Beruflich Dokumente
Kultur Dokumente
Profit
Planning
Prepared by
Douglas Cloud
Pepperdine University
2-2
Objectives
Describe and apply the concepts of fixed and
After reading this
variable costs.
chapter, you should
Describe and apply the concept of
be able to:
contribution margin.
Prepare contribution margin format income
statements.
Describe and discuss the significance of the
relevant range.
Construct and interpret a cost-volume-profit
graph.
2-3
Objectives
Determine the sales volume or selling price
needed to achieve a target profit.
Describe and illustrate target costing.
Describe and discuss the importance of cost
structure.
Discuss the assumptions that underlie cost-
volume-profit analysis.
2-4
Cost Behavior
Variable costs change, in total, in direct
proportion to changes in volume.
Selling price of backpack $20.00
Cost of backpack from
manufacturer $10.00
Variable cost to pack and ship 1.00
Sales commission (5%) 1.00
Total variable cost $12.00
Variable Costs
Example
Exeter Company
5,000 units 6,000 units 7,000 units
Sales ($20 per unit) $100,000 $120,000 $140,000
Variable costs ($12 per unit) 60,000 72,000 84,000
Contribution margin $ 40,000 $ 48,000 $ 56,000
Fixed costs 40,000 40,000 40,000
Profit $0 $8,000 $16,000
2-6
Important Rule
As sales change,
income changes by 6,000 Backpacks
Contribution margin
unit contribution
for 6,000 backpacks $48,000
margin multiplied by
Less fixed costs 40,000
the change in sales.
Net income $ 8,000
The unit
contribution
margin per
backpack is $8.
2-7
Operating Leverage
6,000 Backpacks
Contribution margin
for 6,000 backpacks $48,000 $48,000
Less fixed costs 40,000 $8,000
Net income $ 8,000 =6
2-10
Relevant Range
Relevant range is
the range of volume
over which it can
reasonably expect
selling price, per-
unit variable cost,
and total fixed costs
to be constant.
2-11
Definitions
Definitions
Cost-Volume-Profit Graph
Dollar
s $160,000 Total Total
Revenues Cost
$140,000
$120,000 Profit
$100,000 Area
Loss Break-even point,
$80,000
Area 5,000 units, $100,000
$60,000
$40,000
Fixed cost line
$20,000
$0
Unit Sales
2-14
Break-Even Point
Profit
Profit
Contribution total
Profit = margin per x Q fixed
unit costs
2-17
Break-Even Point
In units
Total fixed costs
Q (break-even sales in units) =
Contribution margin
per unit
$40,000
= 5,000 backpacks
$20 - $12
2-18
Contribution Margin
Percentage
Total fixed costs
B/E in $ =
Contribution margin ratio per unit
Contribution margin
Sales
$8 $20 = 40%
2-19
Break-Even Point
In dollars
Total fixed costs
S (break-even sales in dollars) =
Contribution margin
ratio
$40,000
= $100,000
.40
2-20
Dollars Percentages
Sales $160,000 100%
Variable costs 96,000 60%
Contribution margin $ 64,000 40%
Fixed costs 40,000 25%
Income $ 24,000 15%
2-22
Target Costing
$40,000
Process A: B/E = = 13,333 units
units
$3
$95,000
Process B: B/E = = 15,833 units
units
$6
2-28
Margin of Safety
The difference in volume from the expected
level of sales to the break-even point is called
the margin of safety (MOS).
If expected sales are 20,000 units, the margin of
safety is 6,667 units (20,000 - 13,333).
If expected sales are $200,000, the margin of
safety is $66,670 ($200,000 - $133,330).
2-29
Indifference Point
The indifference point is the level of volume
at which total costs, and hence profits, are the
same under both cost structures.
Chapter 2
The End
2-32