management accounting - hansen mowen ch16
TRANSCRIPT
16 -1
Cost-Volume-Cost-Volume-Profit Profit
Analysis: A Analysis: A Managerial Managerial
Planning ToolPlanning Tool
CHAPTERCHAPTER
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1. Determine the number of units that must be sold to break even or earn a target profit.
2. Calculate the amount of revenue required to break even or to earn a targeted profit.
3. Apply cost-volume-profit analysis in a multiple-product setting.
4. Prepare a profit-volume graph and a cost-volume-profit graph, and explain the meaning of each.
ObjectivesObjectivesObjectivesObjectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
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5. Explain the impact of risk, uncertainty, and changing variables on cost-volume-profit analysis.
6. Discuss the impact of activity-based costing on cost-volume-profit analysis
ObjectivesObjectivesObjectivesObjectives
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Using Operating Income in CVP AnalysisUsing Operating Income in CVP AnalysisUsing Operating Income in CVP AnalysisUsing Operating Income in CVP Analysis
Narrative Equation
Sales revenue
– Variable expenses
– Fixed expenses
= Operating income
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Using Operating Income in CVP AnalysisUsing Operating Income in CVP AnalysisUsing Operating Income in CVP AnalysisUsing Operating Income in CVP Analysis
Sales (1,000 units @ $400)
$400,000
Less: Variable expenses
325,000
Contribution margin
$ 75,000
Less: Fixed expenses
45,000
Operating income
$ 30,000
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Using Operating Income in CVP AnalysisUsing Operating Income in CVP AnalysisUsing Operating Income in CVP AnalysisUsing Operating Income in CVP Analysis
$400,000 ÷ 1,000
$325,000 ÷ 1,000
0 = ($400 x Units) – ($325 x Units) – $45,000
Break Even in Units
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Using Operating Income in CVP AnalysisUsing Operating Income in CVP AnalysisUsing Operating Income in CVP AnalysisUsing Operating Income in CVP Analysis
Break Even in Units
0 = ($400 x Units) – ($325 x Units) – $45,000
0 = ($75 x Units) – $45,000$75 x Units = $45,000
Units = 600Proof
Sales (600 units) $240,000Less: Variable exp. 195,000Contribution margin $ 45,000Less: Fixed expenses 45,000 Operating income $ 0
ProofSales (600 units) $240,000Less: Variable exp. 195,000Contribution margin $ 45,000Less: Fixed expenses 45,000 Operating income $ 0
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Achieving a Targeted ProfitAchieving a Targeted ProfitAchieving a Targeted ProfitAchieving a Targeted Profit
Desired Operating Income of $60,000
$60,000 = ($400 x Units) – ($325 x Units) – $45,000
$105,000 = $75 x Units Units = 1,400
ProofSales (1,400 units) $560,000Less: Variable exp. 455,000Contribution margin $105,000Less: Fixed expenses 45,000 Operating income $ 60,000
ProofSales (1,400 units) $560,000Less: Variable exp. 455,000Contribution margin $105,000Less: Fixed expenses 45,000 Operating income $ 60,000
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Desired Operating Income of 15% of Sales Revenue
0.15($400)(Units) = ($400 x Units) – ($325 x Units) – $45,000
$60 x Units = ($400 x Units) – $325 x Units) – $45,000
Units = 3,000
Targeted Income as a Percent of Sales RevenueTargeted Income as a Percent of Sales Revenue
$60 x Units = ($75 x Units) – $45,000
$15 x Units = $45,000
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Net income = Operating income – Income taxes
= Operating income – (Tax rate x Operating income)
After-Tax Profit TargetsAfter-Tax Profit TargetsAfter-Tax Profit TargetsAfter-Tax Profit Targets
= Operating income (1 – Tax rate)
Or
Operating income =Net income
(1 – Tax rate)
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$48,750 = Operating income – (0.35 x Operating income)
$48,750 = 0.65 (Operating income)
After-Tax Profit TargetsAfter-Tax Profit TargetsAfter-Tax Profit TargetsAfter-Tax Profit Targets
$75,000 = Operating income
If the tax rate is 35 percent and a firm wants to achieve a profit of $48,750. How much is
the necessary operating income?
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After-Tax Profit TargetsAfter-Tax Profit TargetsAfter-Tax Profit TargetsAfter-Tax Profit Targets
How many units would have to be sold to earn an operating income of $48,750?
Units = ($45,000 + $75,000)/$75
Units = $120,000/$75
Units = 1,600Proof
Sales (1,600 units) $640,000Less: Variable exp. 520,000Contribution margin $120,000Less: Fixed expenses 45,000Operating income $ 75,000Less: Income tax (35%) 26,250 Net income $ 48,750
ProofSales (1,600 units) $640,000Less: Variable exp. 520,000Contribution margin $120,000Less: Fixed expenses 45,000Operating income $ 75,000Less: Income tax (35%) 26,250 Net income $ 48,750
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Break-Even Point in Sales DollarsBreak-Even Point in Sales DollarsBreak-Even Point in Sales DollarsBreak-Even Point in Sales Dollars
First, the contribution margin ratio must be calculated.
First, the contribution margin ratio must be calculated.
Sales $400,000 100.00%Less: Variable expenses 325,000 81.25%Contribution margin $ 75,000 18.75%Less: Fixed exp. 45,000Operating income $ 30,000
Sales $400,000 100.00%Less: Variable expenses 325,000 81.25%Contribution margin $ 75,000 18.75%Less: Fixed exp. 45,000Operating income $ 30,000
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Break-Even Point in Sales DollarsBreak-Even Point in Sales DollarsBreak-Even Point in Sales DollarsBreak-Even Point in Sales Dollars
Given a contribution margin ratio of 18.75%, how much sales revenue is required to break even?
Operating income = Sales – Variable costs – Fixed costs
$0 = Sales – (Variable costs ratio x Sales) – $45,000
Sales = $240,000
$0 = Sales (1 – 0.8125) – $45,000Sales (0.1875) = $45,000
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Relationships Among Contribution Margin, Fixed Cost, and Profit
Relationships Among Contribution Margin, Fixed Cost, and Profit
Contribution MarginContribution Margin
Total Variable CostTotal Variable Cost
Revenue
Fixed CostFixed Cost
Fixed Cost = Contribution Margin
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Relationships Among Contribution Margin, Fixed Cost, and Profit
Relationships Among Contribution Margin, Fixed Cost, and Profit
Contribution MarginContribution Margin
Total Variable CostTotal Variable Cost
Revenue
Fixed CostFixed Cost
Fixed Cost < Contribution Margin
ProfitProfit
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Relationships Among Contribution Margin, Fixed Cost, and Profit
Relationships Among Contribution Margin, Fixed Cost, and Profit
Contribution MarginContribution Margin
Total Variable CostTotal Variable Cost
Revenue
Fixed CostFixed Cost
Fixed Cost > Contribution Margin
LossLoss
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Profit Targets and Sales RevenueProfit Targets and Sales Revenue
How much sales revenue must a firm generate to earn a before-tax profit of $60,000. Recall that fixed costs total $45,000 and the contribution margin ratio is .1875.
Sales = ($45,000 + $60,000)/0.1875
= $105,000/0.1875
= $560,000
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Multiple-Product AnalysisMultiple-Product AnalysisMultiple-Product AnalysisMultiple-Product Analysis
Mulching Riding Mower Mower Total
Sales $480,000 $640,000 $1,120,000Less: Variable expenses 390,000 480,000 870,000Contribution margin $ 90,000 $160,000 $ 250,000Less: Direct fixed expenses 30,000 40,000 70,000Product margin $ 60,000 $120,000 $ 180,000Less: Common fixed expenses 26,250 Operating income $ 153,750
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Income Statement: B/E SolutionIncome Statement: B/E SolutionIncome Statement: B/E SolutionIncome Statement: B/E Solution
Mulching RidingMulching Riding Mower Mower TotalMower Mower Total
Sales $184,800 $246,400 $431,200Less: Variable expenses 150,150 184,800 334,950Contribution margin $ 34,650 $ 61,600 $ 96,250Less: Direct fixed expenses 30,000 40,000 70,000Segment margin $ 4,650 $ 23,600 $ 26,250Less: Common fixed expenses 26,250 Operating income $ 0
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The profit-volume graph portrays the relationship between profits
and sales volume.
The profit-volume graph portrays the relationship between profits
and sales volume.
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Example
The Tyson Company produces a single product with the following cost and price data:
Total fixed costs $100Variable costs per unit 5Selling price per unit 10
Total fixed costs $100Variable costs per unit 5Selling price per unit 10
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Profit-Volume Graph
Profit or Loss
Loss
(40, $100)I = $5X - $100
Break-Even Point(20, $0)
$100—
80—
60—
40—
20—
0—
- 20—
- 40—
-60—
-80—
-100—
5 10 15 20 25 30 35 40 45 50 | | | | | | | | | |
Units Sold
(0, -$100)
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The cost-volume-profit graph depicts the relationship among
costs, volume, and profits.
The cost-volume-profit graph depicts the relationship among
costs, volume, and profits.
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Cost-Volume-Profit Graph
Revenue
Units Sold
$500 --
300 --
301 --
302 --
303 --
250 --
200 --
150 --
100 --
50 --
0 -- 5 10 15 20 25 30 35 40 45 50 55 60 | | | | | | | | | | | |
Total Revenue
Total Cost
Profit ($100)
Profit ($100)
LossLoss
Break-Even Point (20, $200)
Fixed Expenses ($100)
Variable Expenses ($5 per unit)
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Assumptions of C-V-P AnalysisAssumptions of C-V-P AnalysisAssumptions of C-V-P AnalysisAssumptions of C-V-P Analysis
1. The analysis assumes a linear revenue function and a linear cost function.
2. The analysis assumes that price, total fixed costs, and unit variable costs can be accurately identified and remain constant over the relevant range.
3. The analysis assumes that what is produced is sold.
4. For multiple-product analysis, the sales mix is assumed to be known.
5. The selling price and costs are assumed to be known with certainty.
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$
Units
Total Cost
Total Revenue
Relevant Range
Relevant Range
16 -28 Alternative 1: If advertising expenditures increase by $8,000, sales will increase from 1,600 units to 1,725 units.
BEFORE THEBEFORE THE WITH THEWITH THEINCREASEDINCREASED INCREASEDINCREASED
ADVERTISINGADVERTISING ADVERTISINGADVERTISING
Units sold 1,600 1,725Unit contribution margin x $75 x $75Total contribution margin $120,000 $129,375Less: Fixed expenses 45,000 53,000 Profit $ 75,000 $ 76,375
DIFFERENCE IN PROFITDIFFERENCE IN PROFIT
Change in sales volume 125Unit contribution margin x $75Change in contribution margin $9,375Less: Change in fixed expenses 8,000 Increase in profits $1,375
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BEFORE THEBEFORE THE WITH THEWITH THEPROPOSED PROPOSED
PROPOSEDPROPOSEDCHANGESCHANGESCHANGESCHANGESUnits sold 1,600 1,900
Unit contribution margin x $75 x $50Total contribution margin $120,000 $95,000Less: Fixed expenses 45,000 45,000 Profit $ 75,000 $50,000
Alternative 2: A price decrease from $400 to $375 per lawn mower will increase sales from 1,600 units to 1,900 units.
DIFFERENCE IN PROFITDIFFERENCE IN PROFIT
Change in contribution margin $ -25,000Less: Change in fixed expenses -------- Decrease in profits $ -25,000
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BEFORE THEBEFORE THE WITH THEWITH THEPROPOSED PROPOSED
PROPOSEDPROPOSEDCHANGESCHANGES
CHANGESCHANGESUnits sold 1,600 2,600Unit contribution margin x $75 x $50Total contribution margin $120,000 $130,000Less: Fixed expenses 45,000 53,000 Profit $ 75,000 $ 77,000
Alternative 3: Decreasing price to $375and increasing advertising expenditures by $8,000 will increase sales from 1,600 units to 2,600 units.
DIFFERENCE IN PROFITDIFFERENCE IN PROFIT
Change in contribution margin $10,000Less: Change in fixed expenses 8,000 Increase in profit $ 2,000
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Margin of SafetyMargin of SafetyMargin of SafetyMargin of Safety
Assume that a company has the following projected income statement:
Sales $100,000Less: Variable expenses 60,000Contribution margin $ 40,000Less: Fixed expenses 30,000Income before taxes $ 10,000
Break-even point in dollars (R):
R = $30,000 ÷ .4 = $75,000Safety margin = $100,000 - $75,000 = $25,000
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Degree of Operating Leverage (DOL)
DOL = $40,000/$10,000 = 4.0
Now suppose that sales are 25% higher than projected. What is the percentage change in profits?
Percentage change in profits = DOL x percentage change in sales
Percentage change in profits = 4.0 x 25% = 100%
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Proof:
Sales $125,000Less: Variable expenses 75,000Contribution margin $ 50,000Less: Fixed expenses 30,000Income before taxes $ 20,000
Degree of Operating Leverage (DOL)
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CVP and ABCCVP and ABC
Assume the following:
Sales price per unit $15
Variable cost 5
Fixed costs (conventional)$180,000
Fixed costs (ABC) $100,000 with $80,000 subject to ABC analysis
Other Data:
UnitLevel of
VariableActivity
Activity Driver CostsDriver
Setups $500100
Inspections 50600
Sales price per unit $15
Variable cost 5
Fixed costs (conventional)$180,000
Fixed costs (ABC) $100,000 with $80,000 subject to ABC analysis
Other Data:
UnitLevel of
VariableActivity
Activity Driver CostsDriver
Setups $500100
Inspections 50600
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BEP = $180,000 ÷ $10
= 18,000 units
CVP and ABCCVP and ABC
1. What is the BEP under conventional analysis?
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CVP and ABCCVP and ABC
2. What is the BEP under ABC analysis?
BEP = [$100,000 + (100 x $500) + (600 x $50)]/$10
= 18,000 units
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BEP = [$100,000 + (100 x $450) + (600 x $40)]/$10
= 16,900 units
3. What is the BEP if setup cost could be reduced to $450 and inspection cost reduced to $40?
CVP and ABCCVP and ABC
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The EndThe EndThe EndThe End
Chapter SixteenChapter Sixteen
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