Download presentation

Presentation is loading. Please wait.

Published byJadon Redford Modified about 1 year ago

1
C3 - 1 CVP analysis is used to answer questions such as: –How many coffees must Starbucks sell in a store to break even? –How many coffees must Starbucks sell in order to make $10,000 at a store? –What is the change in income if selling prices decline and sales volume increases? –How much does income increase if we install a new machine to reduce labor costs? –What is the income effect if we change the sales mix of our products or services? CVP analysis is used to answer questions such as: –How many coffees must Starbucks sell in a store to break even? –How many coffees must Starbucks sell in order to make $10,000 at a store? –What is the change in income if selling prices decline and sales volume increases? –How much does income increase if we install a new machine to reduce labor costs? –What is the income effect if we change the sales mix of our products or services? Questions Addressed by Cost-Volume-Profit Analysis C2 18-1

2
C3 - 2 Cost Behavior Summary C1 18-2

3
C3 - 3 Mixed costs contain a fixed portion that is incurred even when the facility is unused, and a variable portion that increases with usage. Example: monthly electric utility charge –Fixed service fee –Variable charge per kilowatt hour used Mixed Costs C1 18-3

4
C3 - 4 Activity Cost Total cost remains constant within a narrow range of activity. Example: Adding a supervisor for each 10 new workers. Step-Wise Costs C1

5
C3 - 5 Curvilinear Costs Also called a nonlinear cost, it increases at a NON- constant rate as volume increases. A linear cost increases at a constant rate (variable costs) Example: adding hourly workers. The first few increase output because they can specialize more, but too many starts to slow communications and crowd a work space.

6
C3 - 6 Variable Costs Total Variable Cost Graph Total Costs $300,000 $250,000 $200,000 $150,000 $100,000 $50, Unit Variable Cost Graph $20 $15 $10 $5 0 Cost per Unit ,000 $ 50,000 $10 10, , , , , , , , , , Units Total Cost Produced Cost per Unit Units Produced (000)

7
C3 - 7 Variable Costs Total Variable Cost Graph Total Costs $300,000 $250,000 $200,000 $150,000 $100,000 $50, Unit Variable Cost Graph $20 $15 $10 $5 0 Cost per Unit ,000 $ 50,000 $10 10, , , , , , , , , , Units Total Cost Produced Cost per Unit Units Produced (000)

8
C3 - 8 Variable Costs Total Variable Cost Graph Total Costs $300,000 $250,000 $200,000 $150,000 $100,000 $50, Unit Variable Cost Graph $20 $15 $10 $5 0 Cost per Unit ,000 $ 50,000 $10 10, , , , , , , , , , Units Total Cost Produced Cost per Unit Units Produced (000)

9
C3 - 9 Fixed Costs Total Fixed Cost Graph Total Costs 0 Unit Fixed Cost Graph Cost per Unit 50,000 $75,000 $ ,000 75, ,000 75, ,000 75, ,000 75, ,000 75, Units Total Cost Produced Cost per Unit Units Produced (000) $150,000 $125,000 $100,000 $75,000 $50,000 $25, $1.50 $1.25 $1.00 $.75 $.50 $

10
C Fixed Costs Total Fixed Cost Graph Total Costs 0 Unit Fixed Cost Graph Cost per Unit 50,000 $75,000 $ ,000 75, ,000 75, ,000 75, ,000 75, ,000 75, Units Total Cost Produced Cost per Unit $150,000 $125,000 $100,000 $75,000 $50,000 $25, $1.50 $1.25 $1.00 $.75 $.50 $ Units Produced (000)

11
C Fixed Costs Total Fixed Cost Graph Total Costs 0 Unit Fixed Cost Graph Cost per Unit 50,000 $75,000 $ ,000 75, ,000 75, ,000 75, ,000 75, ,000 75, Units Total Cost Produced Cost per Unit $150,000 $125,000 $100,000 $75,000 $50,000 $25, $1.50 $1.25 $1.00 $.75 $.50 $ Units Produced (000)

12
C Mixed Costs Total Mixed Cost Graph Total Costs 0 Total Machine Hours (000) $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5, Mixed costs are usually separated into their fixed and variable components for management analysis. Mixed costs are sometimes called semivariable or semifixed costs.

13
C Variable Costs Total Fixed Costs Total Units Produced Total Costs Unit Fixed Costs Total Units Produced Per Unit Cost Total Variable Costs Total Units Produced Unit Variable Costs Total Units Produced Total Costs Per Unit Cost Fixed Costs

14
C Variable Costs Total Fixed Costs Total Units Produced Total Costs Unit Fixed Costs Total Units Produced Per Unit Cost Total Variable Costs Total Units Produced Unit Variable Costs Total Units Produced Total Costs Per Unit Cost Fixed Costs Used for planning. Remains the same regardless of activity level. $10 per unit $75,000 total

15
C Activity Cost Total cost remains constant within a narrow range of activity. Example: Adding a supervisor for each 10 new workers. Step-Wise Costs C1

16
C Curvilinear Costs Also called a nonlinear cost, it increases at a NON- constant rate as volume increases. A linear cost increases at a constant rate (variable costs) Example: adding hourly workers. The first few increase output because they can specialize more, but too many starts to slow communications and crowd a work space.

17
C –How many coffees must Starbucks sell in a store to break even? –How many coffees must Starbucks sell in order to make $10,000 at a store? –What is the change in income if selling prices decline and sales volume increases? –How much does income increase if we install a new machine to reduce labor costs? –What is the income effect if we change the sales mix of our products or services? –How many coffees must Starbucks sell in a store to break even? –How many coffees must Starbucks sell in order to make $10,000 at a store? –What is the change in income if selling prices decline and sales volume increases? –How much does income increase if we install a new machine to reduce labor costs? –What is the income effect if we change the sales mix of our products or services? Contribution Margin helps us figure out: C

18
C Sales (50,000 units) $1,000,000 Variable costs 600,000 Contribution margin $400,000 Fixed costs 300,000 Income from operations$100,000 Contribution Margin Income Statement Total The contribution margin is available to cover the fixed costs and income from operations. Sales Variable costs Fixed costs Income from operations

19
C Contribution Margin Income Statement Sales (50,000 units) $1,000,000 $ % Variable costs 600,000 % Contribution margin $400,000 $ % Fixed costs 300,000 Income from operations $100,000 Total Per Unit Percent/Ratio The statement can be extended to include per unit dollars and percentage numbers.

20
C Contribution Margin Income Statement Sales (50,000 units) $1,000,000 $20 100% Variable costs 600, % Contribution margin $400,000 $ 8 40% Fixed costs 300,000 Income from operations $100,000 Total Per Unit Percent/Ratio The statement can be extended to include per unit dollars and percentage numbers.

21
C Sales (50,000 units) $1,000,000 $20 100% Variable costs 600, % Contribution margin $400,000 $ 8 40% Fixed costs 300,000 Income from operations $100,000 Contribution Margin Income Statement Total Per Unit Percent/Ratio Sales Sales Variable Variablecosts Fixed Fixedcosts Incomefrom operations operations =++ Sales Sales Variable VariablecostsContributionmargin –=

22
C Contribution Margin Income Statement Total Per Unit Percent/Ratio Unit Contribution Margin Contribution Margin Ratio Sales (50,000 units) $1,000,000 $20 100% Variable costs 600, % Contribution margin $400,000$ 8 40% Fixed costs 300,000 Income from operations $100,000 The contribution margin can be expressed three ways: 1. Total contribution margin in dollars. 2. Unit contribution margin (dollars per unit). 3. Contribution margin ratio (percentage). The contribution margin can be expressed three ways: 1. Total contribution margin in dollars. 2. Unit contribution margin (dollars per unit). 3. Contribution margin ratio (percentage).

23
C Sales (???? units) ? $20 100% Variable costs ? 12 60% Contribution margin $300,000 $ 8 40% Fixed costs 300,000 Income from operations $ 0 Calculating the Break-Even Point Total Per Unit Percent At the break-even point, fixed costs and the contribution margin are equal.

24
C Calculating the Break-Even Point Total Per Unit Percent Break-even Break-evensales Fixedcosts =/ Contributionmargin Sales (???? units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 300,000 $ 8 40% Fixed costs 300,000 Income from operations $ 0 /or Divide by either: $8 per unit or 40%

25
C Calculating the Break-Even Point Total Per Unit Percent Break-even Break-evensales Fixedcosts = / Contribution Margin per unit Sales (???? units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 300,000 $ 8 40% Fixed costs 300,000 Income from operations $ 0 or What is the break-even sales in units?

26
C Calculating the Break-Even Point Total Per Unit Percent Break-even Break-evensales Fixedcosts =/ Contributionmargin Break-even sales = $300,000 / $8 = 37,500 units Sales (????? units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 300,000 $ 8 40% Fixed costs 300,000 Income from operations $ 0 What is the break-even sales in dollars? /or

27
C Calculating the Break-Even Point Total Per Unit Percent Break-even Break-evensales Fixedcosts =/ Contributionmargin Break-even sales = $300,000 / $8 = 37,500 units Break-even sales = $300,000 / 40% = $750,000 Sales (????? units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 300,000 $ 8 40% Fixed costs 300,000 Income from operations $ 0 /or

28
C Break-even formulas may be adjusted to show the sales volume needed to earn any amount of income. Unit sales = Fixed costs + Target income Contribution margin per unit Dollar sales = Fixed costs + Target income Contribution margin ratio Computing Sales for a Target Income C

29
C Calculating a Planned Sales Level Total Per Unit Percent Plannedsales Fixed Target costs profit Fixed Target costs profit =/ Contributionmargin Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 400,000 $ 8 40% Fixed costs 300,000 Income from operations $ 100,000 + /or Fixed costs plus the target profit equals the required total contribution margin.

30
C Calculating a Planned Sales Level Total Per Unit Percent Plannedsales Fixed Target costs profit =/ Contributionmargin Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 400,000 $ 8 40% Fixed costs 300,000 Income from operations $ 100,000 + /or $8 per unit or 40%

31
C Sales (????? units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 400,000 $ 8 40% Fixed costs 300,000 Income from operations $ 100,000 Calculating a Planned Sales Level Total Per Unit Percent Plannedsales Fixed Target costs profit =/ Contributionmargin + /or What is the planned sales level in units?

32
C Sales (????? units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 400,000 $ 8 40% Fixed costs 300,000 Income from operations $ 100,000 Calculating a Planned Sales Level Plannedsales Fixed Target costs profit =/ Contributionmargin Planned sales = ($300,000 + $100,000) / $8 = 50,000 units + What is the planned sales level in dollars? Total Per Unit Percent /or

33
C Calculating a Planned Sales Level Total Per Unit Percent Plannedsales Fixed Target costs profit =/ Contributionmargin Planned sales = ($300,000 + $100,000) / $8 = 50,000 units + Planned sales = ($300,000 + $100,000) / 40% = $1,000,000 /or $1,000,000 Sales (50,000 units) $1,000,000 $20 100% Variable costs 600, % Contribution margin $ 400,000 $ 8 40% Fixed costs 300,000 Income from operations $ 100,000

34
C How do taxes impact our analysis? THINK: 1)Taxes come out of profits, reducing our profits. 2)Taxes are typically stated as a percent of our profits/income. 3)Must listen carefully and read carefully, are we asked for a target income or a target “pre-tax” income or a target “after- tax” income ? Which requires higher sales: 1)a target income of $100,000 or 2) a target “pre-tax” income of $100,000 or a target “after-tax” income of $100,000? Assume a 40% tax rate. Explain, show calculations:

35
C How do taxes impact our analysis? Which is a larger number: 1)a target income of $100,000 or 2) a target “pre- tax” income of $100,000 or a target “after-tax” income of $100,000? Assume a 40% tax rate. Explain, show calculations. 1)A target income and “pre-tax” income are the same thing, we don’t factor in taxes. 2)A target “after-tax” income of $100,000 means we have to earn more than $100,000 because that is what we want after we have paid our taxes. Pre-tax income = After-tax income/(100% - tax rate) Pre-tax income = $100,000 / (100% - 40%) Pre-tax income = $100,000 / 60% Pre-tax income = $166,666 Proof: = $166,666 X 40% = gives us taxes due Taxes due = $ 66,666 Income after tax = $100,000

36
C Sales Mix – Weighted Average Sales $ 90 $140 Variable costs Contribution margin $ 20 $ 45 Sales mix 80% 20% Contribution margin Contribution margin Products A B What is the average contribution for each product?

37
C Sales Mix – Weighted Average Sales $ 90 $140 Variable costs Contribution margin $ 20 $ 45 Sales mix x 80% x 20% Product contribution $ 16 $ 9 Contribution margin Contribution margin Products AB STEP ONE: What is the total product contribution?

38
C Sales Mix – Weighted Average Sales $ 90 $140 Variable costs Contribution margin $ 20 $ 45 Sales mix x 80% x 20% Product contribution $ 16 $ 9 Total product contribution$ 25 (weighted average) The pure average is: $32.50 ($20+$45) / 2 We don’t use this because we aren’t selling products on a 1:1 basis. Contribution margin Contribution margin Products AB

39
C Sales Mix – Weighted Average Sales $ 90 $140 Variable costs Contribution margin $ 20 $ 45 Sales mix x 80% x 20% Product contribution $ 16 $ 9 Total product contribution$ 25 Step Two: Treat the “total product contribution” as if it were the CONTRIBUTION margin of a single product and CALCULATE BREAK EVEN Contribution margin Contribution margin Products AB

40
C Sales Mix – Weighted Average Sales $ 90 $140 Variable costs Contribution margin $ 20 $ 45 Sales mix x 80% x 20% Product contribution $ 16 $ 9 Total product contribution$ 25 Contribution margin Contribution margin Beak-even sales units Beak-even sales units Products AB Total fixed costs $200,000 Product contribution $25 What is the break-even sales units?

41
C Sales Mix – Weighted Average Sales $ 90 $140 Variable costs Contribution margin $ 20 $ 45 Sales mix x 80% x 20% Product contribution $ 16 $ 9 Total product contribution $ 25 Contribution margin Contribution margin Break-even sales units Break-even sales units Products AB Total fixed costs $200,000 Product contribution $25 STEP 3: this is the total units of A and B combined. Need to calculate how many of A & B need to be sold, based on original sales mix of 80% & 20%. = 8,000 units

42
C Sales Mix – Weighted Average Sales $ 90 $140 Variable costs Contribution margin $ 20 $ 45 Sales mix x 80% x 20% Product contribution $ 16 $ 9 Total product contribution $ 25 Contribution margin Contribution margin Break-even sales units Break-even sales units Products AB Total fixed costs $200,000 Product contribution $25 Break-even sales units 8,000 Product A units (80%) 6,400 Product B units (20%) 1,600 = 8,000 units

43
C Operating Leverage Contribution margin Operating income Contribution margin Operating income Sales $400,000 $400,000 Variable costs 300, ,000 Contribution margin $100,000 $100,000 Fixed costs 80,000 50,000 Income from operations $20,000$ 50,000 Jones Inc. Wilson Inc. Operating leverage is a measure of the relative mix of variable costs and fixed costs and tells us how sensitive operating income is to changes in sales. High leverage = higher increase in income from increased sales.

44
C Operating Leverage Contribution margin Operating income Contribution margin Operating income Sales $400,000 $400,000 Variable costs 300, ,000 Contribution margin $100,000 $100,000 Fixed costs 80,000 50,000 Income from operations $20,000$ 50,000 Jones Inc. Wilson Inc. A Operating leverage is a measure of the relative mix of variable costs and fixed costs. Both companies have the same contribution margin.

45
C Operating Leverage Contribution margin Operating income Contribution margin Operating income Sales $400,000 $400,000 Variable costs 300, ,000 Contribution margin $100,000 $100,000 Fixed costs 80,000 50,000 Income from operations $20,000$ 50,000 Operating leverage (A/B) Jones Inc. Wilson Inc.A B Operating leverage is a measure of the relative mix of variable costs and fixed costs. What is the operating leverage?

46
C Operating Leverage Contribution margin Operating income Contribution margin Operating income Sales $400,000 $400,000 Variable costs 300, ,000 Contribution margin $100,000 $100,000 Fixed costs 80,000 50,000 Income from operations $20,000$ 50,000 Operating leverage (A/B) Jones Inc. Wilson Inc.A B Operating leverage is a measure of the relative mix of variable costs and fixed costs. What do these numbers mean? 5 2

47
C Operating Leverage Contribution margin Operating income Contribution margin Operating income Sales $400,000 $400,000 Variable costs 300, ,000 Contribution margin $100,000 $100,000 Fixed costs 80,000 50,000 Income from operations $20,000$ 50,000 Operating leverage (A/B) This tells us that, if sales increase 10% for both companies, we can expect a 50% and 20% increase in operating income, respectively. Jones Inc. Wilson Inc. A B Operating leverage is a measure of the relative mix of variable costs and fixed costs and tells us how sensitive operating income is to changes in sales. High leverage = higher increase in income from increased sales. 5 2

48
C Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Total Sales

49
C Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Total Sales Variable Costs 60%

50
C % 60% 40% 100% 60% 40% Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Total Sales Variable Costs Contribution Margin 40% 60%

51
C Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Total Costs Total Sales Fixed Costs Variable Costs

52
C Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Total Costs Total Sales

53
C Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Operating Loss Area Operating Profit Area Total Costs Total Sales

54
C Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) Break-Even Point Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs $100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs $100,000 Total Costs Total Sales $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50

55
C Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) Break-Even Point Unit selling price$ 50 Unit variable cost30 Unit contribution margin$20 Total fixed costs$100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$20 Total fixed costs$100,000 Total Costs Total Sales $100,000 $20 = 5,000 units $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50

56
C Cost-Volume-Profit Chart (Break-Even) Sales and Costs ($000) 0 Units of Sales (000) Break-Even Point Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs $100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs $100,000 Operating Loss Area Operating Profit Area Total Costs Total Sales $100,000 $20 = 5,000 units $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50

57
C Revised Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) Revised Break- Even Point Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$80,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$80,000 Operating Loss Area Operating Profit Area Total Costs Total Sales $80,000 $20 = 4,000 units $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50

58
C Profit-Volume Chart Operating Profit (Loss) $000’s $100 $75 $50 $25 $ 0 $(25) $(50) $(75) $(100) Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000 Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000 Units of Sales (000’s) Relevant range is 10,000 units.

59
C Profit-Volume Chart Operating Profit (Loss) $000’s $100 $75 $50 $25 $ 0 $(25) $(50) $(75) $(100) Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000 Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000 Units of Sales (000’s) Maximum profit within the relevant range. Maximum loss is equal to the total fixed costs.

60
C Profit-Volume Chart Operating Profit (Loss) $000’s $100 $75 $50 $25 $ 0 $(25) $(50) $(75) $(100) Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000 Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000 Profit Line Units of Sales (000’s) Operating Profit Operating Loss

61
C Profit-Volume Chart Operating Profit (Loss) $000’s $100 $75 $50 $25 $ 0 $(25) $(50) $(75) $(100) Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000 Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000 Profit Line Units of Sales (000’s) Operating Profit Operating Loss Break-Even Point

Similar presentations

© 2017 SlidePlayer.com Inc.

All rights reserved.

Ads by Google