cost volume profit analysis lecture

7/30/2019 Cost Volume Profit Analysis Lecture

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Cost Behavior


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Jason Inc. produces stereo sound systemsunder the brand name of J-Sound. The partsfor the stereo are purchased from an outside

supplier for Rs10 per unit (a variable cost).

Variable Cost

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Total Variable Cost Graph

TotalCost

s

Rs300,000

Rs250,000

Rs200,000

Rs150,000

Rs100,000

Rs50,00010 20 300

Units Produced

(in thousands)

Variable Cost

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Unit Variable Cost Graph

Rs20

Rs15

Rs10

Rs5

0

CostperU

nit

10 20 30Units Produced

(000)

Variable Cost

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TotalCosts

Rs300,000

Rs250,000

Rs200,000

Rs150,000

Rs100,000

Rs50,000

10 20 300

Rs20

Rs15Rs10

Rs5

0CostperU

nit

10 20 30

Number of

Units

Produced

Units Produced (000)


Direct

Materials

Cost per Unit

Total Direct

Materials

Cost

5,000 units Rs10 Rs 50,000

10,000 10 l00,000

15,000 10 150,000

20,000 10 200,000

25,000 10 250,000

30,000 10 300,000

Variable Cost

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The productionsupervisor for Minton

Inc.s Los Angeles plant

is Jane Sovissi. She ispaid Rs75,000 per year.The plant produces from

50,000 to 300,000

bottles of perfume.

La Fleur

Fixed Costs

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Number of

Bottles

Produced

Total Salary

for Jane

Sovissi

50,000 bottles Rs75,000 Rs1.500

100,000 75,000 0.750

150,000 75,000 0.500

200,000 75,000 0.375

250,000 75,000 0.300300,000 75,000 0.250

Salary per

Bottle

Produced

Fixed Costs

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Fixed Costs

Total Fixed Cost Graph

TotalCosts Rs150,000

Rs125,000

Rs100,000

Rs75,000

Rs50,000

Rs25,000

100 200 3000

Unit Fixed Cost Graph

Bottles Produced (000)

Number of

Bottles

Produced

CostperUnitRs1.50

Rs1.25

Rs1.00

Rs.75

Rs.50

Rs.25

100 200 3000


Total Salary

for Jane

Sovissi

50,000 bottles Rs75,000 Rs1.500

100,000 75,000 0.750

15,000 75,000 0.500

20,000 75,000 0.375

25,000 75,000 0.30030,000 75,000 0.250

Salary per

Bottle

Produced

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Simpson Inc. manufacturessails using rented equipment.

The rental charges areRs15,000 per year, plus Rs1

for each machine hour usedover 10,000 hours.

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Mixed Costs

Total Mixed Cost Graph

TotalCosts

0

Total Machine Hours (000)

Rs45,000

Rs40,000

Rs35,000Rs30,000

Rs25,000

Rs20,000

Rs15,000

Rs10,000

Rs5,000

10 20 30 40

Mixed costs are

usually separated into

their fixed and

variable componentsfor management

analysis.

Mixed costs are

sometimes called

semivariable or

semifixed costs.

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The high-low method is a simple wayto separate mixed costs into theirfixed and variable components.

Mixed Costs

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Actual costs incurred

Production Total(Units) Cost(Rs)

June 1,000 45,000

July 1,500 52,000

August 2,100 61,500September 1,800 57,500

October 750 41,250

High-Low Method

Variable cost per unit =

Highest level of activity (Rs) minus

lowest level of activity (Rs)

Highest level of activity (n) minus

lowest level of activity (n)

What month has

the highest level

of activity interms of cost?

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Contribution Margin Income Statement

Sales (50,000 units) Rs1,000,000Variable costs 600,000

Total Contribution Rs 400,000

Fixed costs 300,000

Profit Rs 100,000

The Total

Contribution is

available to cover

the fixed costs

and Profit .

FIXED

COSTS

Contribution

Profit

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Contribution Margin Ratio

100%60%

40%

30%

10%

Contribution margin ratio =SalesVariable costs

Sales

Contribution margin ratio = Rs1,000,000600,000Rs1,000,000

Contribution margin ratio = 40%

Sales (50,000 units) Rs1,000,000Variable costs 600,000

Contribution margin Rs 400,000

Fixed costs 300,000

Income from operations Rs 100,000

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Summary of Effects of Changes on

Break-Even Point

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Target Profit

Fixed costs are estimated at Rs200,000, and thedesired profit is Rs100,000. The unit selling

price is Rs75 and the unit variable cost is Rs45.

The firm wishes to make a Rs100,000 profit.

Sales (? units) Rs ?

Variable costs ?

Contribution margin Rs ?

Fixed costs 200,000Income from operations Rs 0

Rs75

45

Rs30

In

Units

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Sales (? units) Rs ?

Variable costs ?

Contribution margin Rs ?

Fixed costs 200,000Income from operations Rs 0

Sales (units) = Unit contribution margin

Fixed costs + desired profitRs200,000 + Rs100,000

Rs3010,000 units

Target Profit InUnits

Rs75

45

Rs30

Target profit is

used here to refer

to Income from

operations.

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Rs75

45

Rs30

Sales (10,000 units x Rs75) Rs750,000

Variable costs (10,000 x Rs45) 450,000

Contribution margin Rs300,000

Fixed costs 200,000Income from operations Rs100,000

Proof that sales of 10,000 units

will provide a profit of

Rs100,000.

Target Profit

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Graphic Approach toCost-Volume-Profit

Analysis

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Marginof Safety

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Margin of Safety = Sales

Sales at break-even pointSales

The margin of safety indicates thepossible decrease in sales that may occur

before an operating loss results.

Margin of Safety =Rs250,000Rs200,000

Rs250,000

Margin of Safety = 20%

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Assumptions of Cost-Volume-Profit Analysis

1. Total sales and total costs can berepresented by straight lines.

2. Within the relevant rangeof operatingactivity, the efficiency of operations doesnot change.

3. Costs can be accurately divided into fixed

and variablecomponents.4. The sales mix is constant.

5. There is no change in the inventoryquantities during the period.

The reliability of cost-volume-profit analysis

depends upon several assumptions.

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cost volume profit analysis lecture

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