Professional Documents
Culture Documents
Cost-Volume-Profit Analysis
Objective 1
Identify how changes in volume
affect costs.
Types of
Costs
Variable
Fixed
Mixed
Total Variable Cost
Total variable costs change
when activity changes.
Total Long Distance
Minutes Talked
Variable Cost Per Unit
Variable costs per unit do not change
as activity increases.
The cost per long
Telephone Charge
distance
Per Minute
minute talked is
constant.
For example, 10
cents per minute.
Minutes Talked
Variable Costs
Example
Consider Grand Canyon Railway.
Assume that breakfast costs Grand
–
–
0 1 2 3 4 5
Volume
(Thousands of passengers)
Total Fixed Cost
Total fixed costs remain unchanged
when activity changes.
Your monthly
basic
Telephone Bill
Monthly Basic
telephone bill
probably
does not change
when
you make more
Number of Local Calls local calls.
Mixed Costs
Contain fixed portion that is incurred
even when facility is unused & variable
portion that increases with usage.
Example: monthly electric utility
charge
Fixed service fee
Variable charge per kilowatt hour used
Mixed Costs
Total Utility Cost
ost
d c Variable
i xe
l m Utility Charge
o ta
T
Fixed Monthly
Utility Charge
Activity (Kilowatt Hours)
Relevant Range...
$120,000 –
Relevant Range
$80,000 –
st s o C de xi F
$40,000
–
–
0 5,000 10,000 15,000 20,000 25,000
Volume in Units
Objective 2
Use CVP analysis to compute
breakeven point.
Assumptions of CVP
Analysis
Expenses can be classified as either
variable or fixed.
CVP relationships are linear over a
wide range of production and sales.
Sales prices, unit variable cost, and
total fixed expenses will not vary
within the relevant range.
Assumptions of CVP
Analysis
Volume is the only cost driver.
The relevant range of volume is
specified.
Inventory levels will be unchanged.
The sales mix remains unchanged
during the period.
Contribution Margin
Income Statement
Sales
- Variable Costs
Contribution Margin
- Fixed Costs
Operating Income
Contribution Margin
Example
Luis and Tom manufacture a device
that allows users to take a closer look
at icebergs from a ship.
The usual price for the device is
$100.
Variable costs are $70 per unit.
They receive a proposal from a
company in Newfoundland to sell
20,000 units at a price of $85.
Contribution Margin
Example
There is sufficient capacity to
produce the order.
How do we analyze this situation?
$85 – $70 = $15 contribution
margin.
$15 × 20,000 units = $300,000
(total increase in contribution
margin)
Contribution Margin
Income Statement
Sales (20,000 x $85) $1,700,000
Variable costs
(20,000 x $70) (1,400,000)
Contribution margin $300,000
Computing Break-Even
Point
Total costs
Volume in Units
Preparing a CVP Chart
Starting at the origin, draw the sales line Sales
with a slope equal to the unit sales price.
Costs and Revenue
Total costs
Break-even
Point
Volume in Units
Various Sales Levels
Example
What operating income is
expected when sales are _____
units?
Target Operating Income
Example
Suppose that our business would
be content with operating income
of _________________.
How many units must be sold?
Objective 4
Use CVP method to perform
sensitivity analysis.
Change in Sales Price
Example
Suppose that the sales price per
device is _____ rather than ____
What is the revised breakeven
sales in units?
Change in Variable Costs
Example
Suppose that variable expenses
per device are ____ instead of ____
Other factors remain unchanged.
Change in Fixed Costs
Example
Suppose that fixed costs increased
by $30,000.
What are the new fixed costs?
What is the new breakeven point?
Margin of Safety Example
$5,000
$4,000
$3,000 rofi
t Revenues
$2,000 Break even in units = 1,200,000
P
Total Expense
Break
$1,000 even in s$ = 1,200,000 x 24 = $28,800,000
$- Los
- 50 100 150 200 250
(in thousands)
Windows Doors
Selling Price $200 $500
Variable Cost 125 350
Unit Contribution $ 75 $ 150
Sales Mix Ratio 4 1
Computing Multiproduct
Break-Even Point
Step 1: Compute contribution margin per
composite unit.
Windows Doors
Selling Price $200 $500
Variable Cost 125 350
Unit Contribution $ 75 $ 150
Sales Mix Ratio
Composite C/M
Computing Multiproduct
Break-Even Point
Sales Composite
Product Mix Units Units
Window 4 × 2,000 = 8,000
Door 1 × 2,000 = 2,000
Multiproduct Break-Even
Income Statement
Step 4: Verify the results.