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Cost-Volume-Profit
Relationships
Basics of Cost-Volume-Profit Analysis
InInaInCVP
aaCVCgraph,
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Units
Dollars
CVP Graph
Fixed Expenses
Units
CVP Graph
Total Expenses
Dollars
Fixed Expenses
Units
CVP Graph
Total Sales
Total Expenses
Dollars
Fixed Expenses
Units
CVP Graph
BBrreeBreak-even
aakk-ee- vveenpoint
n ppooiinntt
(400 units or $200,000 in sales)
(44( 0000uunniitsst oorr$ a
re
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)
fit A
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s
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Learning Objective
LO3
40%
$500
Contribution Margin Ratio
iinncrecreaaseseiinnCCM.M
. ($
$( 5500,,000000××4400%% == $
Quick Check
Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup
of coffee is $1.49 and the average variable
expense per cup is $0.36. The average fixed
expense per month is $1,300. On average, 2,100
cups are sold each month. What is the CM Ratio
for Coffee Klatch?
a. 1.319
b. 0.758
c. 0.242
d. 4.139
Quick Check
Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup
of coffee is $1.49 and the average variable
expense per cup is $0.36. The average fixed
expense per month is $1,300. On average, 2,100
cups are sold each month. What is the CM Ratio
for Coffee Klatch
a. 1.319 ? Unit contribution margin
CM Ratio = Unit selling price
b. 0.758
($1.49-$0.36)
c. 0.242 =
$1.49
d. 4.139
$1.13
= = 0.758
$1.49
Learning Objective
LO4
Sales increased
SaSalle essiinnccrby
ree$20,000,
aasseebdbdyy $but
$22net
00,,000000,,
operating income decreased bbuuttnby
neett
ooppeerraattiinngg
Changes in Fixed Costs and Sales Volume
Sales
SaSallincrease
eessiinnccby
rre$40,000,
eaassebebyand
y $$4net
400operating
,,000000,, aincome
anndd
nneettooincreases
ppeerraatiitby
nng$10,200.
g iinnccoommee
Change in Fixed Cost, Sales Price and
Volume
Sales
SaSalleeincrease
ssiinnccrrby
eea$62,000,
asse bebyy fixed
$$662costs
2,,0000increase
00,, fiifxxeby
edd
$15,000, and c coooperating
net sstsst iinnccincome
rreeaassincreases
ee bbyy by $2,000.
Change in Variable Cost, Fixed Cost and
Sales Volume
What is the profit impact if Racing (1) pays
a $15 sales commission per bike sold,
instead of paying salespersons flat salaries
that currently total $6,000 per month, and
(2) increases unit sales from 500 to 575
bikes?
Change in Variable Cost, Fixed Cost and
Sales Volume
SalesSincrease
insnscby
Saalleie crr$37,500,
eeaassebebvariable
yy $$337costs
7,,5500increase
00,, by
vvaarriiabut
$31,125, abbfixed
lleecco ossttssiindecrease
expenses nccrreeaasby
see bbyy
$6,000.
Change in Regular Sales Price
If Racing has an opportunity to sell 150
bikes to a wholesaler without disturbing
sales to other customers or fixed
expenses, what price would it quote to the
wholesaler if it wants to increase monthly
profits by $3,000?
Change in Regular Sales Price
OR
Where:
Q = Number of bikes sold
$500 = Unit selling price
$300 = Unit variable expense
$80,000 = Total fixed expense
Equation Method
We calculate the break-even point as follows:
Sales = Variable expenses + Fixed expenses + Profits
X = 0.60X + $80,000 + $0
Where:
X = Total sales dollars
0.60 = Variable expenses as a % of
sales
$80,000 = Total fixed expenses
Equation Method
The equation can be modified to calculate the
break-even point in sales dollars.
X = 0.60X + $80,000 + $0
0.40X = $80,000
X = $80,000 ÷
0.40 X =$200,000
Contribution Margin Method
$80,000
= $200,000 break-even sales
40%
Quick Check
Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup
of coffee is $1.49 and the average variable
expense per cup is $0.36. The average fixed
expense per month is $1,300. On average 2,100
cups are sold each month. What is the break-even
sales in units?
a. 872 cups
b. 3,611 cups
c. 1,200 cups
d. 1,150 cups
Quick Check
Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup
of coffee is $1 .49 and the average
Fixedvariable
expenses
expense per upBreak-even =
is $0.36. The average
Unit fixed
CM
cexpense per month is $1,300. On average 2,100
$1,300
=
cups are sold each month. What is- $0.36/cup
the break-
$1.49/cup
sales in units?even
$1,300
a. 872 cups =
$1.13/cup
b. 3,611 cups
= 1,150 cups
c. 1,200 cups
d. 1,150 cups
Quick Check
Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup
of coffee is $1.49 and the average variable
expense per cup is $0.36. The average fixed
expense per month is $1,300. On average 2,100
cups are sold each month. What is the break-even
sales in dollars?
a. $1,300
b. $1,715
c. $1,788
d. $3,129
Quick Check
Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup
of coffee is $1.49 and the average variable
expense per cup is $0.36. The average fixed
expense per month is $1,300. On average 2,100
cups are sold each month. What is the break-even
sales in dollars?
a. $1,300 Break-even Fixed expenses
=
b. $1,715 sales CM Ratio
$1,300
c. $1,788 =
0.758
d. $3,129
= $1,715
Learning Objective
LO6
$200Q = $180,000
Q = 900 bikes
The Contribution Margin Approach
The contribution margin method can be used
to determine that 900 bikes must be sold
to
earn the target profit of $100,000.
Unit sales to attain Fixed expenses + Target profit
=
the target profit Unit contribution margin
Margin of $50,000
= 100 bikes
Safety in units = $500
Quick Check
Coffee Klatch is an espresso stand in a
downtown office building. The average selling
price of a cup of coffee is $1.49 and the
average variable expense per cup is $0.36.
The average fixed expense per month is
$1,300. On average 2,100 cups are sold each
month. What is the margin of safety?
a. 3,250 cups
b. 950 cups
c. 1,150 cups
d. 2,100 cups
Quick Check
Coffee Klatch is an espresso stand in a
downtown office
Margin of building.
safety The average
= Total sales selling
– Break-even sales
= 2,100
price of a cup of coffee cups –and
is $1.49 1,150 cups
the
= 950 cups
erage variable expense per cup is $0.36.
av e average fixed expenseor per month is
$1,300. On average
Margin of safety2,100 cups
950 cups are sold
Th each percentage = 2,100 cups = 45%
nth. What is the margin of safety?
mo
a. 3,250 cups
b. 950 cups
c. 1,150 cups
d. 2,100 cups
Cost Structure and Profit Stability
Cost structure refers to the relative proportion
of fixed and variable costs in an
organization.
Managers often have some latitude in
determining their organization’s cost structure.
Cost Structure and Profit Stability
There are advantages and disadvantages to high
fixed cost (or low variable cost) and low fixed cost
(or high variable cost) structures.
An
AAn advantage
n aaddvvaaof nnatta
high
aggefixed
eooff
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aahhistructure
igghh ffiixxeis edd that
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A disadvantage
a h i g h f i x ofe adhigh
with lower proportion of a h i g h f i x e d
fixed cost structure is that
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ghhecosts.
erriinnggoooodd
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tthhaattiinncoocmmee wwiillll
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Learning Objective
LO8
$100,000 = 5
$20,000
Operating Leverage
With an operating leverage of 5, if Racing
increases its sales by 10%, net operating
income would increase by 50%.
$265,000
= 48.2%
$550,000 (rounded)
Multi-product break-even analysis
Break-even Fixed expenses
=
sales CM Ratio
$170,000
=
48.2%
= $352,697
Key Assumptions of CVP Analysis