Chapter 12 Cost-Volume-Profit Analysis. Chapter 122 Chapter 12: Objectives Define break-even point (BEP) and cost-volume-profit (CVP) analysis and recognize.

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Chapter 12 Cost-Volume-Profit Analysis

Chapter 122 Chapter 12: Objectives Define break-even point (BEP) and cost-volume-profit (CVP) analysis and recognize their limiting underlying assumptions. Use CVP analysis in both single- and multi-product companies. Develop a break-even chart and profit-volume graph. Use the margin of safety and operating leverage concepts.

Chapter 123 CVP Assumptions Operating within Relevant Range All costs are Fixed or Variable All Revenue and Variable costs are constant per unit Constant contribution margin (Unit Sales price- Unit Variable cost) Total fixed cost is constant. Total Revenue Sales price * units = Fixed Cost + variable cost * units Total Cost Solving for “units”: Break even units = Fixed cost Sales – Variable cost/unit or

Chapter 124 Total Revenues - Total Costs = Profit R(X) - [VC(X) + FC] = P R(X) - VC(X) - FC = P where R = revenue (selling price) per unit $50 X = number of units sold (volume) R(X) = total revenues VC = variable cost per unit $15 VC(X) = total variable costs FC = total fixed costs$647,500 P = pre-tax profit $0 How many units do we need to sell to break even? Using CVP formula:18,500 units = $647,500/$35 or (1)$50X - ($9X + $6X) - $647,500=$0 (2)$50X - $15X - $647,500=$0 (3)$35X=$647,500 (4)X=$647,500÷$35 (5)X=18,500 units Setting profit equal to $0:

Chapter 125 Desired Profit To calculate sales necessary to earn a profit, treat the profit as an additional fixed cost. X units = $647,500 + $150,000 $35 X= 22,786 units

Chapter 126 After Tax Profit To calculate the pretax earnings necessary to generate after tax earnings: Pre tax earnings =After tax earnings 1 – Tax rate $250,000=$150,

Chapter 127 Multi Product Analysis Assume constant product mix Calculate contribution margin per basket Calculate break-even baskets Determine total units per product

Chapter 128 Additional Concepts Margin of Safety Operating Leverage

Chapter 129 Conclusions At break even, total cost = total revenue There are strict assumptions in CVP analysis CM ratio is CM per unit/SP per unit. Desired profit must be adjusted for taxes. Multi-product CVP analysis can be accomplished. Operating leverage can be used in sensitivity analysis

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