67710419 management accounting hansen mowen ch16
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Cost-Volume-
Profit
Analysis: A
Managerial
Planning Tool
CHAPTER
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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.
Objectives
After studying this
chapter, you should
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
Objectives
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Using Operating Income in CVP Analysis
Narrative Equation
Sales revenue
– Variable expenses
– Fixed expenses
= Operating income
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Using 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 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 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) $240,000
Less: Variable exp. 195,000
Contribution margin $ 45,000
Less: Fixed expenses 45,000
Operating income $ 0
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Achieving a Targeted Profit
Desired Operating Income of $60,000
$60,000 = ($400 x Units) – ($325 x Units) – $45,000
$105,000 = $75 x UnitsUnits = 1,400
Proof
Sales (1,400 units) $560,000
Less: Variable exp. 455,000
Contribution margin $105,000
Less: 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 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 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 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 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) $640,000
Less: Variable exp. 520,000
Contribution margin $120,000
Less: Fixed expenses 45,000
Operating income $ 75,000
Less: Income tax (35%) 26,250
Net income $ 48,750
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Break-Even Point in Sales Dollars
First, the contribution margin
ratio must be calculated.
Sales $400,000 100.00%
Less: Variable
expenses 325,000 81.25%
Contributionmargin $ 75,000 18.75%
Less: Fixed exp. 45,000
Operating income $ 30,000
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Break-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) – $45,000
Sales (0.1875) = $45,000
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Relationships Among Contribution
Margin, Fixed Cost, and Profit
Contribution Margin
Total Variable Cost
Revenue
Fixed Cost
Fixed Cost = Contribution Margin
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Relationships Among Contribution
Margin, Fixed Cost, and Profit
Contribution Margin
Total Variable Cost
Revenue
Fixed Cost
Fixed Cost < Contribution Margin
Profit
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Relationships Among Contribution
Margin, Fixed Cost, and Profit
Contribution Margin
Total Variable Cost
Revenue
Fixed Cost
Fixed Cost > Contribution Margin
Loss
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Multiple-Product Analysis
Mulching Riding
Mower Mower Total
Sales $480,000 $640,000 $1,120,000
Less: Variable expenses 390,000 480,000 870,000Contribution margin $ 90,000 $160,000 $ 250,000
Less: Direct fixed expenses 30,000 40,000 70,000
Product margin $ 60,000 $120,000 $ 180,000
Less: Common fixed expenses 26,250
Operating income $ 153,750
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Income Statement: B/E Solution
Mulching Riding
Mower Mower Total
Sales $184,800 $246,400 $431,200
Less: Variable expenses 150,150 184,800 334,950Contribution margin $ 34,650 $ 61,600 $ 96,250
Less: Direct fixed expenses 30,000 40,000 70,000
Segment margin $ 4,650 $ 23,600 $ 26,250
Less: Common fixed expenses 26,250Operating income $ 0
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The profit-volume graph portraysthe 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 5
Selling price per unit 10
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Prof it-Volume Graph
Profitor 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 graphdepicts the relationship among
costs, volume, and profits.
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Cost-Volume-Profi t Graph
Revenue
Units Sold
$500 --
450 --
400 --
350 --
300 --
250 --
200 --
150 --
100 --
50 --
0 --5 10 15 20 25 30 35 40 45 50 55 60| | | | | | | | | | | |
Total Revenue
Total Cost
Loss
Break-Even Point
(20, $200)
Fixed Expenses ($100)
Variable Expenses
($5 per unit)
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Assumptions of C-V-P Analysis
1. The analysis assumes a linear revenue function and a
linear cost function.
2. The analysis assumes that price, total fixed costs, and
unit variable costs can be accurately identified andremain constant over the relevant range.
3. The analysis assumes that what is produced is sold.
4. For multiple-product analysis, the sales mix is assumed
to be known.
5. The selling price and costs are assumed to be known
with certainty.
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$
Units
Total Cost
Total Revenue
Relevant Range
Relevant Range
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$8,000, sales will increase from 1,600 units to 1,725 units.
BEFORE THE WITH THE
INCREASED INCREASEDADVERTISING ADVERTISING
Units sold 1,600 1,725
Unit contribution margin x $75 x $75
Total contribution margin $120,000 $129,375Less: Fixed expenses 45,000 53,000
Profit $ 75,000 $ 76,375
DIFFERENCE IN PROFIT
Change in sales volume 125
Unit contribution margin x $75
Change in contribution margin $9,375
Less: Change in fixed expenses 8,000
Increase in profits $1,375
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BEFORE THE WITH THEPROPOSED PROPOSED
CHANGES CHANGES
Units sold 1,600 1,900
Unit contribution margin x $75 x $50Total contribution margin $120,000 $95,000
Less: 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 PROFIT
Change in contribution margin $ -25,000
Less: Change in fixed expenses --------
Decrease in profits $ -25,000
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BEFORE THE WITH THE
PROPOSED PROPOSED
CHANGES CHANGES
Units sold 1,600 2,600
Unit contribution margin x $75 x $50Total contribution margin $120,000 $130,000
Less: 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 PROFIT
Change in contribution margin $10,000
Less: Change in fixed expenses 8,000
Increase in profit $ 2,000
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Margin of Safety
Assume that a company has the following projectedincome statement:
Sales $100,000
Less: Variable expenses 60,000Contribution margin $ 40,000
Less: Fixed expenses 30,000
Income before taxes $ 10,000
Break-even point in dollars (R):
R = $30,000 ÷ .4 = $75,000
Safety 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 $125,000
Less: Variable expenses 75,000Contribution margin $ 50,000
Less: Fixed expenses 30,000
Income before taxes $ 20,000
Degree of Operating Leverage (DOL)
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CVP 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 analysisOther Data:
Unit Level of
Variable Activity
Activity Driver Costs DriverSetups $500 100
Inspections 50 600
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BEP = $180,000 ÷ $10
= 18,000 units
CVP and ABC
1. What is the BEP under conventionalanalysis?
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CVP 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 ABC
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The End
Chapter Sixteen