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PowerPoint Presentation by
Gail B. Wright
Professor Emeritus of Accounting
Bryant University
MANAGEMENT
ACCOUNTING
8th EDITION
BY
HANSEN & MOWEN
11 COST-VOLUME-PROFIT ANALYSIS
1
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
1. Determine the number of units sold to break
even or earn a targeted profit.
2. Calculate the amount of revenue required to
break even or earn a targeted profit.
3. Apply cost-volume-profit analysis in a
multiple-product setting.
Continued
2
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
4. Prepare a profit-volume graph & a costvolume-profit graph, and explain the
meaning of each.
5. Explain the impact of risk, uncertainty, &
changing variables on cost-volume-profit
analysis.
6. Discuss the impact of activity-based costing
on cost-volume-profit analysis.
3
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
LO 1
BREAK-EVEN
BREAK-EVEN POINT:
POINT: Definition
Definition
LO 1
Operating Income
= Sales revenue
Variable expenses
Fixed expenses
6
LO 1
NET
NET INCOME:
INCOME: Definition
Definition
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
8
LO 1
WHITTIER
WHITTIER CO.:
CO.: Income
Income Statement
Statement
Check-up on break-even
Sales (600 units @ $400)
$ 240,000
195,000
$ 45,000
45,000
$
LO 1
CONTRIBUTION
CONTRIBUTION MARGIN:
MARGIN:
Definition
Definition
10
LO 1
FORMULA: Break-Even
Break-even using contribution margin.
Break-even units:
# Units = Fixed cost / Unit contribution margin
# Units = $45,000 / ($400 - $325)
= 600
11
LO 1
LO 2
VARIABLE
VARIABLE COST
COST RATIO:
RATIO:
Definition
Definition
13
LO 2
CONTRIBUTION
CONTRIBUTION MARGIN
MARGIN RATIO:
RATIO:
Definition
Definition
14
LO 2
WHITTIER
WHITTIER CO.:
CO.: Background
Background
CMR for mulching lawn mower.
Sales (1,000 units @ $400)
Less: Variable expenses
Contribution margin
Less: Fixed expenses
Operating income
$ 400,000
100.00%
325,000
81.25%
$ 75,000
18.75%
45,000
$ 30,000
15
LO 2
Sales = $240,000
OR
Break-even Sales = Fixed cost / CMR
$240,000
= $45,000 / 0.1875
16
LO 3
17
LO 3
DIRECT
DIRECT FIXED
FIXED EXPENSES:
EXPENSES:
Definition
Definition
18
LO 3
WHITTIER
WHITTIER CO.:
CO.: Sales
Sales Mix
Mix &
& CVP
CVP
Background
Background
Unit
Price
VC
Mulching
$400
$325
$ 75
$ 225
800
600
200
400
Riding
Package Total
Package
CM Cont. Mix
Margin*
$ 625
19
LO 3
20
LO 3
BREAK-EVEN SOLUTION
Mulching mower sales =
$400 x 3 x 154 packages.
EXHIBIT 11-1
21
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
22
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
23
LO 5
LO 5
ALTERNATIVES
For
Forthe
themulching
mulchingmower
mowerare:
are:
#1
#1IfIfadvertising
advertisingexpenditures
expendituresincrease
increaseby
by$8,000,
$8,000,
sales
saleswill
willincrease
increasefrom
from1,600
1,600toto1,725
1,725mowers.
mowers.
#2
#2AAprice
pricedecrease
decreasefrom
from$400
$400toto$375
$375per
permower
mower
will
willincrease
increasesales
salesfrom
from1,600
1,600toto1,900.
1,900.
#3
#3Decreasing
Decreasingprice
pricetoto$375
$375and
andincreasing
increasing
advertising
advertisingexpenditures
expendituresby
by$8,000
$8,000will
willincrease
increase
sales
salesfrom
from1,600
1,600toto2,600
2,600mowers.
mowers.
25
LO 5
26
LO 5
27
LO 5
SENSITIVITY
SENSITIVITY ANALYSIS:
ANALYSIS:
Definition
Definition
28
LO 5
SENSITIVITY ANALYSIS
Under 2 systems, the same
change in price will have
different effects on elements
of CVP, & response to risk
& uncertainty.
EXHIBIT 11-8
29
LO 6
30
LO 6
CHAPTER 11
THE
THE END
END
32