COST-VOLUME-PROFIT ANALYSIS
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1 Chapter 22 COST-VOLUME-PROFIT ANALYSIS PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
2 Monthly Basic Telephone Bill Monthly Basic Telephone Bill per Local Call 22-2 C 1 FIXED COSTS Number of Local Calls Total fixed costs remain constant as activity increases. Number of Local Calls Cost per call declines as activity increases.
3 Total Costs Cost per Minute 22-3 C 1 VARIABLE COSTS Minutes Talked Total variable costs increase as activity increases. Minutes Talked Cost per Minute is constant as activity increases.
4 Total Utility Cost 22-4 C 1 MIXED COSTS Mixed costs contain a fixed portion that is incurred even when the facility is unused, and a variable portion that increases with usage. Utilities typically behave in this manner. Variable Cost per KW Activity (Kilowatt Hours) Fixed Monthly Utility Charge
5 Total Cost in 1,000 s of Dollars 22-5 P 1 SCATTER DIAGRAMS 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, Activity, 1,000 s of Units Produced
6 Total Cost in 1,000 s of Dollars 22-6 P 1 SCATTER DIAGRAMS Unit Variable Cost = Slope = Δ in cost Δ in units Horizontal distance is the change in activity Vertical distance is the change in cost. Activity, 1,000 s of Units Produced
7 22-7 P 1 THE HIGH-LOW METHOD The following relationships between units produced and total cost are observed: Using these two levels of activity, compute: the variable cost per unit. the total fixed cost.
8 22-8 P 1 THE HIGH-LOW METHOD Units Cost High activity level - December 67,500 $ 29,000 Low activity level - January 17,500 20,500 Change in activity 50,000 $ 8,500 Variable cost per unit is determined as follows: Fixed costs are determined as follows: Total cost = $17,525 + $0.17 per unit produced
9 22-9 A 1 CONTRIBUTION MARGIN AND ITS MEASURES Total Unit Sales Revenue (2,000 units) $ 200,000 $ 100 Less: Variable costs 140, Contribution margin $ 60,000 $ 30 Less: Fixed costs 24,000 Net income $ 36,000 Contribution margin is the amount by which revenue exceeds the variable costs of producing the revenue. Total contribution margin is $60,000 and the contribution margin per unit sold is $30.
10 22-10 A 1 CONTRIBUTION MARGIN AND ITS MEASURES Total Unit Sales Revenue (2,000 units) $ 200,000 $ 100 Less: Variable costs 140, Contribution margin $ 60,000 $ 30 Less: Fixed costs 24,000 Net income $ 36,000 Contribution margin ratio = Contribution margin per unit Sales price per unit Contribution margin ratio = $30 per unit $100 per unit = 30%
11 22-11 P 2 COMPUTING THE BREAK-EVEN POINT How much contribution margin must Rydell Company have to cover its fixed costs (break-even)? Answer: $24,000 Total Unit Sales Revenue (2,000 units) $ 200,000 $ 100 Less: Variable costs 140, Contribution margin $ 60,000 $ 30 Less: Fixed costs 24,000 Net income $ 36,000 How many units must Rydell sell to cover its fixed costs (break-even)? Answer: $24,000 $30 per unit = 800 units
12 22-12 P 2 COMPUTING THE BREAK-EVEN POINT 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 Unit sales price less unit variable cost ($30 in previous example)
13 22-13 P 2 COMPUTING THE BREAK-EVEN POINT 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
14 22-14 C 2 COMPUTING SALES FOR A TARGET INCOME Break-even formulas may be adjusted to show the sales volume needed to earn any amount of income. Unit sales = Fixed costs + Target pretax income Contribution margin per unit Dollar sales = Fixed costs + Target pretax income Contribution margin ratio
15 22-15 C 2 COMPUTING SALES (DOLLARS) FOR A TARGET NET INCOME To convert target net income to before-tax income, use the following formula: Before-tax income = Target net income 1 - tax rate
16 22-16 P 4 COMPUTING A MULTIPRODUCT BREAK-EVEN POINT The CVP formulas can 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.
17 22-17 A 2 DEGREE OF OPERATING LEVERAGE A measure of the extent to which fixed costs are being used in an organization. A measure of how a percentage change in sales will affect profits. Contribution margin Pretax income = Degree of operating leverage
18 END OF CHAPTER
COST-VOLUME-PROFIT ANALYSIS
Chapter 22 COST-VOLUME-PROFIT ANALYSIS PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright 2015
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