Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 7 Cost-Volume- Profit Analysis

7-2 The Break-Even Point The break-even point is the point in the volume of activity where the organization’s revenues and expenses are equal.

7-3 Equation Approach Sales revenue – Variable expenses – Fixed expenses = Profit UnitsalespriceSalesvolume in units × UnitvariableexpenseSalesvolume × × X) ($500 × X) × X) ($300 × X)– –$80,000 = $0 X) ($200X)–$80,000 = $0 X = 400 surf boards

7-4 Contribution-Margin Approach For each additional surf board sold, Curl generates $200 in contribution margin. Consider the following information developed by the accountant at Curl, Inc.:

7-5 Contribution-Margin Approach Fixed expenses Fixed expenses Unit contribution margin Unit contribution margin = Break-even point (in units) $80,000 $80,000 $200 = 400 surf boards

7-6 Contribution-Margin Approach Here is the proof! 400 × $500 = $200, × $300 = $120,000

7-7 Contribution Margin Ratio Calculate the break-even point in sales dollars rather than units by using the contribution margin ratio. Contribution margin Sales = CM Ratio Fixed expense Fixed expense CM Ratio Break-even point (in sales dollars) =

7-8 Contribution Margin Ratio $80,000 $80,00040% $200,000 sales =

7-9 Graphing Cost-Volume-Profit Relationships Viewing CVP relationships in a graph gives managers a perspective that can be obtained in no other way. Consider the following information for Curl, Inc.:

7-10 Cost-Volume-Profit Graph Fixed expenses Total expenses Total sales Break-even point Break-even point Profit area Loss area

7-11 Target Net Profit We can determine the number of surfboards that Curl must sell to earn a profit of $100,000 using the contribution margin approach. Fixed expenses + Target profit Unit contribution margin = Units sold to earn the target profit $80,000 + $100,000 $200 $80,000 + $100,000 $200 = 900 surf boards See the Equation Approach example in text book (LO1)

7-12 Applying CVP Analysis Safety Margin The difference between budgeted sales revenue and break-even sales revenue. The amount by which sales can drop before losses begin to be incurred. Safety Margin The difference between budgeted sales revenue and break-even sales revenue. The amount by which sales can drop before losses begin to be incurred. See example the Safety Margin example in text book (LO4)

7-13 What would happen to BREAK EVEN POINT if there is a: Changes in Fixed Costs: See example in text book (LO4) Changes in Unit Contribution Margin: See example in text book (LO4) for: –Unit Variable expenses –Sale prices Changes in Fixed Costs: See example in text book (LO4) Changes in Unit Contribution Margin: See example in text book (LO4) for: –Unit Variable expenses –Sale prices

7-14 Predicting Profit Given Expected Volume Fixed expenses Unit contribution margin Target net profit Find: {req’d sales volume}Given: Fixed expenses Unit contribution margin Expected sales volume Find: {expected profit} Given: See the example in text book (LO4)

7-15 CVP Analysis with Multiple Products For a company with more than one product, sales mix is the relative combination in which a company’s products are sold. Different products have different selling prices, cost structures, and contribution margins. See the example in text book (LO5) For a company with more than one product, sales mix is the relative combination in which a company’s products are sold. Different products have different selling prices, cost structures, and contribution margins. See the example in text book (LO5)