cost volume analysis.pptx

7/29/2019 Cost Volume Analysis.pptx

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Cost-Volume-ProfitAnalysis


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The Break-Even Point

The break-even point is the point in the volume of activity where the organizations revenues and

expenses are equal.

Sales 250,000$Less: variable expenses 150,000 Contribution margin 100,000

Less: fixed expenses 100,000 Net income -$


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Contribution-Margin Approach

Consider the following information developed bythe accountant at Curl, Inc.:

Total Per Unit PercentSales (500 surf boards) 250,000$ 500$ 100%Less: variable expenses 150,000 300 60%Contribution margin 100,000$ 200$ 40%

Less: fixed expenses 80,000 Net income 20,000$


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Total Per Unit PercentSales (500 surf boards) 250,000$ 500$ 100%Less: variable expenses 150,000 300 60%Contribution margin 100,000$ 200$ 40%



For each additional surf board sold, Curlgenerates $200 in contribution margin.


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Fixed expensesUnit contribution margin =

Break-even point(in units)

Total Per Unit PercentSales (500 surf boards) 250,000 $ 500$ 100%Less: variable expenses 150,000 300 60%Contribution margin 100,000 $ 200$ 40%Less: fixed expenses 80,000 Net income 20,000$

$80,000

$200= 400 surf boards


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Here is the proof!

Total Per Unit PercentSales ( 400 surf boards) 200,000$ 500$ 100%Less: variable expenses 120,000 300 60%Contribution margin 80,000$ 200$ 40%Less: fixed expenses 80,000

Net income -$

400 $500 = $200,000 400 $300 = $120,000


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Contribution Margin Ratio

Calculate the break-even point in sales dollars rather thanunits by using the contribution margin ratio.

Contribution marginSales = CM Ratio

Fixed expenseCM Ratio

Break-even point(in sales dollars)=


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Contribution Margin Ratio

Total Per Unit PercentSales ( 400 surf boards) 200,000$ 500$ 100%Less: variable expenses 120,000 300 60%

Contribution margin 80,000$ 200$ 40%Less: fixed expenses 80,000 Net income -$

$80,00040%

$200,000 sales=


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Equation Approach

Sales revenue Variable expenses Fixed expenses = Profit

Unitsalesprice

Salesvolumein units

Unit

variableexpense

Salesvolumein units

($500 X) ($300 X) $80,000 = $0

($200X) $80,000 = $0

X = 400 surf boards


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Graphing Cost-Volume-Profit Relationships

Viewing CVP relationships in a graph gives managers aperspective that can be obtained in no other way.Consider the following information for Curl, Inc.:

Income300 units

Income400 units

Income500 units

Sales 150,000$ 200,000$ 250,000$Less: variable expenses 90,000 120,000 150,000 Contribution margin 60,000$ 80,000$ 100,000$Less: fixed expenses 80,000 80,000 80,000 Net income (loss) (20,000)$ -$ 20,000$


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-

50,000

00,000

50,000

00,000

50,000

00,000

50,000

00,000

50,000

- 100 200 300 400 500 600 700 800

Cost-Volume-Profit Graph

Fixed expenses

Units Sold

Total expenses

Total salesBreak-evenpoint


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$(100,000)

$(80,000)

$(60,000)

$(40,000)

$(20,000)

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$- $50 $100 $150 $200 $250 $300 $350 $400

1 3 4 52 6 7 8

Units sold (00s)

Profit-Volume GraphSome managers like the profit-volume

graph because it focuses on profits and volume.

Break-evenpoint


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Target Net Profit

We can determine the number of surfboardsthat Curl must sell to earn a profit of

$100,000 using the contribution margin

approach .

Fixed expenses + Target profit Unit contribution margin =

Units sold to earnthe target profit

$80,000 + $100,000 $200 = 900 surf boards


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Equation Approach

Sales revenue Variable expenses Fixed expenses = Profit

($500 X) ($300 X) $80,000 = $100,000

($200X) = $180,000

X = 900 surf boards


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Applying CVP Analysis

Safety Margin The difference between budgeted sales

revenue and break-even sales revenue. The amount by which sales can drop before

losses begin to be incurred.


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Changes in Fixed Costs

Curl is currently selling 500 surf boards permonth.

The owner believes that an increase of $10,000 inthe monthly advertising budget, would increasebike sales to 540 units.

Should we authorize the requested increase inthe advertising budget?


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CurrentSales

(500 Boards)

ProposedSales

(540 Borads)Sales 250,000$ 270,000$

Less: variable expenses 150,000 162,000 Contribution margin 100,000$ 108,000$Less: fixed expenses 80,000 90,000 Net income 20,000$ 18,000$

Changes in Fixed Costs

$80,000 + $10,000 advertising = $90,000

540 units $500 per unit = $270,000


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Changes in UnitContribution Margin

Because of increases in cost of raw materials, Curlsvariable cost per unit has increased from $300 to

$310 per surf board. With no change in selling price

per unit, what will be the new break-even point?

($500 X) ($310 X) $80,000 = $0

X = 422 units (rounded)


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Predicting Profit Given ExpectedVolume

Fixed expensesUnit contribution marginTarget net profit

Find: {required sales volume}Given:

Fixed expensesUnit contribution marginExpected sales volume Find: {expected profit}

Given:


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Predicting Profit GivenExpected Volume

In the coming year, Curls owner expects to sell 525surfboards. The unit contribution margin is

expected to be $190, and fixed costs are expected

to increase to $90,000.

($190 525) $90,000 = X

X = $9,750 profit

X = $99,750 $90,000

Total contribution - Fixed cost = Profit


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CVP Analysis with Multiple Products

For a company with more than one product, salesmix is the relative combination in which a

companys products are sold.

Different products have different selling prices, coststructures, and contribution margins.

Lets assume Curl sells surf boards and sailboards and see how we deal with break-

even analysis.


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Curl provides us with the following information:

DescriptionSellingPrice

UnitVariable

Cost

UnitContribution

Margin

Numberof

BoardsSurfboards 500$ 300$ 200$ 500 Sailborads 1,000 450 550 300 Total sold 800

DescriptionNumber

of Boards% of

TotalSurfboards 500 62.5% (500 800)Sailborads 300 37.5% (300 800)Total sold 800 100.0%


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Weighted-average unit contribution margin

Description

Contribution

Margin % of Total

Weighted

ContributionSurfboards 200$ 62.5% 125.00$Sailborads 550 37.5% 206.25 Weighted-average contribution margin 331.25$

$200 62.5%


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Break-even pointBreak-even

point= Fixed expenses

Weighted-average unit contribution margin

Break-evenpoint =

$170,000$331.25

Break-evenpoint =

514 combined unit sales


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Break-even pointBreak-evenpoint =

514 combined unit sales

DescriptionBreakeven

Sales% ofTotal

IndividualSales

Surfboards 514 62.5% 321

Sailborads 514 37.5% 193 Total units 514


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Assumptions UnderlyingCVP Analysis

Selling price is constant throughout theentire relevant range.Costs are linear over the relevant range.In multi-product companies, the salesmix is constant.In manufacturing firms, inventories do

not change (units produced = unitssold).


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Cost Structure and Operating Leverage

The cost structure of an organization is therelative proportion of its fixed and variablecosts.

Operating leverage is . . . the extent to which an organization uses fixed costs

in its cost structure.

greatest in companies that have a high proportion of fixed costs in relation to variable costs.


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Measuring Operating Leverage

Contribution marginNet income

Operating leveragefactor =

Actual sales

500 BoardSales 250,000$Less: variable expenses 150,000 Contribution margin 100,000


$100,000

$20,000= 5


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Measuring Operating Leverage

A measure of how a percentage change insales will affect profits. If Curl increases itssales by 10%, what will be the percentage

increase in net income?

Percent increase in sales 10%Operating leverage factor 5Percent increase in profits 50%


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CVP Analysis, Activity-Based Costing, andAdvanced Manufacturing Systems

An activity-based costing system can providea much more complete picture of cost-

volume-profit relationships and thusprovide better information to managers.

Break-evenpoint

= Fixed costsUnit contribution margin


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A Move Toward JIT andFlexible Manufacturing

Overhead costs like setup, inspection, andmaterial handling are fixed with respect tosales volume , but they are not fixed with

respect to other cost drivers .

This is the fundamental distinction betweena traditional CVP analysis and an activity-

based costing CVP analysis.

cost volume analysis.pptx

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