1. Volume Decisions Chapters 8 & 10 ME 2027 Performance and Cost Analysis ME 2605 Cost Management and Control (for IMIM) Håkan Kullvén, KTH, 2007 Hakan.kullven@indek.kth.se

2. (Note: Contribution per unit equals selling price less unit variable cost) 14 Costs and revenues Changes: assuming 8 000 tickets sold Panel A: CVP graph Break-even point Total revenues = £20Q £20 000 Profit Total costs = £60 000 + £10Q Loss £120 000 £60 000 6 000 8 000 Quantity of tickets sold, Q Profit Panel B: Profit-volume graph Profit = £(20 - 10)Q - £60 000 £20 000 £(60000) £0 6 000 8 000 Profit = (selling price x volume) - (unit variable cost x sales volume) - fixed costs Profit = sales revenue - costs Profit = [(selling price - unit variable cost) x volume] - fixed costs [(Selling price - unit variable cost) x break-even point in units] - fixed costs = 0 (Selling price - unit variable cost) x break-even point in units =fixed costs Break-even point in units = Fixed costs / (selling price - unit variable cost) = (£20 x 8 000) - (£10 x 8 000) - £60 000 £20 000 = £160 000 - £140 000 = [(£20-£10) x 8 000] - £60 000 [(£20-£10) x 6 000] - £60 000 = 0 (£20-£10) x 6 000 = £60 000 £60 000 / (£20-£10) = 6 000 tickets Cost-Volume-Profit Example 8.1 page 271

3. Assumptions All other variables remains constant Single product or constant sales mix Total costs and total revenue are linear functions of output Profits are calculated on a variable costing basis Analysis applies to relevant range only Costs can be accurately divided into their fixed and variable elements The analysis applies only to a short-term time horizon Complexity-related fixed costs do not change

4. ABC: Activity Based Costing Figure 10.1 page 373

5. Design steps 1.Identify activities 2.Assign costs to activity cost centres 3.Choose drivers –T–Transaction –D–Duration –I–Intensity 4.Assign activity-costs to products

6. Activity hierarchies Figure 10.2 page 385

7. Of no use… Example 10.2 page 386

8. Costs & Visibility Figure 10.3 page 392

9. Next, we… explore how other aspects, not only volume, affects the revenues and costs in decisions about e.g. pricing, product-mix, equipment replacement, outsourcing, and discontinuation Chapter 9