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ACCOUNTING
8th EDITION
BY
HANSEN & MOWEN
11 COST-VOLUME-PROFIT ANALYSIS
1
QUESTIONS TO THINK ABOUT:
McFarland’s Fine Foods
2
QUESTIONS TO THINK ABOUT:
McFarland’s Fine Foods
3
QUESTIONS TO THINK ABOUT:
McFarland’s Fine Foods
4
QUESTIONS TO THINK ABOUT:
McFarland’s Fine Foods
5
LEARNING OBJECTIVE
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LO 1
COST-VOLUME-PROFIT (CVP)
CVP expresses:
# units that must be sold to break even
Impact of a given reduction in fixed costs on
break-even point
Impact of an increase in price on profit
Sensitivity analysis of impact of various price or
cost levels on profit
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LO 1
8
LO 1
UNIT: Examples
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LO 1
Operating Income
= Sales revenue
– Variable expenses
– Fixed expenses
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LO 1
11
LO 1
12
LO 1
FORMULA: Break-Even
Break-even is 0 profit.
Break-even:
0 = Sales revenue – Variable expenses – Fixed
expenses
0 = ($400 x Units) – ($325 x Units) - $45,000
($75 x Units) = $45,000
Units = 600
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LO 1
√Check-up on break-even
Sales (600 units @ $400) $ 240,000
Less: Variable expenses 195,000
Contribution margin $ 45,000
Less: Fixed expenses 45,000
Operating income $ 0
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LO 1
CONTRIBUTION MARGIN:
Definition
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LO 1
FORMULA: Break-Even
Break-even units:
# Units = Fixed cost / Unit contribution margin
# Units = $45,000 / ($400 - $325)
= 600
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LO 1
√Check-up on break-even
Sales (600 units @ $400) $ 240,000
Less: Variable expenses 195,000
Contribution margin $ 45,000
Less: Fixed expenses 45,000
Operating income $ 0
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LO 1
18
LO 1
20
LO 1
21
LO 1
23
LO 1
24
LO 1
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LEARNING OBJECTIVE
2 revenue required to
break even or earn a
targeted profit.
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LO 2
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LO 2
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LO 2
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LO 2
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LO 2
Apply cost-volume-
3 profit analysis in a
multiple-product setting.
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LO 3
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LO 3
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LO 3
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LO 3
Is the relative
combination of products
being sold.
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LO 3
WHITTIER CO.: Sales Mix & CVP
Background
Mulching Riding
Price / unit 400 800
VC / unit 325 600
CM 75 200
Product Mix 3 2
Margin* 225 400
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LO 3
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LO 3
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LO 3
BREAK-EVEN SOLUTION
Mulching Riding
Price / unit 400 800
Mulching mower sales =
VC / unit 325 600 $400 x 3 x 154 packages.
CM 75 200
Product Mix 3 2
EXHIBIT 11-1
Margin* 225 400
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LO 3
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LO 3
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LEARNING OBJECTIVE
Prepare a profit-volume
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LO 4
PROFIT-VOLUME GRAPH
EXHIBIT 11-2
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LO 4
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LO 4
COST-PROFIT-VOLUME GRAPH
EXHIBIT 11-3
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LO 4
ASSUMPTIONS OF CVP
CVP analysis assumes
Linear revenue & cost functions
Price, total fixed costs, & unit variable costs
can be accurately identified & remain constant
over the relevant range
What is produced is sold
Sales mix is known
Selling prices & costs are known with certainty
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LO 4
COST-PROFIT-VOLUME GRAPH
EXHIBIT 11-4a
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LO 4
COST-PROFIT-VOLUME GRAPH
Yes. CVP will apply so
long as the cost &
revenue functions are
approximately linear over
the relevant range.
EXHIBIT 11-4b
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LEARNING OBJECTIVE
5 changing variables on
cost-volume-profit
analysis.
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LO 5
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LO 5
ALTERNATIVES
For the mulching mower are:
#1 If advertising expenditures increase by $8,000,
sales will increase from 1,600 to 1,725 mowers.
#2 A price decrease from $400 to $375 per mower
will increase sales from 1,600 to 1,900.
#3 Decreasing price to $375 and increasing
advertising expenditures by $8,000 will
increase sales from 1,600 to 2,600 mowers.
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LO 5
ALTERNATIVE #1
Increasing
advertising
EXHIBIT 11-5 increases profit
by $1,375.
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LO 5
ALTERNATIVE #2
Decreasing price
EXHIBIT 11-6 decreases profit
by $25,000.
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LO 5
ALTERNATIVE #3
The combination of
EXHIBIT 11-7 increasing advertising &
decreasing price increases
profit by $2,000.
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LO 5
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LO 5
57
LO 5
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LO 5
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LO 5
OPERATING LEVERAGE:
Definition
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LO 5
SENSITIVITY ANALYSIS:
Definition
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LO 5
SENSITIVITY ANALYSIS
6 activity-based costing on
cost-volume-profit
analysis.
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LO 6
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LO 6
Break-even =
[Fixed cost + (Unit VC x Units) + (Setup cost x Setups) +Engineering cost
x Engineering hours)] ÷ (Price – Unit variable cost)
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LO 6
# Units
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LO 6
# Units
= [Targeted income + ABC Fixed cost + (Setup cost x Setups) +
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LO 6
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CHAPTER 11
THE END
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