CVP
Now, in combination with advertising and a price cut, CyclCo will replace $50,000 in sales salaries with a $25 per bike commission, increasing sales by 50 percent above the original 500 bikes. What is the effect on income?
Sales Less: variable expenses Contribution margin Less: fixed expenses Operating income 500 Bikes $ 250,000 150,000 $ 100,000 80,000 $ 20,000
Business Applications of CVP
Now, in combination with advertising and a price cut, CyclCo will replace $50,000 in sales salaries with a $25 per bike commission, increasing sales by 50 percent above the original 500 bikes. What is the effect on income?
1.5 × 500 Sales Less: variable expenses Contribution margin Less: fixed expenses Operating income 500 Bikes $ 250,000 150,000 $ 100,000 80,000 $ 20,000 750 × $450 750 × $325 $92K - $50K 750 Bikes $ 337,500 243,750 $ 93,750 42,000 $ 51,750 The combination of advertising, a price cut, and change in compensation increases income.
Additional Considerations in CVP
Different products with different contribution margins.
Determining semivariable cost elements.
Complying with the assumptions of CVP analysis.
CVP Analysis When a Company Sells Many Products
Sales mix is the relative combination in which a company’s different products are sold.
Different products have different selling prices, costs, and contribution margins.
If CyclCo sells bikes and carts, how will we deal with break-even analysis?
CVP Analysis When a Company Sells Many Products
CyclCo provides us with the following information:
Sales Var. exp.
Contrib. margin Fixed exp.
Net income Bikes $ 250,000 150,000 $ 100,000 100% 60% 40% Carts $ 300,000 135,000 $ 165,000 100% 45% 55% Total $ 550,000 285,000 $ 265,000 170,000 $ 95,000 100% 52% 48%
CVP Analysis When a Company Sells Many Products
The overall contribution margin ratio is:
Sales Var. exp.
Contrib. margin Fixed exp.
Net income Bikes $ 250,000 150,000 $ 100,000 100% 60% 40% Carts $ 300,000 135,000 $ 165,000 100% 45% 55% Total $ 550,000 285,000 $ 265,000 170,000 $ 95,000 100% 52% 48% $265,000 $550,000 = 48% (rounded)
CVP Analysis When a Company Sells Many Products
Break-even in sales dollars is: Sales Var. exp.
Contrib. margin Fixed exp.
Operating income Bikes $ 250,000 150,000 $ 100,000 100% 60% 40% Carts $ 300,000 135,000 $ 165,000 100% 45% 55% Total $ 550,000 285,000 $ 265,000 170,000 $ 95,000 100% 52% 48% $170,000 .48
= $354,167 (rounded)
The High-Low Method
OwlCo recorded the following production activity and maintenance costs for two months:
High activity level Low activity level Change Units 9,000 5,000 4,000 Cost $ 9,700 6,100 $ 3,600
Using these two levels of activity, compute: the variable cost per unit. the total fixed cost.
total cost formula.
The High-Low Method
High activity level Low activity level Change Units 9,000 5,000 4,000 Cost $ 9,700 6,100 $ 3,600
Unit variable cost
in cost $3,600 = = = in units $0.90 per unit
The High-Low Method
High activity level Low activity level Change Units 9,000 5,000 4,000 Cost $ 9,700 6,100 $ 3,600
Unit variable cost
in cost $3,600 = = = in units $0.90 per unit
Fixed cost = Total cost – Total variable cost
The High-Low Method
High activity level Low activity level Change Units 9,000 5,000 4,000 Cost $ 9,700 6,100 $ 3,600
Unit variable cost
in cost $3,600 = = = in units $0.90 per unit
Fixed cost = Total cost – Total variable cost Fixed cost = $9,700 – ($0.90 per unit × 9,000 units) Fixed cost = $9,700 – $8,100 = $1,600
The High-Low Method
High activity level Low activity level Change Units 9,000 5,000 4,000 Cost $ 9,700 6,100 $ 3,600
Unit variable cost
in cost $3,600 = = = in units $0.90 per unit
Fixed cost = Total cost – Total variable cost Fixed cost = $9,700 – ($0.90 per unit × 9,000 units) Fixed cost = $9,700 – $8,100 = $1,600
Total cost = $1,600 + $.90 per unit
The High-Low Method Question 1
If sales commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, what is the variable portion of sales commission per unit sold?
a. $.08 per unit b. $.10 per unit c. $.12 per unit d. $.125 per unit
The High-Low Method Question 1
If sales commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, what is the variable portion of sales commission per unit sold?
a. $.08 per unit b. $.10 per unit c. $.12 per unit d. $.125 per unit
High level Low level Change Units 120,000 80,000 40,000 Cost $ 14,000 10,000 $ 4,000 $4,000 ÷ 40,000 units = $.10 per unit
The High-Low Method Question 2
If sales commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, what is the fixed portion of the sales commission?
a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000
The High-Low Method Question 2
If sales commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, what is the fixed portion of the sales commission?
a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000
Total cost = Total fixed cost + Total variable cost $14,000 = Total fixed cost + ($.10 × 120,000 units) Total fixed cost = $14,000 - $12,000 Total fixed cost = $2,000
Assumptions Underlying CVP Analysis
A limited range of activity, called the relevant range , where CVP relationships are linear. – Unit selling price remains constant.
– Unit variable costs remain constant.
– Total fixed costs remain constant.
Sales mix remains constant.
Production = sales (no inventory changes).