Cost-Volume-Profit

Analysis
Chapter 20

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights

 Fixed Costs (and Fixed
Expenses)

Monthly Basic Telephone

Bill per Local Call
Telephone Bill
Monthly Basic

Number of Local Calls Number of Local Calls

Total fixed costs Cost per call
remain constant as declines as
activity increases. activity increases.

20-2
 Variable Costs (and Variable
Expenses)
Total Long Distance

Cost per Minute

Telephone Bill

Minutes Talked Minutes Talked

Total variable Cost per Minute

costs increase as is constant as
activity increases. activity increases.

20-3
Cost Behavior Summary

Summary of Variable and Fixed Cost Behavior

Variable Costs Fixed costs

Remains the same even Dereases as activity level

Per Unit
when activity level changes. increases.
Changes as activity level Remains the same over wide
Total
changes. ranges of activity.

20-4
 Semivariable Costs (Mixed
Costs)
Slope is
variable cost
per unit
of activity.
Total Utility Cost

t
cos
d Variable
i xe
l m
t a Utility Charge
To

Fixed Monthly
Utility Charge
Activity (Kilowatt Hours)
20-5
 CVP Relationships : A
Graphical Analysis
 Starting at the origin, draw
the total revenue line with a slope
equal to the unit sales price.
 Draw the
total cost line
Costs and Revenue

Break-even Profit with a slope

Point equal to the
in Dollars

unit variable
cost.

 Total fixed
Loss cost extends
horizontally
from the
vertical axis.
Volume in Units 20-6
Economies of Scale
Economies
Economies ofof scale
scale are
are most
most apparent
apparent
in
in business
business with
with high
high fixed
fixed costs.
costs.

Utility
Utility Oil
Oil Steel
Steel
Companies
Companies Refineries
Refineries Mills
Mills

Number
Fixed Costs of Flights Fixed Cost
per Month per Month per Flight
$ 100,000,000 1,000 $ 100,000
100,000,000 2,000 50,000
100,000,000 4,000 25,000
100,000,000 8,000 12,500

Airlines
Airlines
20-7
Semivariable Costs
Total cost increases to a
new higher cost for the next
higher range of activity.

Total cost remains

Cost
constant within a
narrow range of
activity. Activity

20-8
 Curvilinear Costs
Curvilinear
Cost Function
Total Cost

A straight line
closely (constant
unit variable cost)
approximates a
curvilinear variable
Relevant Range
cost line within
the relevant range.

Volume of Output
20-9
Computing Break-Even
Point
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
Operating income $ 10,000

How
How
Contribution
How
How many
much
muchunits
many contribution
unitsmargin
must
must this
contribution
Contribution margin is
is margin
thisamount
company
margin must
company
amount by
by which
must sell
this
thisto
sell
which tocompany
revenue
cover
cover its
company
revenueits
exceeds
have
the
have
exceeds to
tovariable
the cover
fixed
fixed costs
cover its
itscosts
costs
variable fixed
fixed
costs (break
of
costs
producing
(break
costs
of even)?
(break
(breakthe
even)?
producing even)?
revenue.
even)?
the revenue.
Answer:
Answer: $30,000Answer:
$30,000 ÷÷ $20
Answer: $20$30,000
per
per unit
unit == 1,500
$30,000 1,500 units
units

20-10
How Many Units Must We
Sell?
We have just seen one of the basic CVP
relationships – the break-even computation.
Break-even Fixed costs
=
point in units Contribution margin per unit

Unit sales price less unit variable cost

($20 in previous example)

20-11
How Many Dollars in Sales
Must We Generate?
The break-even formula may also be
expressed in sales dollars.

Break-even Fixed costs

=
point in dollars Contribution margin ratio

Unit sales price

Unit variable cost
20-12
Computing Sales Needed
to Achieve Target
Operating Income
Break-even formulas may be adjusted
to show the sales volume needed to
earn
any amount of operating income.

Fixed costs + Target income

Unit sales =
Contribution margin per unit

Fixed costs + Target income

Dollar sales =
Contribution margin ratio

20-13
What is Our Margin of
Safety?
Margin of safety is the amount by which sales
may decline before reaching break-even sales:

Margin of safety = Actual sales – Break-even sales

Margin of safety provides a quick means of

estimating operating income at any level of sales:

Operating Margin Contribution

= ×
Income of safety margin ratio

20-14
 Determining Semivariable
Cost Elements : The High-
Low Method
Matrix, Inc. recorded the following production activity and
maintenance costs for two months:

Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600
Using these two levels of activity, compute:
 the variable cost per unit.
 the total fixed cost.
 total cost formula.

20-15
Determining Semivariable
Cost Elements : The High-
Low Method
Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600

 Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit

 Fixed cost = Total cost – Total variable cost
Fixed cost = $9,700 – ($0.90 per unit × 9,000 units)
Fixed cost = $9,700 – $8,100 = $1,600
 Total cost = $1,600 + $.90 per unit

20-16
End of Chapter 20

20-17