Volume Decisions Chapters 8 & 10 ME 2027 Performance and Cost Analysis ME 2605 Cost Management and Control (for IMIM) Håkan Kullvén, KTH, 2007

(Note: Contribution per unit equals selling price less unit variable cost) 14 Costs and revenues Changes: assuming tickets sold Panel A: CVP graph Break-even point Total revenues = £20Q £ Profit Total costs = £ £10Q Loss £ £ Quantity of tickets sold, Q Profit Panel B: Profit-volume graph Profit = £( )Q - £ £ £(60000) £ 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) - £ £ = £ £ = [(£20-£10) x 8 000] - £ [(£20-£10) x 6 000] - £ = 0 (£20-£10) x = £ £ / (£20-£10) = tickets Cost-Volume-Profit Example 8.1 page 271

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

ABC: Activity Based Costing Figure 10.1 page 373

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

Activity hierarchies Figure 10.2 page 385

Of no use… Example 10.2 page 386

Costs & Visibility Figure 10.3 page 392

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