6 slide 1 cost-volume-profit analysis chapter 6 main concepts: 1. basics of cvp analysis 2....
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Slide 1
Cost-Volume-Profit Cost-Volume-Profit AnalysisAnalysis
Chapter
6
Chapter
6Main Concepts:
1. Basics of CVP Analysis
2. Contribution Approach 3. Break-Even Analysis a. Equation Method b. Contribution Margin Method
4. The Concept of Sales Mix
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Slide 2
Assumptions of CVP AnalysisAssumptions of CVP Analysis
Selling price is constant throughout the entire relevant range.
Costs are linear throughout the entire relevant range.
In multi-product companies, the sales mix is constant.
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Slide 3
The Basics of Cost-Volume-Profit (CVP) AnalysisThe Basics of Cost-Volume-Profit (CVP) Analysis
Contribution Margin (CM) is the amount
remaining from sales revenue after variable cost have been deducted.
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The Basics of Cost-Volume-Profit (CVP) AnalysisThe Basics of Cost-Volume-Profit (CVP) Analysis
CM goes to cover fixed costs.
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The Basics of Cost-Volume-Profit (CVP) AnalysisThe Basics of Cost-Volume-Profit (CVP) Analysis
After covering fixed costs, anyremaining CM contributes to income.
Sales (500 bikes) 250,000$Less: variable expenses 150,000 Contribution margin 100,000 Less: fixed expenses 80,000 Net income 20,000$
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The Contribution ApproachThe Contribution Approach
Consider the following information developed by the accountant at Sakuraba Co.:
Total Per Unit PercentSales (500 bikes) 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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The Contribution ApproachThe Contribution Approach
For each additional unit Sakuraba sells, $200 more in contribution margin will help to cover
fixed costs and profit.
Total Per Unit PercentSales (500 bikes) 250,000$ 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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The Contribution ApproachThe Contribution Approach
Each month Sakuraba must generate at least $80,000 in CM to break even for the month.
Total Per Unit PercentSales (500 bikes) 250,000$ 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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The Contribution ApproachThe Contribution Approach
If Sakuraba sells 400 units 400 units in a month, it will be operating at the break-even pointbreak-even point.
Total Per Unit PercentSales (400 bikes) 200,000$ 500$ 100%Less: variable expenses 120,000 300 60%Contribution margin 80,000$ 200$ 40%
Less: fixed expenses 80,000 Net income -$
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The Contribution ApproachThe Contribution Approach
If Sakuraba sells one additional unit (401 bikes), net income will increase by $200.
Total Per Unit PercentSales (401 bikes) 200,500$ 500$ 100%Less: variable expenses 120,300 300 60%Contribution margin 80,200$ 200$ 40%
Less: fixed expenses 80,000 Net income 200$
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Slide 11
The Contribution ApproachThe Contribution ApproachThe break-even point can be defined either
as:The point where total sales revenue equals total
costs (variable and fixed).The point where total contribution margin equals
total fixed costs.
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Slide 12
Contribution Margin RatioContribution Margin Ratio
The contribution margin ratio ratio is defined as follows:
Contribution margin Contribution margin SalesSales = CM Ratio= CM Ratio
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Contribution Margin RatioContribution Margin RatioThe contribution margin ratio ratio is defined as follows:
For Sakuraba, the contribution margin ratio is:
Contribution margin Contribution margin SalesSales = CM Ratio= CM Ratio
$200 $200 $500$500 = 40%= 40%
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Slide 14
Contribution Margin RatioContribution Margin Ratio
At Sakuraba, each $1.00 increase in sales revenue results in a total contribution margin
increase of 40¢.
If sales increase by $50,000, what will be the If sales increase by $50,000, what will be the increase in total contribution margin? increase in total contribution margin?
$20,000 = $.40 x $50,000
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Contribution Margin RatioContribution Margin Ratio
400 Bikes 500 BikesSales 200,000$ 250,000$Less: variable expenses 120,000 150,000 Contribution margin 80,000 100,000 Less: fixed expenses 80,000 80,000 Net income -$ 20,000$
A $50,000 increase insales revenue
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Slide 16
Contribution Margin RatioContribution Margin Ratio
400 Bikes 500 BikesSales 200,000$ 250,000$Less: variable expenses 120,000 150,000 Contribution margin 80,000 100,000 Less: fixed expenses 80,000 80,000 Net income -$ 20,000$
A $50,000 increase in sales revenueresults in a $20,000 increase in CM.
($50,000 × 40% = $20,000)
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Slide 17
Break-Even AnalysisBreak-Even AnalysisThe break-even point is the point where
Total sales revenue = total costs ororTotal contribution margin = total fixed costs.
Break-even analysis can be approached in two ways:Equation methodContribution margin method.
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Slide 18
Equation MethodEquation Method
Sales – (Variable costs + Fixed costs) = ProfitsSales – (Variable costs + Fixed costs) = Profits
Sales = Variable costs + Fixed costs + ProfitsSales = Variable costs + Fixed costs + Profits
At the break-even point At the break-even point profits equal zero.profits equal zero.
OR
S/uX = VC/uX + Fixed costs + ProfitsS/uX = VC/uX + Fixed costs + Profits
OR
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Equation MethodEquation Method
Here is the information from the Sakuraba Co.:
Total Per Unit PercentSales (500 bikes) 250,000$ 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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Slide 20
Equation MethodEquation Method We calculate the break-even point as follows:
S/uX = VC/uX + Fixed costs + ProfitsS/uX = VC/uX + Fixed costs + Profits
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Equation MethodEquation Method We calculate the break-even point as follows:
S/uX = VC/uX + Fixed costs + ProfitsS/uX = VC/uX + Fixed costs + Profits
$500X = $300X + $80,000 + 0$500X = $300X + $80,000 + 0
Where:Where:X X = Number of bikes sold= Number of bikes sold$500 $500 = Unit sales price= Unit sales price$300 $300 = Unit variable cost= Unit variable cost$80,000 $80,000 = Total fixed costs= Total fixed costs
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Slide 22
Equation MethodEquation Method We calculate the break-even point as follows:
S/uX = VC/uX + Fixed costs + ProfitsS/uX = VC/uX + Fixed costs + Profits
$500X = $300X + $80,000 + 0$500X = $300X + $80,000 + 0
$200X = $80,000$200X = $80,000
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Slide 23
Equation MethodEquation Method We calculate the break-even point as follows:
S/uX = VC/uX + Fixed costs + ProfitsS/uX = VC/uX + Fixed costs + Profits
$500X = $300X + $80,000 + 0$500X = $300X + $80,000 + 0
$200X = $80,000$200X = $80,000
X = 400 unitsX = 400 units
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Contribution Margin MethodContribution Margin Method
The contribution margin method is a variation of the equation method.
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Slide 25
Contribution Margin MethodContribution Margin Method
The contribution margin method is a variation of the equation method.
Fixed costs Fixed costs Unit contribution margin Unit contribution margin ==
Break-even pointBreak-even pointin units soldin units sold
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Slide 26
Contribution Margin MethodContribution Margin Method
The contribution margin method is a variation of the equation method.
Fixed costs Fixed costs Unit contribution margin Unit contribution margin ==
Break-even pointBreak-even pointin units soldin units sold
$80,000 $80,000 $200$200 = 400 bikes= 400 bikes
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Contribution Margin MethodContribution Margin Method
We can calculate the break-even point in total sales dollars as follows:
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Contribution Margin MethodContribution Margin Method
We can calculate the break-even point in total sales dollars as follows:
Fixed costs Fixed costs CM ratioCM ratio ==
Break-even point inBreak-even point intotal sales dollarstotal sales dollars
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Slide 29
Contribution Margin MethodContribution Margin Method
We can calculate the break-even point in total sales dollars as follows:
Fixed costs Fixed costs CM ratioCM ratio ==
Break-even point inBreak-even point intotal sales dollarstotal sales dollars
$80,000 $80,000 40%40% = $200,000 sales= $200,000 sales
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Slide 30
CVP Relationships in Graphic FormCVP Relationships in Graphic Form Viewing CVP relationships in a graph gives managers a
perspective that can be obtained in no other way. Consider the following information for Sakuraba Co.:
Income 300 units
Income 400 units
Income 500 units
Sales 150,000$ 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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Slide 31
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
- 100
200
300
400
500
600
700
800
CVP GraphCVP Graph
Fixed costs
Units
Dol
lars
$80,000
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Slide 32
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
- 100
200
300
400
500
600
700
800
CVP GraphCVP Graph
Units
Dol
lars
Variable costs
$300/unit X$90,000/300 units
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-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
- 100
200
300
400
500
600
700
800
CVP GraphCVP Graph
Total costs
Units
Dol
lars
$80,000 + $300X
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Slide 34
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
- 100
200
300
400
500
600
700
800
CVP GraphCVP Graph
Total Sales
Units
Dol
lars
$500/unit X$150,000/300 units
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Slide 35
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
- 100
200
300
400
500
600
700
800
CVP GraphCVP Graph
Break-even point
Units
Dol
lars
Y = a + bX
Price X
a + bX = Price X
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Slide 36
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
- 100
200
300
400
500
600
700
800
CVP GraphCVP Graph
$80,000 + $300/unit (400 units) = $500/unit (400 units)
= $200,000
Units
Dol
lars
Y = a + bX
Price X
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Slide 37
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
- 100
200
300
400
500
600
700
800
CVP GraphCVP Graph
Break-even point400 units or
$200,000 sales.
Units
Dol
lars
Y = a + bX
Price X
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Slide 38
Let’s Test Your Understanding!Let’s Test Your Understanding!
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Slide 39
Basics of CVP AnalysisBasics of CVP Analysis
1. What does CVP stand for?
2. Compare the Traditional and Contribution Income Statement.
Cost-Volume-Profit
Sales Sales-CGS -VarExp GM CM-S&A -Fixed Exp NI NI
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Break-Even AnalysisBreak-Even Analysis
1. The Contribution Ratio = ________________________________.
2. At Break-Even, fixed costs = ________________________.
3. At Break-Even, sales = ________________________________.
4. Units at Break-Even = ________________________.
5. Sales at Break-Even = ________________________.
Total CM/Sales or CM per unit/Price
Sales - Var Exp. = CM
Total Exp = Fixed Exp. + Var. Exp
Fixed Exp./CM per unit
Fixed Exp./CM%
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Slide 41
Exercise 1Exercise 1Pringle Company manufactures and sells a single product. The
company’s sales and costs for a recent month follow:
Total Per Unit
Sales $600,000 $40
Less variable expenses $420,000 $28
Contribution margin $180,000 $12
Less fixed expenses $150,000
Net income $30,000
1. What is the monthly break-even point in units sold and in sales dollars?2. Without resorting to computations, what is the total contribution margin at the break-even point.3. What is the company’s CM ratio? If monthly sales increase by $80,000 and there is no change in fixed costs, by how much would you expect monthly net income to increase.
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Exercises 1Exercises 11. What is the monthly break-even point in units sold and in sales dollars?
S/uX = VC/uX + Fixed costs + Profits$40X = $28X + $150,000 + $0$12X = $150,000 X = $150,000/$12 X = 12,500 units
12,500 units x $40/u = $500,000
2. Without resorting to computations, what is the total contribution margin at the break-even point.
The fixed cost of $150,000, which would yield a profit of zero.
3a. Determine the CM ratio?
CM ratio = CM/Sales = $180,000/$600,000 = 30%3b. If monthly sales increase by $80,000, by how much would you expect monthly net
income to increase
CM ratio X Sales = 30% X $80,000 = $24,000
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Slide 43
Exercise 2Exercise 2Super Sales Company is the exclusive distribution for a new
product. The product sells for $60 per unit and has a CM ratio of 40%. The company’s fixed costs are $360,000 per year.
1. What are the contribution margin & variable costs per unit?
2. Using the equation method: a. What is the break-even point in units and in sales dollars?
CM per unit = $60 x 40% = $24Variable exp. per unit : $60 x (100% - 40%) = $36
S/uX = VC/uX + Fixed costs + Profits $60X = $36X + $360,000 + $0 X = 15,000 units
orFixed costs/CM per unit = $360,000/$24 per unit = 15,000 units
Sales@BE = PriceX = $60/unit (15,000 units) = $900,000or
Sales@BE = Fixed costs/CM ratio = $360,000/40%= $900,000
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Slide 44
Target Net Profit AnalysisTarget Net Profit Analysis
Suppose Sakuraba 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.
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The CVP EquationThe CVP EquationS/uX = VC/uX + Fixed costs + ProfitsS/uX = VC/uX + Fixed costs + Profits
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The CVP EquationThe CVP EquationS/uX = VC/uX + Fixed costs + ProfitsS/uX = VC/uX + Fixed costs + Profits
$500X = $300X + $80,000 + $100,000
Where:
X = Number of bikes sold$500 = Unit sales price$300 = Unit variable cost$80,000 = Total fixed costs$100,000 = Target net income
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Slide 47
The CVP EquationThe CVP EquationS/uX = VC/uX + Fixed costs + ProfitsS/uX = VC/uX + Fixed costs + Profits
$500X = $300X + $80,000 + $100,000
$200X = $180,000
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Slide 48
The CVP EquationThe CVP EquationS/uX = VC/uX + Fixed costs + ProfitsS/uX = VC/uX + Fixed costs + Profits
$500X = $300X + $80,000 + $100,000
$200X = $180,000
X = 900 bikes
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Slide 49
The Contribution Margin ApproachThe 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.
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Slide 50
The Contribution Margin ApproachThe 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.
Fixed costs + Target profit Unit contribution margin
=Units sold to attain
the target profit
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Slide 51
The Contribution Margin ApproachThe 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.
Fixed costs + Target profit Unit contribution margin
=Units sold to attain
the target profit
$80,000 + $100,000 $200
= 900 bikes
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Slide 52
The Concept of Sales MixThe Concept of Sales Mix
For a company with more than one product, sales mix is the relative combination in which a company’s products are sold.
Different products have different selling prices, cost structures, and contribution margins.
Let’s assume Sakuraba sells bikes and carts and see how we deal with break-even analysis.
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Slide 53
The Concept of Sales MixThe Concept of Sales Mix
Sakuraba provides us with the following information:
Bikes CartsPrice $15.00 $22.50VC/u $8.00 $9.50CM/u $7.00 $13.00
Expected unit sales 70,000 140,000Sales Mix 1/3 2/3
Fixed Costs $1,320,000.00
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Slide 54
The Concept of Sales MixThe Concept of Sales Mix
Find breakeven point in total units.
$1,320,000____$1,320,000____ =120,000 units=120,000 units (1/3)$7 + (2/3)$13(1/3)$7 + (2/3)$13
Bikes CartsPrice $15.00 $22.50VC/u $8.00 $9.50CM/u $7.00 $13.00
Expected unit sales 70,000 140,000Sales Mix 1/3 2/3
Fixed Costs $1,320,000.00
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Slide 55
The Concept of Sales MixThe Concept of Sales Mix
Separate total units by product mix.
Bikes: 120,000 x 1/3 = 40,000 unitsBikes: 120,000 x 1/3 = 40,000 unitsCarts: 120,000 x 2/3 = Carts: 120,000 x 2/3 = 80,000 units80,000 units
TotalTotal 120,000 units 120,000 units
Bikes CartsPrice $15.00 $22.50VC/u $8.00 $9.50CM/u $7.00 $13.00
Expected unit sales 70,000 140,000Sales Mix 1/3 2/3
Fixed Costs $1,320,000.00
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Slide 56
The Margin of Safety or Safety MarginThe Margin of Safety or Safety Margin
Excess of budgeted (or actual) sales over the break-even volume of sales
Amount by which sales can drop before losses begin to be incurred
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Slide 57
The Margin of SafetyThe Margin of Safety
Excess of budgeted (or actual) sales over the break-even volume of sales.
Amount by which sales can drop before losses begin to be incurred.
Total sales - Break-even sales = Margin of safety
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Slide 58
The Margin of SafetyThe Margin of Safety
Excess of budgeted (or actual) sales over the break-even volume of sales.
Amount by which sales can drop before losses begin to be incurred.
Let’s calculate the margin of safety for Sakuraba.Total sales - Break-even sales = Margin of safety
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Slide 59
The Margin of SafetyThe Margin of Safety
Sakuraba has a break-even point of $200,000. If actual sales are $250,000, the margin of
safety is $50,000 or 100 bikes.Break-even
sales 400 units
Actual sales 500 units
Sales 200,000$ 250,000$ Less: variable expenses 120,000 150,000 Contribution margin 80,000 100,000 Less: fixed expenses 80,000 80,000 Net income -$ 20,000$
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Slide 60
The Margin of SafetyThe Margin of Safety
The margin of safety can be expressed as 20 20 percent percent of sales . . . ($50,000 ÷ $250,000)
Break-even sales
400 unitsActual sales
500 unitsSales 200,000$ 250,000$ Less: variable expenses 120,000 150,000 Contribution margin 80,000 100,000 Less: fixed expenses 80,000 80,000 Net income -$ 20,000$