[ppt]cost-volume-profit analysis - mcgraw hill...
TRANSCRIPT
Cost-Volume-Profit Analysis
Chapter 7
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
The Break-Even PointThe Break-Even PointThe break-even point is the point in the volume of
activity where the organization’s revenues and expenses are equal.
Sales 250,000$ Less: variable expenses 150,000 Contribution margin 100,000 Less: fixed expenses 100,000 Net income -$
7-2
Equation ApproachEquation ApproachSales revenue – Variable expenses – Fixed expenses = Profit
UnitUnitsalessalespriceprice
SalesSalesvolumevolumein unitsin units
××UnitUnit
variablevariableexpenseexpense
SalesSalesvolumevolumein unitsin units
××
($500 × X)× X) ($300 × X)× X)–– –– $80,000 = $0
($200X)X) –– $80,000 = $0
X = 400 surf boardsX = 400 surf boards7-3
Contribution-Margin ApproachContribution-Margin Approach
For each additional surf board sold, Curl generates $200 in contribution margin.
Total Per Unit PercentSales (500 surf boards) 250,000$ 500$ 100%Less: variable expenses 150,000 300 60%Contribution margin 100,000$ 200$ 40%Less: fixed expenses 80,000 Net income 20,000$
Consider the following information developed by the accountant at Curl, Inc.:
7-4
Contribution-Margin ApproachContribution-Margin Approach Fixed expensesFixed expenses Unit contribution margin Unit contribution margin
== Break-even pointBreak-even point(in units)(in units)
Total Per Unit PercentSales (500 surf boards) 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$
$$80,00080,000 $$200200 == 400 surf boards400 surf boards
7-5
Contribution-Margin ApproachContribution-Margin Approach Here is the proof!
Total Per Unit PercentSales (400 surf boards) 200,000$ 500$ 100%Less: variable expenses 120,000 300 60%Contribution margin 80,000$ 200$ 40%Less: fixed expenses 80,000 Net income -$
400 × $500 = $200,000400 × $500 = $200,000 400 × $300 = $120,000400 × $300 = $120,0007-6
Contribution Margin RatioContribution Margin Ratio
Calculate the break-even point in sales dollars rather than units by using the contribution margin ratio.
Contribution margin Sales
= CM Ratio
Fixed expenseFixed expense CM RatioCM Ratio
Break-even pointBreak-even point(in sales dollars)(in sales dollars)==
7-7
Graphing Cost-Volume-Profit Graphing Cost-Volume-Profit RelationshipsRelationshipsViewing CVP relationships in a graph gives managers a perspective that can be obtained in no other way.Consider the following information for Curl, Inc.:
7-8
Cost-Volume-Profit GraphCost-Volume-Profit GraphD
olla
rs
600 700 800Units
200 300 400 500
450,000
100
200,000
150,000
100,000
50,000
400,000
350,000
300,000
250,000
Fixed expensesTotal expenses
7-9
Cost-Volume-Profit GraphCost-Volume-Profit GraphD
olla
rs
600 700 800Units
200 300 400 500
450,000
100
200,000
150,000
100,000
50,000
400,000
350,000
300,000
250,000
Fixed expensesTotal expenses
7-10
Cost-Volume-Profit GraphCost-Volume-Profit GraphD
olla
rs
600 700 800Units
200 300 400 500
450,000
100
200,000
150,000
100,000
50,000
400,000
350,000
300,000
250,000
Fixed expensesTotal expenses
Total sales
7-11
Cost-Volume-Profit GraphCost-Volume-Profit GraphD
olla
rs
600 700 800Units
200 300 400 500
450,000
100
200,000
150,000
100,000
50,000
400,000
350,000
300,000
250,000
Fixed expensesTotal expenses
Total sales
Break-evenpoint Profit a
rea
Loss area
7-12
Profit-Volume GraphProfit-Volume GraphSome managers like the profit-volume
graph because it focuses on profits and volume.
`
100 200 300 400 500 600 700Units
Pro
fit
0
100,000
(20,000)
(40,000)
(60,000)
80,000
60,000
40,000
20,000
Loss area
Profit areaBreak-even
point
7-13
Target Net ProfitTarget Net Profit We can determine the number of
surfboards that Curl must sell to earn a profit of $100,000 using the contribution
margin approach.
Fixed expenses + Target profit Unit contribution margin = Units sold to earn
the target profit
$80,000 + $100,000 $200 = 900 surf boards
7-14
Equation ApproachEquation Approach
Sales revenue – Variable expenses – Fixed expenses = Profit
($500 × X)× X) ($300 × X)× X)–– –– $80,000 = $100,000$100,000
($200X)X) = $180,000
X = 900 surf boardsX = 900 surf boards
7-15
Applying CVP AnalysisApplying CVP AnalysisSafety Margin
The difference between budgeted sales revenue and break-even sales revenue.
The amount by which sales can drop before losses occur.
7-16
CVP Analysis with Multiple CVP Analysis with Multiple ProductsProducts
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 Curl sells surfboards and sail boards and see how we deal with break-even analysis.
7-17
CVP Analysis with Multiple CVP Analysis with Multiple ProductsProductsCurl provides us with the following: information:
7-18
CVP Analysis with Multiple CVP Analysis with Multiple ProductsProducts
Weighted-average unit contribution margin
$200 × 62.5%
$550 × 37.5%7-19
CVP Analysis with Multiple CVP Analysis with Multiple ProductsProducts
Break-even pointBreak-evenpoint = Fixed expenses
Weighted-average unit contribution margin
Break-evenpoint = $170,000
$331.25
Break-evenpoint = 514 combined unit sales514 combined unit sales
7-20
CVP Analysis with Multiple CVP Analysis with Multiple ProductsProducts
Break-even pointBreak-even
point = 514 combined unit sales
7-21
Assumptions UnderlyingAssumptions UnderlyingCVP AnalysisCVP Analysis1. Selling price is constant
throughout the entire relevant range.
2. Costs are linear over the relevant range.
3. In multi-product companies, the sales mix is constant.
4. In manufacturing firms, inventories do not change (units produced = units sold).
7-22
CVP Relationships and the Income CVP Relationships and the Income StatementStatement
A. Traditional Format
Sales $500,000Less: 380,000Gross margin $120,000Less: Operating expenses:Selling expenses $35,000Administrative expenses 35,000 70,000Net income $50,000
ACCUTIME COMPANYIncome Statement
For the Year Ended December 31, 20x1
7-23
CVP Relationships and the Income CVP Relationships and the Income StatementStatement
B. Contribution Format
Sales $500,000Less: Variable expenses:Variable manufacturing $280,000Variable selling 15,000Variable administrative 5,000 300,000Contribution margin $200,000Less: Fixed expenses:Fixed manufacturing $100,000Fixed selling 20,000Fixed administrative 30,000 150,000Net income $50,000
Income StatementFor the Year Ended December 31, 20x1
ACCUTIME COMPANY
7-24
Cost Structure and Operating Cost Structure and Operating LeverageLeverageThe cost structure of an organization is the
relative proportion of its fixed and variable costs.
Operating leverage is:the extent to which an organization uses fixed
costs in its cost structure.greatest in companies that have a high proportion
of fixed costs in relation to variable costs.
7-25
Measuring Operating Measuring Operating LeverageLeverage
Contribution margin Net income
Operating leveragefactor =
$100,000 $100,000 $20,000$20,000 = 5= 5
7-26
Measuring Operating Measuring Operating LeverageLeverageA measure of how a percentage change in sales
will affect profits. If Curl increases its sales by 10%, what will be the percentage increase in
net income?
Percent increase in sales 10%Operating leverage factor × 5Percent increase in profits 50%
7-27
CVP Analysis, Activity-Based Costing, CVP Analysis, Activity-Based Costing, and Advanced Manufacturing Systemsand Advanced Manufacturing SystemsAn activity-based costing system provides a much
more complete picture of cost-volume-profit relationships and, thus, it provides better
information to managers.
Break-evenBreak-evenpointpoint
== Fixed costsFixed costsUnit contribution marginUnit contribution margin
7-28
AA Move Toward JIT andMove Toward JIT andFlexible ManufacturingFlexible Manufacturing
Overhead costs like setup, inspection, and material handling are fixed with respect to sales volume, but they are not fixed with
respect to other cost drivers.
This is the fundamental distinction between a traditional CVP analysis and an activity-
based costing CVP analysis.
7-29