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Cost-Volume-Profit Analysis
Revenues
Costs
Presentation Outline
I.
A. Variable Costs
Although variable cost per unit remain
constant, total variable cost increases
and decreases in proportion to
changes in the activity level.
$
Variable cost
in total
Level of Activity
Total fixed
cost
Level of Activity
Discretionary Fixed
Costs
Arise from annual
decisions by
management to spend
in certain fixed cost
areas (i.e., advertising,
research and
development,
maintenance).
D. Mixed Cost
A mixed cost has both a variable and
a fixed component.
$
Variable
component
Fixed
component
Level of Activity
E. Step Costs
Step costs are those costs that are fixed for a
range of volume but increase to a higher level
when the upper bound of the range is exceeded.
At that point the costs again remain fixed until
another upper bound is exceeded.
$
Level of Activity
B. Scattergraphs
1.
Outliers
C. Regression Analysis
Total Cost
Line
Variable Cost
Fixed Cost
Activity Level
The variable cost element b is computed as follows:
b = (Cost at high activity level) (Cost at low activity level)
(High activity level) (Low activity level)
y=a+bx
Total cost
Fixed
cost
Number of units
of activity
C o s t o f R e c e iv in g
R e p o rt
B. Scattergraph
Scattergraph
250
200
150
100
50
0
-
50
100
150
1. Outliers
Outliers are abnormal
or
nonrepresentative
observations within
a data set that may
be inadvertently
used in the
application of the
high-low method.
C. Regression Analysis
Regression analysis is a statistical
technique that analyzes the association
between dependent and independent
variables.
An independent variable is a variable
that, when changed, will cause
consistent and observable changes in
the dependent variable.
Cost of Receiving
Report
250
200
150
100
50
0
-
50
100
150
Multiple Regression
Two or more
independent
variables are used
to predict the
dependent
variable.
y=a+bx
y = a + b1x1 + b2x2
Relevant
range
Level of Activity
Total
variable cost
Relevant
range
Level of Activity
Total fixed
cost
May be computed
per unit or in total
(see page 235).
Contribution
margin ratio is the
contribution
margin divided by
sales (see page
240)
Unit selling
x=
price
Fixed
costs
Target pretax
+
profit
Unit variable
Fixed
Target pretax
x + costs +
cost
profit
Target
units
Target
sales $
D. Multiproduct Analysis
Contribution Margin Approach (See
example on pages 127-128)
Contribution Margin Ratio
Approach (See example on pages
128-131)
E. Constraints
When there are constraints on how
many items can be provided, the
focus shifts from the contribution
margin per unit to the contribution
margin per unit of constraint. See
illustration on page 135.
F. Cost-Volume-Profit
Assumptions
Selling price remains constant
Cost can be accurately separated
into fixed and variable components
Variable and fixed cost behavior
assumptions hold
Sales mix is constant
G. Margin of Safety
An Illustration of
Regression Analysis
Using Microsoft
Excel
Dependent variable
Independent variable
Prediction
equation
Variable
Cost per
Unit
y = $3,998.25 + 2.09x
Fixed Cost
Number
of Units
$3,998.25
Fixed
Cost
Coefficient of Correlation
Coefficient of Determination
Summary
Cost behavior
Separating mixed costs
The relevant range
Target net profit and breakeven
analysis
Degree of operating leverage