cost-volume-profit analysis - allied american...
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Cost-Volume-Profit Analysis
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Chapter 21PowerPoint Editor:
Beth Kane, MBA, CPA
Wild, Shaw, and ChiappettaFundamental Accounting Principles22nd Edition
21-C1: Fixed Costs
2
Identifying Cost BehaviorCost-volume-profit analysis is used to answer questions such as:– How much does income increase if we install a
new machine to reduce labor costs? – What is the change in income if selling prices
decline and sales volume increases? – How will income change if we change the sales
mix of our products or services?– What sales volume is needed to earn a target
income?
C 13
Fixed Costs
C 14
Variable Costs
C 15
Mixed Costs
C 16
Step-Wise Costs
Total cost increases to a new higher cost for the next higher range of activity, but remains constant within a range of activity.
C 17
Curvilinear Costs
Costs that increase when activityincreases, but in a nonlinear manner.C 1
8
NEED-TO-KNOW
Determine whether each of the following is best described as a fixed, variable, mixed, step-wise, or curvilinearcost with respect to product units.
Rubber used to manufacture tennis balls $0.50 per tennis ball Variable costDepreciation (straight-line method) Electricity cost Supervisory salariesA salesperson’s commission is 7% for sales of up to $100,000, and 10% of sales for sales above $100,000
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
0 2,000 4,000 6,000 8,000 10,000
Tota
l Cos
t
Units Produced
$0.50 per tennis ball - Variable
C 19
NEED-TO-KNOW
Determine whether each of the following is best described as a fixed, variable, mixed, step-wise, or curvilinearcost with respect to product units.
Rubber used to manufacture tennis balls $0.50 per ball Variable costDepreciation (straight-line method) $2,000 per month Fixed costElectricity cost Supervisory salariesA salesperson’s commission is 7% for sales of up to $100,000, and 10% of sales for sales above $100,000
$0
$500
$1,000
$1,500
$2,000
$2,500
0 2,000 4,000 6,000 8,000 10,000
Tota
l Cos
t
Units Produced
$2,000 per month - Fixed
C 110
NEED-TO-KNOW
Determine whether each of the following is best described as a fixed, variable, mixed, step-wise, or curvilinearcost with respect to product units.
Rubber used to manufacture tennis balls $0.50 per ball Variable costDepreciation (straight-line method) $2,000 per month Fixed costElectricity cost $500 + $0.10 per ball Mixed costSupervisory salariesA salesperson’s commission is 7% for sales of up to $100,000, and 10% of sales for sales above $100,000
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
0 2,000 4,000 6,000 8,000 10,000
Tota
l Cos
t
Units Produced
$500 + $0.10 per unit- Mixed
C 111
NEED-TO-KNOW
Determine whether each of the following is best described as a fixed, variable, mixed, step-wise, or curvilinearcost with respect to product units.
Rubber used to manufacture tennis balls $0.50 per ball Variable costDepreciation (straight-line method) $2,000 per month Fixed costElectricity cost $500 + $0.10 per ball Mixed costSupervisory salaries 4,000 units per shift $5,000 per mo. per supervisor Step-wise costA salesperson’s commission is 7% for sales of up to $100,000, and 10% of sales for sales above $100,000
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
0 2,000 4,000 6,000 8,000 10,000
Units Produced
$5,000 per supervisor per month - Step-wise
Tota
l Cos
t
C 112
NEED-TO-KNOW
Determine whether each of the following is best described as a fixed, variable, mixed, step-wise, or curvilinearcost with respect to product units.
Rubber used to manufacture tennis balls $0.50 per ball Variable costDepreciation (straight-line method) $2,000 per month Fixed costElectricity cost $500 + $0.10 per ball Mixed costSupervisory salaries 4,000 units per shift $5,000 per mo. per supervisor Step-wise cost
Curvilinear costA salesperson’s commission is 7% for sales of up to $100,000, and 10% of sales for sales above $100,000
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000
Sales $
Sales Commissions - Curvilinear
Tota
l Cos
t
C 113
21-P1: Measuring Cost Behavior
14
Measuring Cost BehaviorThe objective is to classify all costs as either fixed
or variable. We will look at three methods:1. Scatter diagrams.2. The high-low method.3. Least–squares regression.
A scatter diagram is a plot of cost data points on a graph. It is almost always helpful to plot cost data to be able to observe a visual picture of the relationship
between cost and activity.
P 115
Scatter Diagrams
P 116
The High-Low MethodThe following relationships between units
produced and total cost are observed:
Using these two levels of activity, compute: the variable cost per unit. the total fixed cost. P 1
17
Units CostHigh activity level - October 67,500 29,000$ Low activity level - February 17,500 20,500 Change in activity 50,000 8,500$
The High-Low Method
Total cost = $17,525 + $0.17 per unit producedP 1
18
The objective of the cost analysis remains the
same: determination oftotal fixed cost and the
variable unit cost.
Least-Squares RegressionLeast-squares regression is usually covered in advanced cost accounting courses. It is
commonly used with spreadsheet programs or calculators.
P 119
Comparison of Cost Estimation Methods
P 120
NEED-TO-KNOW
Using the information below, use the high-low method to determine the cost equation(total fixed costs plus variable costs per unit).
Activity Level
Units Produced
Total Cost
Lowest 1,600 $9,800Highest 4,000 17,000
Variable Cost = $7,2002,400
$3 per unit produced
Fixed Costs (at high point) Total cost = Fixed costs + $3 per unit$17,000 = Fixed costs + ($3 x 4,000)$5,000 = Fixed costs
Fixed Costs (at low point) Total cost = Fixed costs + $3 per unit$9,800 = Fixed costs + ($3 x 1,600)$5,000 = Fixed costs
Cost at high point - Cost at low pointUnits at high point - Units at low point
($17,000 - $9,800)(4,000 - 1,600)
Total costs = $5,000 + $3 per unit
P 121
NEED-TO-KNOW
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500
Tota
l Cos
t
Units Produced
Total Cost
Slope = Variable Cost $3 per unity-intercept = Fixed Costs $5,000
(1,600 units, $9,800)
(4,000 units, $17,000)
(0 units, $5,000)
= $5,000 + $3 per unit
P 122
21-A1: Contribution Margin and Its Measures
23
Contribution Margin and Its Measures
A 124
21-P2: Computing the Break-Even Point
25
Using Break-Even Analysis
The break-even point (expressed in units of product or dollars of sales) is the unique sales level at which a company earns neither a profit nor incurs a loss.
P 226
Computing the Break-Even Point
P 227
P 2
Computing the Margin of Safety
28
NEED-TO-KNOW
A manufacturer predicts fixed costs of $400,000 for the next year. Its one product sells for $170 per unit,and it incurs variable costs of $150 per unit. The company predicts total sales of 25,000 units for the nextyear.1. Compute the contribution margin per unit.2. Compute the break-even point (in units).3. Compute the margin of safety (in dollars).
Contribution margin per unit, or unit contribution margin, is the amount by which a product’s unit selling price exceeds its total variable cost per unit.
Sales $170 per unitVariable costs 150 per unitContribution margin $ 20 per unit
$20 per unit
P 229
NEED-TO-KNOW
A manufacturer predicts fixed costs of $400,000 for the next year. Its one product sells for $170 per unit,and it incurs variable costs of $150 per unit. The company predicts total sales of 25,000 units for the nextyear.1. Compute the contribution margin per unit.2. Compute the break-even point (in units).3. Compute the margin of safety (in dollars).
Break-even point in units = Fixed costsContribution margin per unit
$400,000$20 per unit
20,000 units to break-even
Units per unit TotalSales 20,000 $170 $3,400,000Variable costs 20,000 $150 3,000,000Contribution margin $20 400,000Fixed costs 400,000Net income $0
$20 per unit20,000 units
P 230
NEED-TO-KNOW
A manufacturer predicts fixed costs of $400,000 for the next year. Its one product sells for $170 per unit,and it incurs variable costs of $150 per unit. The company predicts total sales of 25,000 units for the nextyear.1. Compute the contribution margin per unit.2. Compute the break-even point (in units).3. Compute the margin of safety (in dollars).
The excess of expected sales over the break-even sales level is called a company’s margin of safety
$20 per unit20,000 units
Units per unit TotalExpected sales 25,000 $170 $4,250,000Break-even sales 20,000 $170 3,400,000Margin of safety $850,000
$850,000
P 231
21-P3: Preparing a Cost-Volume-Profit Chart
32
Preparing a CVP Chart
P 333
Working with Changesin Estimates
P 334
21-C2: Applying Cost-Volume-Profit Analysis
35
Computing Income from Sales and Costs
C 236
Computing Salesfor a Target Income
C 237
Computing Salesfor a Target Income
C 238
Computing Salesfor a Target Income
C 239
NEED-TO-KNOWA manufacturer predicts fixed costs of $502,000 for the next year. Its one product sells for $180 per unit,and it incurs variable costs of $126 per unit. Its target income (pretax) is $200,000.1. Compute the contribution margin ratio.2. Compute the dollar sales needed to yield the target income.3. Compute the unit sales needed to yield the target income.
The contribution margin ratio is the percent of a unit’s selling price that exceeds total unit variable cost.
Contribution margin ratio = Contribution margin per unitSelling price per unit
$180 - $126 $54$180 $180
30%
30%
per unit RatioSales $180 100%Variable costs 126 70%Contribution margin $54 30%
C 240
NEED-TO-KNOW
Dollar sales to achieve target income = Fixed costs + Pretax IncomeContribution margin ratio
$502,000 + $200,000.30
$2,340,000
A manufacturer predicts fixed costs of $502,000 for the next year. Its one product sells for $180 per unit,and it incurs variable costs of $126 per unit. Its target income (pretax) is $200,000.1. Compute the contribution margin ratio.2. Compute the dollar sales needed to yield the target income.3. Compute the unit sales needed to yield the target income.
30%
per unit Ratio TotalSales $180 100% $2,340,000Variable costs $126 70% 1,638,000Contribution margin $54 30% 702,000Fixed costs 502,000Net income $200,000
$2,340,000
C 241
NEED-TO-KNOW
Break-even point in units = Fixed costsContribution margin per unit
A manufacturer predicts fixed costs of $502,000 for the next year. Its one product sells for $180 per unit,and it incurs variable costs of $126 per unit. Its target income (pretax) is $200,000.1. Compute the contribution margin ratio.2. Compute the dollar sales needed to yield the target income.3. Compute the unit sales needed to yield the target income.
30%$2,340,000
Units to yield target income = Fixed costs + target (pretax) incomeContribution margin per unit
$502,000 + $200,000 $702,000$180 - $126 $54
13,000 units
Units per unit TotalSales 13,000 $180 $2,340,000Variable costs 13,000 $126 1,638,000Contribution margin $54 702,000Fixed costs 502,000Net income $200,000
13,000 units (or $2,340,000 / $180)
C 242
Using Sensitivity Analysis
C 243
21-P4: Computing a Multiproduct Break-Even Point
44
Computing a MultiproductBreak-Even Point
The CVP formulas can be modified for use when a company sells more than one product. The unit contribution margin is replaced with the
contribution margin for a composite unit. A composite unit is composed of specific numbers
of each product in proportion to the product sales mix. Sales mix is the ratio of the volumes of the various
products.P 4
45
Computing a MultiproductBreak-Even Point
The resulting break-even formulafor composite unit sales is:
Break-even pointin composite units
Fixed costsContribution marginper composite unit
=
ContinueP 4
46
Haircuts Basic Ultra Budget
Selling Price 20.00$ 32.00$ 16.00$ Variable Cost 13.00 18.00 8.00 Unit Contribution 7.00$ 14.00$ 8.00$ Sales Mix Ratio 4 2 1
Hair-Today offers three cuts as shown below. Annual fixed costs are $192,000. Compute the break-even point in
composite units and in number of units for each haircut at the given sales mix.
Computing a MultiproductBreak-Even Point
P 447
Computing a MultiproductBreak-Even Point
P 4
Haircuts Basic Ultra Budget
Selling Price 20.00$ 32.00$ 16.00$ Sales Mix Ratio 4.00 2.00 1.00 Selling Price/cut 80.00$ 64.00$ 16.00$ Total Selling Price/Composite Unit 160.00$
48
Computing a MultiproductBreak-Even Point
P 4
Haircuts Basic Ultra Budget
Variable Costs 13.00$ 18.00$ 8.00$ Sales Mix Ratio 4.00 2.00 1.00 Selling Price/cut 52.00$ 36.00$ 8.00$ Total Variable Cost/Composite Unit 96.00$
49
Break-even pointin composite units
Fixed costsContribution marginper composite unit
=
Break-even pointin composite units
$192,000$64.00 per
composite unit=
Break-even pointin composite units
= 3,000 composite units
Computing a MultiproductBreak-Even Point
P 450
Sales CompositeProduct Mix Cuts HaircutsBasic 4 × 3,000 = 12,000Ultra 2 × 3,000 = 6,000Budget 1 × 3,000 = 3,000
Total 21,000
Computing a MultiproductBreak-Even Point
P 451
Multiproduct Break-EvenIncome Statement
P 452
NEED-TO-KNOWThe sales mix of a company’s two products, X and Y, is 2:1. Unit variable costs for both productsare $2, and unit selling prices are $5 for X and $4 for Y. The company has $640,000 of fixed costs.1. What is the contribution margin per composite unit?2. What is the break-even point in composite units?3. How many units of X and how many units of Y will be sold at the break-even point?
Selling price per composite unit Units per unit TotalProduct X 2 $5 $10Product Y 1 $4 4Total 3 $14
Variable cost per composite unit Units per unit TotalProduct X 2 $2 $4Product Y 1 $2 2Total 3 $6
Contribution margin per composite unit ($14 - $6) $8
$8
P 453
NEED-TO-KNOWThe sales mix of a company’s two products, X and Y, is 2:1. Unit variable costs for both productsare $2, and unit selling prices are $5 for X and $4 for Y. The company has $640,000 of fixed costs.1. What is the contribution margin per composite unit?2. What is the break-even point in composite units?3. How many units of X and how many units of Y will be sold at the break-even point?
$8
Break-even point in composite units = Fixed costsContribution margin per composite unit
$640,000 $8 per composite unit
80,000 composite units to break even
80,000 composite units
P 454
NEED-TO-KNOWThe sales mix of a company’s two products, X and Y, is 2:1. Unit variable costs for both productsare $2, and unit selling prices are $5 for X and $4 for Y. The company has $640,000 of fixed costs.1. What is the contribution margin per composite unit?2. What is the break-even point in composite units?3. How many units of X and how many units of Y will be sold at the break-even point?
$880,000 composite units
Units of each product at break-even TotalProduct X 80,000 composite units x 2 units per composite unit 160,000Product Y 80,000 composite units x 1 unit per composite unit 80,000
240,000
Total Sales Units per unit TotalProduct X 160,000 $5 $800,000Product Y 80,000 $4 320,000Total 240,000 $1,120,000
Total Variable Costs Units per unit TotalProduct X 160,000 $2 $320,000Product Y 80,000 $2 160,000Total 240,000 $480,000
Composite units per unit TotalSales $14 $1,120,000Variable costs $6 480,000Contribution margin $8 640,000Fixed costs 640,000Net income $0
80,00080,000
P 455
Global View
Over 90 percent of German companies surveyed report their cost accounting systems focus on contribution margin. This focus helps
German companies like Volkswagen control costs and plan their production levels.
56
21-A2: Degree of Operating Leverage
57
Degree of Operating Leverage
A measure of the extent to which fixed costs are being used in an organization.
A measure of how a percentage change in sales will affect profits.
A 258
Rydell Company
Sales (1,200 units) 120,000$ Less: variable expenses 84,000 Contribution margin 36,000 Less: fixed expenses 24,000 Pretax income 12,000$
If Rydell increases sales by 10 percent, what will the percentage increase in income be?
Operating Leverage
A 259
Appendix 21A: Using Excel toEstimate Least-Squares Regression
60
End of Chapter 21
61