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Objectives
Objectives
1. DetermineAfter
the number
ofthis
units that must
studying
After studying this
be sold to chapter,
break even
or
earn
a
target
chapter, you
you
profit.
should
should be
be able
able to:
to:
2. Calculate the amount of revenue required
to break even or to earn a targeted profit.
3. Apply cost-volume-profit analysis in a
multiple-product setting.
4. Prepare a profit-volume graph and a
cost-volume-profit graph, and explain the
meaning of each.
Objectives
Objectives
5. Explain the impact of risk, uncertainty,
and changing variables on cost-volumeprofit analysis.
6. Discuss the impact of activity-based
costing on cost-volume-profit analysis
Equation Approach
Sales revenue Variable expenses Fixed expenses = Profit
Unit
Sales
sales volume
price in units
Unit
Sales
variable volume
expense in units
($500 X)
($300 X)
$80,000 = $0
($200X) $80,000 = $0
X = 400 surf boards
Contribution-Margin Approach
Consider the following information
developed by the accountant at Curl, Inc.:
Total
$250,000
150,000
$100,000
80,000
$ 20,000
Per Unit
$
500
300
$
200
Percent
100%
60%
40%
Contribution-Margin Approach
For each additional surf board sold, Curl
generates $200 in contribution margin.
Total
$250,000
150,000
$100,000
80,000
$ 20,000
Per Unit
$
500
300
$
200
Percent
100%
60%
40%
Contribution-Margin Approach
Fixed expenses
Break-even point
=
Unit contribution margin
(in units)
Sales (500 surf boards)
Less: variable expenses
Contribution margin
Less: fixed expenses
Net income
$80,000
$200
Total
$250,000
150,000
$100,000
80,000
$ 20,000
Per Unit
$
500
300
$
200
Percent
100%
60%
40%
Contribution-Margin Approach
Here is the proof!
Total
$200,000
120,000
$ 80,000
80,000
$
-
Per Unit
$
500
300
$
200
Percent
100%
60%
40%
Contribution margin
Sales
Fixed expense
CM Ratio
= CM
Ratio
Break-even point
=
(in sales dollars)
$80,000
40%
Total
$200,000
120,000
$ 80,000
80,000
$
-
Per Unit
$
500
300
$
200
$200,000 sales
Percent
100%
60%
40%
$80,000 + $100,000
= 900 surf boards
$200
Equation Approach
Sales revenue Variable expenses Fixed expenses = Profit
($500 X)
Safety Margin
Curl, Inc. has a break-even point of $200,000.
If actual sales are $250,000, the safety margin is
$50,000 or 100 surf boards.
Sales
Less: variable expenses
Contribution margin
Less: fixed expenses
Net income
Break-even
sales
400 units
$ 200,000
120,000
80,000
80,000
$
-
Actual sales
500 units
$ 250,000
150,000
100,000
80,000
$
20,000
540
540 units
units $500
$500 per
per unit
unit == $270,000
$270,000
$80,000
$80,000 ++ $10,000
$10,000 advertising
advertising == $90,000
$90,000
Changes in Unit
Contribution Margin
Because of increases in cost of raw materials,
Curls variable cost per unit has increased
from $300 to $310 per surfboard. With no
change in selling price per unit, what will be
the new break-even point?
($500 X)
($310 X) $80,000 = $0
Changes in Unit
Contribution Margin
Suppose Curl, Inc. increases the price of
each surfboard to $550. With no change
in variable cost per unit, what will be the
new break-even point?
($550 X)
($300 X) $80,000 = $0
X = 320 units
Given:
Fixed expenses
Unit contribution margin
Target net profit
Fixed expenses
Unit contribution margin
Expected sales volume
$200 62.5%
$550 37.5%
$170,000
$331.25
Break-even
= 514 combined unit sales
point
Assumptions Underlying
CVP Analysis
Selling price is constant throughout
the entire relevant range.
Costs are linear over the relevant
range.
In multi-product companies, the sales
mix is constant.
In manufacturing firms, inventories do
not change (units produced = units
sold).
Contribution margin
Net income
Actual sales
500 Board
Sales
$ 250,000
Less: variable expenses
150,000
Contribution margin
100,000
Less: fixed expenses
80,000
Net income
$
20,000
$100,000
$20,000
= 5
10%
5
50%
Before-tax
=
net income
End of Chapter 8
We made
it!