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Introduction
Cost Volume-Profit (CVP) analysis
examines the behavior of total revenues, total costs and operating income as changes occur in the out put level, the selling price, the variable cost per unit, and/or the fixed costs of a product.
Introduction
Managers use CVP analysis to help answer
question such as: How will total revenues and total cost be affected if the output levels change. If we raise or lower our selling price how will that effect costs, selling price and out put level?
Introduction
If we expand our business into foreign markets, how will that affect costs, selling price, and output level? What sales volume is required to meet the additional fixed charges arising from an advertising campaign?
Introduction
Should we pay our sales people on the basis of a salary only, or on the basis of a commission only, or by a combination of the two?
Assumptions
changes in the levels of revenues and cost arise because of changes in the number of product (or service) units produced and sold.
Assumptions
Total costs can be separated into a fixed and variable components. 3. There is a linear relationship between the behavior of total revenues and total cost are linear.
2.
Assumptions
4. Selling price, variable cost per unit
and fixed costs (within a relevant range and period) are known and constant.
Assumptions
5.
The analysis either covers a single product or assumes that the proportion of different products when multiple products are sold will remain constant as the level of total units sold changes.
Assumptions
All revenues and costs can be
added and compared without taking into account the units time value of money.
10
Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted.
CM is used first to cover fixed expenses. Any remaining CM contributes to net operating income.
Learning Objective 1
Explain how changes in activity affect contribution margin and net operating income.
es, variable expenses, and contribution margin can also expressed on a per unit basis. If RBC sells an additional cle, $200 more in contribution margin will be generated to cover fixed expenses and profit.
Racing Bicycle Company Contribution Income Statement For the Month of June Total $ 250,000 150,000 100,000 80,000 $ 20,000 Per Unit $ 500 300 $ 200
Sales (500 bicycles) Less: Variable expenses Contribution margin Less: Fixed expenses Net operating income
Sales (500 bicycles) Less: Variable expenses Contribution margin Less: Fixed expenses Net operating income
Sales (400 bicycles) Less: Variable expenses Contribution margin Less: Fixed expenses Net operating income
Sales (401 bicycles) Less: Variable expenses Contribution margin Less: Fixed expenses Net operating income
Learning Objective 2
CVP Graph
450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 100 200 300 400 500 600 700 800
In a CVP graph, unit volume is usually represented on the horizontal (X) axis and dollars on the vertical (Y) axis.
Units
CVP Graph
450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 100 200 300 400 500 600 700 800
Fixed Expenses
Units
CVP Graph
450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 100 200 300 400 500 600 700 800
Units
CVP Graph
450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 100 200 300 400 500 600 700 800
Units
CVP Graph
450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 100 200 300 400 500 600 700 800
Units
Learning Objective 3
Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volume.
Total CM CM Ratio = Total sales For Racing Bicycle Company the ratio is:
$80,000 $200,000 = 40%
Each $1.00 increase in sales results in a total contribution margin increase of 40.
Quick Check
Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. On average, 2,100 cups are sold each month. What is the CM Ratio for Coffee Klatch? a. 1.319 b. 0.758 c. 0.242 d. 4.139
Quick Check
Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. On average, 2,100 cups are sold each month. What is the CM Ratio for Coffee margin Unit contribution CM Ratio = Klatch? Unit selling price a. 1.319 ($1.49-$0.36) = b. 0.758 $1.49 c. 0.242 $1.13 = = 0.758 d. 4.139 $1.49
Learning Objective 4
Show the effects on contribution margin of changes in variable costs, fixed costs, selling price, and volume.
Sales revenue Less: Variable expenses Contribution margin Less: Fixed expenses Net operating income
Sales revenue Less: Variable expenses Contribution margin Less: Fixed expenses Net operating income
Sales increase by $62,000, fixed costs increase by $15,000, and net operating income increases by $2,000.
Sales revenue Less: Variable expenses Contribution margin Less: Fixed expenses Net operating income
Sales increase by $37,500, variable costs increase by $31,125, but fixed expenses decrease by $6,000.
Learning Objective 5
Break-Even Analysis
Equation Method
Profits = (Sales Variable expenses) Fixed expenses OR Sales = Variable expenses + Fixed expenses + Profits
Break-Even Analysis
Here is the information from RBC:
Total Sales (500 bikes) $ 250,000 Less: variable expenses 150,000 Contribution margin $ 100,000 Less: fixed expenses 80,000 Net operating income $ 20,000
Equation Method
We calculate the break-even point as follows:
Sales = Variable expenses + Fixed expenses + Profits
Equation Method
We calculate the break-even point as follows:
Sales = Variable expenses + Fixed expenses + Profits
$500Q = $300Q + $80,000 + $0 $200Q = $80,000 Q = $80,000 $200 per bike Q = 400 bikes
Equation Method
The equation can be modified to calculate the break-even point in sales dollars. Sales = Variable expenses + Fixed expenses + Profits
X = 0.60X + $80,000 + $0
Where: X = Total sales dollars 0.60 = Variable expenses as a % of sales $80,000 = Total fixed expenses
Equation Method
The equation can be modified to calculate the break-even point in sales dollars. Sales = Variable expenses + Fixed expenses + Profits
$80,000 40%
Quick Check
Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. On average 2,100 cups are sold each month. What is the break-even sales in units?
Quick Check
Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable Fixed expenses Break-even = average expense per cup is $0.36. The fixed Unit CM expense per month is $1,300. On average 2,100 $1,300 = cups are sold each month. What is the break-even $1.49/cup - $0.36/cup sales in units?
$1,300 $1.13/cup
= 1,150 cups
Quick Check
Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. On average 2,100 cups are sold each month. What is the break-even sales in dollars?
Quick Check
Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. On average 2,100 cups are sold each month. What is the break-even sales in dollars?
Break-even = sales
=
= $1,715
Learning Objective 6
Learning Objective 7
Learning Objective 8
Compute the break-even point for a multiproduct company and explain the effects of shifts in the sales mix on contribution margin and the break-even point.
a companys products are sold. Different products have different selling prices, cost structures, and contribution margins. Lets assume RBC sells bikes and carts and that the sales mix between the two products remains the same.
Sales revenue Variable expenses Contribution margin Fixed expenses Net operating income Sales mix
$ 250,000
45%
$ 300,000
55%
Sales revenue Variable expenses Contribution margin Fixed expenses Net operating income Sales mix
Rounding Error
$ 158,714 45% $ 193,983 55%
mix is constant. In manufacturing companies, inventories do not change (units produced = units sold).
End of Presentation