DECISION MAKING

REGARDING COST

COST VOLUME PROFIT

ANALYSIS
FIXED COSTS in $

no of units fixed costs

0 3000
100 3000
200 3000
300 3000
400 3000
500 3000
 fixed costs

8000
7000
6000
5000
cost in $

4000
3000
2000
1000
0
1 2 3 4 5 6
number of units(100s)
VARIABLE COSTS in $

no of units variable costs

0 0
100 500
200 1000
300 1500
400 2000
500 2500
 VARIABLE COSTS

3000

2500

2000
cost ($)

1500

1000

500

0
1 2 3 4 5
number of units in 100s
RELATIONSHIP BETWEEN TOTAL COSTS & TOTAL REVENUES

number of units fixed costs total costs total revenue

100 3000 3500 1400
200 3000 4000 2800
300 3000 4500 4200
400 3000 5000 5600
500 3000 5500 7000
600 3000 6000 84000
 Break-even chart showing Margin of safety

8000
7000
6000
5000 fixed costs
cost ($)

4000 total costs

3000 total revenue
2000
1000
0
1 2 3 4 5
number of units in 100s
CALCULATE BREAK-EVEN POINT

Total revenues = Total costs

Total revenues = Fixed costs + Total Variable costs

N x Sales revenue per unit = Fixed costs+(N x Variable cost per unit)

N x(Sales revenue per unit)–(N x Variable cost per unit)= Fixed costs

N ( Sales revenue per unit – Variable cost per unit ) = Fixed costs

N= Fixed costs . =333 units

Sales revenue per unit – Variable cost per unit
CONTRIBUTION
N= Fixed costs .
Sales revenue per unit – Variable cost per unit

Bottom part is the Contribution per Unit

Sales revenue per unit – Variable cost per unit
It is referred as contribution because sale
of each unit contributes to meeting fixed
cost
TOTAL CONTRIBUTION

= N ( Sales revenue per unit – Variable cost per unit )

PROFIT-VOLUME ANALYSIS

PROFIT-VOLUME ANALYSIS

8000
7000
Loss-------Profit ($)

6000
5000
fixed costs
4000
total revenue
3000
2000
1000
0
1 2 3 4 5 6
number of units in 100s
 MARGIN OF SAFETY

The extent to which the planned level of sales lies

above the breakeven point

The difference between the budgeted sales

and the break-even sales
SITUATIONS WHICH WANT
DECISIONS
Deciding how many units of inventory to
buy?

Deciding whether to drop a product?

Deciding which product should be

produced more?

Deciding whether to make or buy a part or

a product?
SHORT TERM DECISION MAKING
1. Determining Relevant costs and
Relevant revenues

Incremental costs

1. Avoidable costs

2. Opportunity costs