Transcript Lecture 23.pptx

Lecture 23
Lecture Overview
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Cost-Volume-Profit Relationships
The Basics of Cost-Volume-Profit (CVP) Analysis
The Contribution Approach
Contribution Margin Ratio
MCQs Test
Changes in Fixed Costs and Sales Volume
Break-Even Analysis
– Equation Method
Contribution Margin Method
The contribution margin method is a variation
of the equation method.
Break-even point
in units sold
=
Fixed expenses
Unit contribution margin
Break-even point in
total sales dollars
=
Fixed expenses
CM ratio
MCQs Test
The average selling price of a cup of coffee is
$1.49 and the average variable expense per cup is
$0.36. The average fixed expense per month is
$1,300. 2,100 cups are sold each month on average.
What is the break-even sales in units?
a. 872 cups
b. 3,611 cups
c. 1,200 cups
d. 1,150 cups
MCQs Test
Coffee Klatch is an espresso stand in a
downtown office building. The average selling price
of a cup of coffee is $1.49 and the average variable
expense per cup is $0.36. The average Ffixed expense
q =sold each
per month is $1,300. Breakeven
2,100 cups are
cm
month on average.
What is the break-even sales
$1,300
in units?
=
$1.49 - $0.36
a. 872 cups
$1,300
=
b. 3,611 cups
$1.13
c. 1,200 cups
= 1,150
d. 1,150 cups
MCQs Test
Coffee Klatch is an espresso stand in a
downtown office building. The average selling price
of a cup of coffee is $1.49 and the average variable
expense per cup is $0.36. The average fixed expense
per month is $1,300. 2,100 cups are sold each
month on average.
What is the break-even sales
in dollars?
a. $1,300
b. $1,715
c. $1,788
d. $3,129
MCQs Test
Coffee Klatch is an espresso stand in a
downtown office building. The average selling price
of a cup of coffee is $1.49 and the average variable
expense per cup is $0.36. The average fixed expense
per month is $1,300. 2,100 cups are sold each
F
month on average. Breakeven
What is the
break-even
sales
Sales =
CM Ratio
in dollars?
$1,300
a. $1,300
=
0.758
b. $1,715
= $1,715
c. $1,788
d. $3,129
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 Wind Co.:
Sales
Less: variable expenses
Contribution margin
Less: fixed expenses
Net income (loss)
Income
300 units
$ 150,000
90,000
$ 60,000
80,000
$ (20,000)
Income
400 units
$ 200,000
120,000
$ 80,000
80,000
$
-
Income
500 units
$250,000
150,000
$100,000
80,000
$ 20,000
CVP Graph
450,000
400,000
350,000
Total Expenses
300,000
250,000
200,000
Fixed expenses
150,000
100,000
50,000
-
100
200
300
400
Units
500
600
700
800
CVP Graph
450,000
400,000
350,000
Total Sales
300,000
250,000
200,000
150,000
100,000
50,000
-
100
200
300
400
Units
500
600
700
800
CVP Graph
450,000
400,000
350,000
300,000
250,000
Break-even point
200,000
150,000
100,000
50,000
-
100
200
300
400
Units
500
600
700
800
Target Profit Analysis
Suppose Wind 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.
The CVP Equation
Sales = Variable expenses + Fixed expenses + Profits
$500Q = $300Q + $80,000 + $100,000
$200Q = $180,000
Q = 900 bikes
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.
Units sold to attain
the target profit
=
$80,000 + $100,000
$200
Fixed expenses + Target profit
Unit contribution margin
= 900 bikes
MCQs Test
Coffee Klatch is an espresso stand in a
downtown office building. The average selling price
of a cup of coffee is $1.49 and the average variable
expense per cup is $0.36. The average fixed expense
per month is $1,300. How many cups of coffee
would have to be sold to attain target profits of
$2,500 per month?
a. 3,363 cups
b. 2,212 cups
c. 1,150 cups
d. 4,200 cups
MCQs Test
F + in
Target
profit
Coffee Klatch
is
an
espresso
stand
a
q to attain target =
cm price
downtown office building. The average selling
$1,300
+ $2,500
of a cup of coffee is $1.49 and
the
average
variable
=
$1.49 -fixed
$0.36
expense per cup is $0.36. The average
expense
per month is $1,300. How many
cups of coffee
$3,800
= target profits of
would have to be sold to attain
$1.13
$2,500 per month?
= 3,363
a. 3,363 cups
b. 2,212 cups
c. 1,150 cups
d. 4,200 cups
The Margin of Safety
Excess of budgeted (or actual) sales over the
break-even volume of sales. The amount by
which sales can drop before losses begin to
be incurred.
Margin of safety = Total sales - Break-even sales
Let’s calculate the margin of safety for Wind.
The Margin of Safety
Wind has a break-even point of $200,000. If
actual sales are $250,000, the margin of safety
is $50,000 or 100 bikes.
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
The Margin of Safety
The margin of safety can be expressed as 20
percent of sales.
($50,000 ÷ $250,000)
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
MCQs Test
Coffee Klatch is an espresso stand in a
downtown office building. The average selling price
of a cup of coffee is $1.49 and the average variable
expense per cup is $0.36. The average fixed expense
per month is $1,300. 2,100 cups are sold each
month on average.
What is the margin of safety?
a. 3,250 cups
b. 950 cups
c. 1,150 cups
d. 2,100 cups
MCQs Test
Margin
of safety
= an
Total
salesstand
- Breakeven
sales
Coffee
Klatch is
espresso
in a
downtown office
building.
average
selling price
= 2,100
cupsThe
- 1,150
cups
of a cup of coffee
$1.49 and the average variable
= 950is cups
expense per cup is $0.36. The average fixed expense
or
per month is $1,300. 2,100 cups are sold each
950 cups
Margin
of safety
month on
average.= What
is the =margin
45% of safety?
percentage
2,100 cups
a. 3,250 cups
b. 950 cups
c. 1,150 cups
d. 2,100 cups
Cost Volume Profit Analysis
Two friends wished to start business of delivering pizza
to the residents of Islamabad by through phone calls
for home delivery within 30 minutes margin. They
allocate fixed cost of Rs 40000 and sales price RS. 100.
Its variable costs Rs. 50 to make and deliver each
pizza.
Requirements
• Using contribution margin approach, compute
breakeven point per pizzas.
• What is the contribution margin ratio?
• Compute the break-even sales revenue.
• How many pizzas must they sold to earn a target net
profit of RS. 65000?
Company Oliver located in Karachi manufactures computer
casing. The firm`s fixed costs are Rs. 4000000 per month
while prices are Rs. 3000 and Variable Cost Rs. 2000 each.
Company sold 5000 components during the previous year.
Requirements
• Compute the break-even point in units.
• What will the new break-even point be if fixed costs
increase by 10 percent?
• What was the company`s net income for the prior year?
• The sales manager believes that a reduction in the sales
price to Rs 2500 will result in orders for 1200 more
components each year. What will be break-even point be
if price is changed?
• Should the price change discuss in requirement (4) be
made?
Lecture Overview
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Contribution Margin Method
MCQs Test
CVP Relationships in Graphic Form
CVP Graph
Target Profit Analysis
The CVP Equation
The Contribution Margin Approach
The Margin of Safety
Practice questions
End of Lecture 23