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McGraw-Hill/Irwin1 © The McGraw-Hill Companies, Inc., 2006
22-1
Cost-Volume-Profit Analysis
Chapter
2222
McGraw-Hill/Irwin2 © The McGraw-Hill Companies, Inc., 2006
22-2
CVP analysis is used to answer questionssuch as:• How much must I sell to earn my desired income?
• How will income be affectedif I reduce selling prices toincrease sales volume?
• How will income be affectedif I change the sales mixof my products?
CVP analysis is used to answer questionssuch as:• How much must I sell to earn my desired income?
• How will income be affectedif I reduce selling prices toincrease sales volume?
• How will income be affectedif I change the sales mixof my products?
Questions Addressed byCost-Volume-Profit AnalysisQuestions Addressed byCost-Volume-Profit Analysis
McGraw-Hill/Irwin3 © The McGraw-Hill Companies, Inc., 2006
22-3
Number of Local Calls
Mon
thly
Bas
ic
Tel
epho
ne B
ill
Total fixed costs remain unchangedwhen activity changes.
Your monthly basictelephone bill probablydoes not change when
you make more local calls.
Total Fixed CostTotal Fixed Cost
McGraw-Hill/Irwin4 © The McGraw-Hill Companies, Inc., 2006
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Number of Local Calls
Mon
thly
Bas
ic T
elep
hone
B
ill p
er L
ocal
Cal
l
Fixed costs per unit declineas activity increases.
Your average cost perlocal call decreases as
more local calls are made.
Fixed Cost Per UnitFixed Cost Per Unit
McGraw-Hill/Irwin5 © The McGraw-Hill Companies, Inc., 2006
22-5
Minutes Talked
Tot
al L
ong
Dis
tanc
eT
elep
hone
Bill
Total variable costs changewhen activity changes.
Your total long distancetelephone bill is basedon how many minutes
you talk.
Total Variable CostTotal Variable Cost
McGraw-Hill/Irwin6 © The McGraw-Hill Companies, Inc., 2006
22-6
Minutes Talked
Per
Min
ute
Tel
epho
ne C
harg
e
Variable costs per unit do not changeas activity increases.
The cost per long distanceminute talked is constant.
For example, 7cents per minute.
Variable Cost Per UnitVariable Cost Per Unit
McGraw-Hill/Irwin7 © The McGraw-Hill Companies, Inc., 2006
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Summary of Variable and Fixed Cost Behavior
Cost In Total Per Unit
Variable Changes as activity level
changes.Remains the same over wide
ranges of activity.
FixedRemains the same even
when activity level changes.Decreases as activity level
increases.
Cost Behavior SummaryCost Behavior Summary
McGraw-Hill/Irwin8 © The McGraw-Hill Companies, Inc., 2006
22-8
Mixed costs contain a fixed portion that is incurred even when facility is unused, and a variable portion that increases with usage.
Example: monthly electric utility charge
• Fixed service fee
• Variable charge perkilowatt hour used
Mixed CostsMixed Costs
McGraw-Hill/Irwin9 © The McGraw-Hill Companies, Inc., 2006
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Variable
Utility Charge
Activity (Kilowatt Hours)
To
tal
Uti
lity
Co
st
Total mixed cost
Fixed Monthly
Utility Charge
Mixed CostsMixed Costs
McGraw-Hill/Irwin10 © The McGraw-Hill Companies, Inc., 2006
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Activity
Co
st
Total cost remainsconstant within anarrow range of
activity.
Step-Wise CostsStep-Wise Costs
McGraw-Hill/Irwin11 © The McGraw-Hill Companies, Inc., 2006
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Activity
Co
st
Total cost increases to a new higher cost for the
next higher range of activity.
Step-Wise CostsStep-Wise Costs
McGraw-Hill/Irwin12 © The McGraw-Hill Companies, Inc., 2006
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Costs that increase when activity increases, but in a nonlinear manner.
Activity
To
tal
Co
st
Curvilinear CostsCurvilinear Costs
McGraw-Hill/Irwin13 © The McGraw-Hill Companies, Inc., 2006
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The objectiveis to classify all costs as
either fixed or variable.
Identifying and MeasuringCost BehaviorIdentifying and MeasuringCost Behavior
McGraw-Hill/Irwin14 © The McGraw-Hill Companies, Inc., 2006
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A scatter diagram of past cost behavior may be helpful in analyzing mixed costs.
Scatter DiagramScatter Diagram
McGraw-Hill/Irwin15 © The McGraw-Hill Companies, Inc., 2006
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Plot the data points on a graph (total cost vs. activity).
0 1 2 3 4
*
To
tal
Co
st i
n1,
000’
s o
f D
oll
ars
10
20
0
***
**
**
*
*
Activity, 1,000’s of Units Produced
Scatter DiagramScatter Diagram
McGraw-Hill/Irwin16 © The McGraw-Hill Companies, Inc., 2006
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Draw a line through the plotted data points so that about equal numbers of points fall above and below the line.
Estimated fixed cost = 10,000
0 1 2 3 4
*
To
tal
Co
st i
n1,
000’
s o
f D
oll
ars
10
20
0
***
**
**
*
*
Activity, 1,000’s of Units Produced
Scatter DiagramScatter Diagram
McGraw-Hill/Irwin17 © The McGraw-Hill Companies, Inc., 2006
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Vertical distance
is the change in cost.
Horizontal distance is the change in activity.
Unit Variable Cost = Slope = in costin units
0 1 2 3 4
*
To
tal
Co
st i
n1,
000’
s o
f D
oll
ars
10
20
0
***
**
**
*
*
Activity, 1,000’s of Units Produced
Scatter DiagramScatter Diagram
McGraw-Hill/Irwin18 © The McGraw-Hill Companies, Inc., 2006
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The following relationships between salesand costs are observed:
Using these two levels of activity, compute: the variable cost per unit. the total fixed cost.
Sales Cost
High activity level 67,500$ 29,000$ Low activity level 17,500 20,500 Change 50,000$ 8,500$
The High-Low MethodThe High-Low Method Exh. 22-6
McGraw-Hill/Irwin19 © The McGraw-Hill Companies, Inc., 2006
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Unit variable cost = = = $0.17 per $in costin units
$8,500$50,000
Sales Cost
High activity level 67,500$ 29,000$ Low activity level 17,500 20,500 Change 50,000$ 8,500$
The High-Low MethodThe High-Low Method Exh. 22-6
McGraw-Hill/Irwin20 © The McGraw-Hill Companies, Inc., 2006
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Sales Cost
High activity level 67,500$ 29,000$ Low activity level 17,500 20,500 Change 50,000$ 8,500$
Unit variable cost = = = $0.17 per $
Fixed cost = Total cost – Total variable
in costin units
$8,500$50,000
The High-Low MethodThe High-Low Method Exh. 22-6
McGraw-Hill/Irwin21 © The McGraw-Hill Companies, Inc., 2006
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Sales Cost
High activity level 67,500$ 29,000$ Low activity level 17,500 20,500 Change 50,000$ 8,500$
Unit variable cost = = = $0.17 per $
Fixed cost = Total cost – Total variable cost
Fixed cost = $29,000 – ($0.17 per sales $ × $67,500)
Fixed cost = $29,000 – $11,475 = $17,525
in costin units
$8,500$50,000
The High-Low MethodThe High-Low Method Exh. 22-6
McGraw-Hill/Irwin22 © The McGraw-Hill Companies, Inc., 2006
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The objective of the cost analysis remains the
same: determination of total fixed cost and the
variable unit cost.
Least-squares regression is usually covered in advanced cost accounting courses. It is
commonly used with computer software because of the large number of
calculations required.
Least-Squares RegressionLeast-Squares Regression
McGraw-Hill/Irwin23 © The McGraw-Hill Companies, Inc., 2006
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Let’s extend our
knowledge of
cost behavior to
break-even analysis.
Break-Even AnalysisBreak-Even Analysis
McGraw-Hill/Irwin24 © The McGraw-Hill Companies, Inc., 2006
22-24
The break-even point (expressed in units of product or dollars of sales) is the
unique sales level at which a company earns neither a profit nor incurs a loss.
Computing Break-Even PointComputing Break-Even Point
McGraw-Hill/Irwin25 © The McGraw-Hill Companies, Inc., 2006
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Contribution margin is amount by which revenue exceeds the variable costs of producing the revenue.
Contribution margin is amount by which revenue exceeds the variable costs of producing the revenue.
Total Unit
Sales Revenue (2,000 units) 100,000$ 50$
Less: Variable costs 60,000 30
Contribution margin 40,000$ 20$
Less: Fixed costs 30,000
Net income 10,000$
Computing Break-Even PointComputing Break-Even Point
McGraw-Hill/Irwin26 © The McGraw-Hill Companies, Inc., 2006
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Total Unit
Sales Revenue (2,000 units) 100,000$ 50$
Less: Variable costs 60,000 30
Contribution margin 40,000$ 20$
Less: Fixed costs 30,000
Net income 10,000$
How much contribution margin must this company have to cover its fixed costs (break even)?
Answer: $30,000
Computing Break-Even PointComputing Break-Even Point
McGraw-Hill/Irwin27 © The McGraw-Hill Companies, Inc., 2006
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How many units must this company sell to cover its fixed costs (break even)?
Total Unit
Sales Revenue (2,000 units) 100,000$ 50$
Less: Variable costs 60,000 30
Contribution margin 40,000$ 20$
Less: Fixed costs 30,000
Net income 10,000$
Answer: $30,000 ÷ $20 per unit = 1,500 units
Computing Break-Even PointComputing Break-Even Point
McGraw-Hill/Irwin28 © The McGraw-Hill Companies, Inc., 2006
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We have just seen one of the basic CVP relationships – the break-even computation.
Break-even point in units = Fixed costs
Contribution margin per unit
Computing Break-Even PointComputing Break-Even Point
Unit sales price less unit variable cost($20 in previous example)
Exh. 22-8
McGraw-Hill/Irwin29 © The McGraw-Hill Companies, Inc., 2006
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The break-even formula may also be expressed in sales dollars.
Break-even point in dollars = Fixed costs
Contribution margin ratio
Unit contribution margin Unit sales price
Computing Break-Even PointComputing Break-Even Point Exh. 22-9
McGraw-Hill/Irwin30 © The McGraw-Hill Companies, Inc., 2006
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ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be
sold to break even?
a. 100,000 units
b. 40,000 units
c. 200,000 units
d. 66,667 units
ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be
sold to break even?
a. 100,000 units
b. 40,000 units
c. 200,000 units
d. 66,667 units
Computing Break-Even PointComputing Break-Even Point
McGraw-Hill/Irwin31 © The McGraw-Hill Companies, Inc., 2006
22-31
ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be
sold to break even?
a. 100,000 units
b. 40,000 units
c. 200,000 units
d. 66,667 units
ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be
sold to break even?
a. 100,000 units
b. 40,000 units
c. 200,000 units
d. 66,667 units
Unit contribution = $5.00 - $3.00 = $2.00
Fixed costsUnit contribution =
$200,000$2.00 per unit
= 100,000 units
Computing Break-Even PointComputing Break-Even Point
McGraw-Hill/Irwin32 © The McGraw-Hill Companies, Inc., 2006
22-32
Use the contribution margin ratio formula to determine the amount of sales revenue ABC must
have to break even. All information remains unchanged: fixed costs are $200,000; unit sales
price is $5.00; and unit variable cost is $3.00.
a. $200,000
b. $300,000
c. $400,000
d. $500,000
Use the contribution margin ratio formula to determine the amount of sales revenue ABC must
have to break even. All information remains unchanged: fixed costs are $200,000; unit sales
price is $5.00; and unit variable cost is $3.00.
a. $200,000
b. $300,000
c. $400,000
d. $500,000
Computing Break-Even PointComputing Break-Even Point
McGraw-Hill/Irwin33 © The McGraw-Hill Companies, Inc., 2006
22-33
Use the contribution margin ratio formula to determine the amount of sales revenue ABC must
have to break even. All information remains unchanged: fixed costs are $200,000; unit sales
price is $5.00; and unit variable cost is $3.00.
a. $200,000
b. $300,000
c. $400,000
d. $500,000
Use the contribution margin ratio formula to determine the amount of sales revenue ABC must
have to break even. All information remains unchanged: fixed costs are $200,000; unit sales
price is $5.00; and unit variable cost is $3.00.
a. $200,000
b. $300,000
c. $400,000
d. $500,000
Unit contribution = $5.00 - $3.00 = $2.00
Contribution margin ratio = $2.00 ÷ $5.00 = .40
Break-even revenue = $200,000 ÷ .4 = $500,000
Computing Break-Even PointComputing Break-Even Point
McGraw-Hill/Irwin34 © The McGraw-Hill Companies, Inc., 2006
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Volume in Units
Co
sts
and
Rev
enu
ein
Do
llar
s Total fixed costsTotal costs
Draw the total cost line with a slopeequal to the unit variable cost.
Plot total fixed costs on the vertical axis.
Preparing a CVP ChartPreparing a CVP Chart
McGraw-Hill/Irwin35 © The McGraw-Hill Companies, Inc., 2006
22-35
Sales
Volume in Units
Co
sts
and
Rev
enu
ein
Do
llar
s Starting at the origin, draw the sales line with a slope equal to the unit sales price.
Preparing a CVP ChartPreparing a CVP Chart
Break-even Point
Total costsTotal fixed costs
McGraw-Hill/Irwin36 © The McGraw-Hill Companies, Inc., 2006
22-36
A limited range of activity called the relevant range, where CVP relationships are linear. Unit selling price remains constant.
Unit variable costs remain constant.
Total fixed costs remain constant.
Production = sales (no inventory changes).
Assumptions of CVP AnalysisAssumptions of CVP Analysis
McGraw-Hill/Irwin37 © The McGraw-Hill Companies, Inc., 2006
22-37
Income (pretax) = Sales – Variable costs – Fixed costsIncome (pretax) = Sales – Variable costs – Fixed costs
Computing Income from Expected SalesComputing Income from Expected Sales Exh.
22-12
McGraw-Hill/Irwin38 © The McGraw-Hill Companies, Inc., 2006
22-38
Rydell expects to sell 1,500 units at $100 each next month. Fixed costs are $24,000 per
month and the unit variable cost is $70. What amount of income should Rydell expect?
Income (pretax) = Sales – Variable costs – Fixed costs
= [1,500 units × $100] – [1,500 units × $70] – $24,000
= $21,000
Income (pretax) = Sales – Variable costs – Fixed costs
= [1,500 units × $100] – [1,500 units × $70] – $24,000
= $21,000
Computing Income from Expected SalesComputing Income from Expected Sales Exh.
22-13
McGraw-Hill/Irwin39 © The McGraw-Hill Companies, Inc., 2006
22-39
Break-even formulas may be adjusted to show the sales volume needed to earn
any amount of income.
Break-even formulas may be adjusted to show the sales volume needed to earn
any amount of income.
Unit sales = Fixed costs + Target incomeContribution margin per unit
Dollar sales = Fixed costs + Target income
Contribution margin ratio
Computing Sales for a Target IncomeComputing Sales for a Target Income
McGraw-Hill/Irwin40 © The McGraw-Hill Companies, Inc., 2006
22-40
ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be
sold to earn income of $40,000?
a. 100,000 units
b. 120,000 units
c. 80,000 units
d. 200,000 units
ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be
sold to earn income of $40,000?
a. 100,000 units
b. 120,000 units
c. 80,000 units
d. 200,000 units
Computing Sales for a Target IncomeComputing Sales for a Target Income
McGraw-Hill/Irwin41 © The McGraw-Hill Companies, Inc., 2006
22-41
ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be
sold to earn income of $40,000?
a. 100,000 units
b. 120,000 units
c. 80,000 units
d. 200,000 units
ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be
sold to earn income of $40,000?
a. 100,000 units
b. 120,000 units
c. 80,000 units
d. 200,000 units = 120,000 units
Unit contribution = $5.00 - $3.00 = $2.00
Fixed costs + Target income Unit contribution
$200,000 + $40,000 $2.00 per unit
Computing Sales for a Target IncomeComputing Sales for a Target Income
McGraw-Hill/Irwin42 © The McGraw-Hill Companies, Inc., 2006
22-42
Target net income is income after income tax.Target net income is income after income tax.
Dollar sales =
Fixed Target net Incomecosts income taxes
Contribution margin ratio
+ +
Computing Sales (Dollars) for aTarget Net IncomeComputing Sales (Dollars) for aTarget Net Income Exh.
22-14
McGraw-Hill/Irwin43 © The McGraw-Hill Companies, Inc., 2006
22-43
To convert target net income to before-tax income, use the following formula:
Before-tax income = Target net income
1 - tax rate
Computing Sales (Dollars) for aTarget Net IncomeComputing Sales (Dollars) for aTarget Net Income
McGraw-Hill/Irwin44 © The McGraw-Hill Companies, Inc., 2006
22-44
Rydell has a monthly target net income of $18,000. The unit selling price is $100. Monthly fixed costs are $24,000, the unit variable cost is $70, and the tax rate is 25 percent.
What is Rydell’s before-tax income andincome tax expense?
Computing Sales (Dollars) for aTarget Net IncomeComputing Sales (Dollars) for aTarget Net Income
McGraw-Hill/Irwin45 © The McGraw-Hill Companies, Inc., 2006
22-45
Before-tax income = Target net income
1 - tax rate
Before-tax income = = $24,000$18,000
1 - .25
Income tax = .25 × $24,000 = $6,000
Rydell has a monthly target net income of $18,000. The unit selling price is $100. Monthly fixed costs are $24,000, the unit variable cost is $70, and the tax rate is 25 percent.
What is Rydell’s before-tax income andincome tax expense?
Computing Sales (Dollars) for aTarget Net IncomeComputing Sales (Dollars) for aTarget Net Income
McGraw-Hill/Irwin46 © The McGraw-Hill Companies, Inc., 2006
22-46
Rydell has a monthly target net income of $18,000. The unit selling price is $100. Monthly fixed costs are $24,000, the unit variable cost is $70, and the tax rate is 25 percent.
What monthly sales revenue will Rydellneed to earn the target net income?
Computing Sales (Dollars) for aTarget Net IncomeComputing Sales (Dollars) for aTarget Net Income
McGraw-Hill/Irwin47 © The McGraw-Hill Companies, Inc., 2006
22-47
Dollar sales =
Fixed Target net Incomecosts income taxes
Contribution margin ratio
+ +
Dollar sales = = $160,000
$24,000 + $18,000 + $6,00030%
Rydell has a monthly target net income of $18,000. The unit selling price is $100. Monthly fixed costs are $24,000, the unit variable cost is $70, and the tax rate is 25 percent.
What monthly sales revenue will Rydellneed to earn the target net income?
Computing Sales (Dollars) for aTarget Net IncomeComputing Sales (Dollars) for aTarget Net Income
McGraw-Hill/Irwin48 © The McGraw-Hill Companies, Inc., 2006
22-48
The formula for computing dollar sales may be used to compute unit sales by substituting contribution per unit in the denominator.
The formula for computing dollar sales may be used to compute unit sales by substituting contribution per unit in the denominator.
Contribution margin per unitUnit sales =
Fixed Target net Incomecosts income taxes
+ +
Unit sales = = 1,600 units$24,000 + $18,000 + $6,000
$30 per unit
Formula for Computing Sales (Units)for a Target Net IncomeFormula for Computing Sales (Units)for a Target Net Income Exh.
22-16
McGraw-Hill/Irwin49 © The McGraw-Hill Companies, Inc., 2006
22-49
Margin of safety is the amount by which sales may decline before reaching break-
even sales.
Margin of safety may be expressed as a percentage of expected sales.
Computing the Margin of SafetyComputing the Margin of Safety Exh. 22-17
Margin of safety Expected sales - Break-even sales percentage Expected sales
=
McGraw-Hill/Irwin50 © The McGraw-Hill Companies, Inc., 2006
22-50
Margin of safety Expected sales - Break-even sales percentage Expected sales
=
If Rydell’s sales are $100,000 and break-even sales are $80,000, what is the margin of safety in dollars and as a percentage?
Computing the Margin of SafetyComputing the Margin of Safety Exh. 22-17
McGraw-Hill/Irwin51 © The McGraw-Hill Companies, Inc., 2006
22-51
If Rydell’s sales are $100,000 and break-even sales are $80,000, what is the margin of safety in dollars and as a percentage?
Margin of safety = $100,000 - $80,000 = $20,000
Margin of safety Expected sales - Break-even sales percentage Expected sales
=
Margin of safety $100,000 - $80,000 percentage $100,000
= = 20%
Computing the Margin of SafetyComputing the Margin of Safety Exh. 22-17
McGraw-Hill/Irwin52 © The McGraw-Hill Companies, Inc., 2006
22-52
The basic CVP relationships may be used to analyze a number of situations such as changing sales price, changing variable
cost, or changing fixed cost.
Consider the following example.
The basic CVP relationships may be used to analyze a number of situations such as changing sales price, changing variable
cost, or changing fixed cost.
Consider the following example.
Continue
Sensitivity AnalysisSensitivity Analysis
McGraw-Hill/Irwin53 © The McGraw-Hill Companies, Inc., 2006
22-53
Rydell Company is considering buying a new machine that would increase monthly fixed costs
from $24,000 to $30,000, but decrease unit variable costs from $70 to $60. The $100 per unit selling price would remain unchanged.
What is the new break-even point in dollars?
Sensitivity Analysis ExampleSensitivity Analysis Example
McGraw-Hill/Irwin54 © The McGraw-Hill Companies, Inc., 2006
22-54
Rydell Company is considering buying a new machine that would increase monthly fixed costs
from $24,000 to $30,000, but decrease unit variable costs from $70 to $60. The $100 per unit selling price would remain unchanged.
Revised Break-evenpoint in dollars
Revised fixed costsRevised contribution margin ratio
Revised Break-evenpoint in dollars
$30,00040%
= $75,000=
=
Sensitivity Analysis ExampleSensitivity Analysis Example Exh. 22-18
McGraw-Hill/Irwin55 © The McGraw-Hill Companies, Inc., 2006
22-55
The CVP formulas may 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.
Computing MultiproductBreak-Even PointComputing MultiproductBreak-Even Point
McGraw-Hill/Irwin56 © The McGraw-Hill Companies, Inc., 2006
22-56
The resulting break-even formulafor composite unit sales is:
Break-even pointin composite units
Fixed costsContribution marginper composite unit
=
Consider the following example:
Continue
Computing MultiproductBreak-Even PointComputing MultiproductBreak-Even Point Exh.
22-19
McGraw-Hill/Irwin57 © The McGraw-Hill Companies, Inc., 2006
22-57
Hair-Today offers three cuts as shown below. Annual fixed costs are $96,000. Compute the break-even point in composite units and in number of units for
each haircut at the given sales mix.
Haircuts Basic Ultra Budget
Selling Price 10.00$ 16.00$ 8.00$ Variable Cost 6.50 9.00 4.00 Unit Contribution 3.50$ 7.00$ 4.00$ Sales Mix Ratio 4 2 1
Computing MultiproductBreak-Even PointComputing MultiproductBreak-Even Point
McGraw-Hill/Irwin58 © The McGraw-Hill Companies, Inc., 2006
22-58
Hair-Today offers three cuts as shown below. Annual fixed costs are $96,000. Compute the break-even point in composite units and in number of units for
each haircut at the given sales mix.
Haircuts Basic Ultra Budget
Selling Price 10.00$ 16.00$ 8.00$ Variable Cost 6.50 9.00 4.00 Unit Contribution 3.50$ 7.00$ 4.00$ Sales Mix Ratio 4 2 1
A 4:2:1 sales mix means that if there are 500 budget cuts, then there will be
1,000 ultra cuts, and 2,000 basic cuts.
Computing MultiproductBreak-Even PointComputing MultiproductBreak-Even Point
McGraw-Hill/Irwin59 © The McGraw-Hill Companies, Inc., 2006
22-59
HaircutsBasic Ultra Budget
Selling Price $10.00 $16.00 $8.00Variable Cost 6.50 9.00 4.00 Unit Contribution $3.50 $7.00 $4.00Sales Mix Ratio × 4 × 2 × 1
14.00$ 14.00$ 4.00$
Step 1: Compute contribution margin per composite unit.
Computing MultiproductBreak-Even PointComputing MultiproductBreak-Even Point
McGraw-Hill/Irwin60 © The McGraw-Hill Companies, Inc., 2006
22-60
HaircutsBasic Ultra Budget
Selling Price $10.00 $16.00 $8.00Variable Cost 6.50 9.00 4.00 Unit Contribution $3.50 $7.00 $4.00Sales Mix Ratio × 4 × 2 × 1Weighted Contribution 14.00$ + 14.00$ + 4.00$ = 32.00$
Contribution margin per composite unit
Step 1: Compute contribution margin per composite unit.
Computing MultiproductBreak-Even PointComputing MultiproductBreak-Even Point
McGraw-Hill/Irwin61 © The McGraw-Hill Companies, Inc., 2006
22-61
Break-even pointin composite units
Fixed costsContribution marginper composite unit
=
Step 2: Compute break-even point in composite units.
Computing MultiproductBreak-Even PointComputing MultiproductBreak-Even Point Exh.
22-19
McGraw-Hill/Irwin62 © The McGraw-Hill Companies, Inc., 2006
22-62
Break-even pointin composite units
Fixed costsContribution marginper composite unit
=
Step 2: Compute break-even point in composite units.
Break-even pointin composite units
$96,000$32.00 per
composite unit
=
Break-even pointin composite units
= 3,000 composite units
Computing MultiproductBreak-Even PointComputing MultiproductBreak-Even Point Exh.
22-19
McGraw-Hill/Irwin63 © The McGraw-Hill Companies, Inc., 2006
22-63
Sales CompositeProduct Mix Cuts Haircuts
Basic 4 × 3,000 = 12,000Ultra 2 × 3,000 = 6,000
Budget 1 × 3,000 = 3,000
Step 3: Determine the number of each haircut that must be sold to break even.
Computing MultiproductBreak-Even PointComputing MultiproductBreak-Even Point
McGraw-Hill/Irwin64 © The McGraw-Hill Companies, Inc., 2006
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HaircutsBasic Ultra Budget Combined
Selling Price 10.00$ 16.00$ 8.00$ Variable Cost 6.50 9.00 4.00 Unit Contribution 3.50$ 7.00$ 4.00$ Sales Volume × 12,000 × 6,000 × 3,000 Total Contribution 42,000$ 42,000$ 12,000$ 96,000$
Fixed Costs 96,000 Income $ 0
Step 4: Verify the results.
Multiproduct Break-EvenIncome StatementMultiproduct Break-EvenIncome Statement Exh.
22-20
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A measure of the extent to which fixed costsare being used in an organization.
A measure of the extent to which fixed costsare being used in an organization.
A measure of how a percentage change in sales will affect profits.
A measure of how a percentage change in sales will affect profits.
Contribution margin Net income
= Degree of operating leverage
Operating LeverageOperating Leverage
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Rydell Company
Sales (1,600 units) 160,000$ Less: variable expenses 112,000 Contribution margin 48,000 Less: fixed expenses 24,000 Net income 24,000$
$48,000 $24,000
= 2.0
Contribution margin Net income
= Degree of operating leverage
If Rydell increases sales by 10percent, what will the percentage
increase in income be?
Operating LeverageOperating Leverage
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Percent increase in sales 10%
Degree of operating leverage × 2
Percent increase in income 20%
Operating LeverageOperating Leverage
Rydell Company
Sales (1,600 units) 160,000$ Less: variable expenses 112,000 Contribution margin 48,000 Less: fixed expenses 24,000 Net income 24,000$
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Homework for Chapter 22Homework for Chapter 22
Ex 22-6, 22-9, 22-11, 22-13, 22-14 Problem 22-3A, 22-5A, 22-6A
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End of Chapter 22End of Chapter 22