HFT 3431 Chapter 7 Cost-Volume-Profit Analysis

Cost Volume Profit Analysis n What Is the Break-Even Point? n What Is the Profit at Occupancy Percentages Above Break-Even? n How Do Increases in Fixed Charges Affect Break-Even? n How Many More Rooms Must Be Sold to Recover Cost Increases?

Cost Volume Profit Analysis n How Many Rooms Must Be Sold to Reach a Certain Profit? n What Is the Effect of Profits When Prices, Variable Costs, and Fixed Costs Change? n How Do Labor Rate Changes Affect Profits?

Cost-Volume Profit Assumptions n Fixed Costs Remain Constant During the Period Being Analyzed. n Variable Costs Fluctuate in a Linear Fashion With Revenues. n Variable Costs Are Constant on a Per Unit Basis.

Cost-Volume Profit Assumptions n Productivity Remains Constant. n Revenues Are Proportional to Variable Costs. n There Are No Volume Discounts.

Cost-Volume Profit Assumptions n All Costs Can Be Broken Down Into Their Fixed and Variable Components. n Joint Costs Are Not Eliminated When One Department Is.

CVP Basic Formula n How Much Should Be Charged to Break-Even? n 10 Room Motel n Variable Costs Are $5 Per Room n Fixed Costs Are $2,500

CVP Basic Formula n 250 Rooms Will Be Sold n SP = VC Per Room + (Fixed Costs / Number Rooms Sold) n SP = $5 +( $2,500 / 250) n SP = $15 Per Room

Most Common Expression of CVP Analysis Is a Graph

Profit Breakeven Loss but cover FC Loss

CVP Basic Formula n How Much Should Be Charged to Earn $2,000 in a 30 Day Period? n 10 Room Motel n Variable Costs Are $5 Per Room n Fixed Costs Are $2,500

CVP Basic Formula n 250 Rooms Will Be Sold n SP = VC Per Room + (Profit + FC) / Number Rooms Sold n SP = $5 +( $2,000 + $2,500) / 250 n SP = $23 Per Room

Most Common Expression of CVP Analysis Is a Graph

CVP Formula for Single Product Analysis n I = Net Income n S = Selling Price n X = Units Sold n V = Variable Costs Per Unit n F = Total Fixed Costs (Plus Profit)

CVP Formula for Single Product Analysis n SX = Total Revenue n VX = Total Variable Costs n Basic Formula for Break-Even (Income Equals 0) n 0 = SX - VX - F

Break-Even Formula Variations n Units Sold at Break-Even n X = F / (S - V) n Fixed Costs at Break-Even n F = SX - VX n Selling Price at Break-Even n S = (F / X) + V

Break-Even Formula Variations n Variable Cost Per Unit at Break-Even V = S - (F / X) n Most Hospitality Operations Sell Multiple Products. Therefore, We Need Additional Tools.

Contribution Margin n Contribution Margin (CM) Is the Selling Price, or Sales, Minus the Variable Cost(s). n Contribution Margin Percentage (Ratio) Is the CM Divided by the Selling Price (or Sales).

Contribution Margin n To Get Break-Even in Units, Divide the Fixed Costs by the Contribution Margin. n To Get Break-Even in Sales Dollars, Divide the Fixed Costs by the Contribution Margin Percentage.

Contribution Margin n Since Our Products Have Different CM, We Use CM Percent (Weighted) a Lot.

Weighted Contribution Margin Percent n The Contribution Margin Percent, or Contribution Margin Ratio (CMR) Says That the Amount Available to Cover Fixed Costs Is the CMR Times the Sales Dollars.

Weighted Contribution Margin Percent n The Weighted CMR Is Computed As Follows: n (Total Revenue - Total Variable Costs) / Total Revenue

Weighted Contribution Margin Percent n Another Way of Looking at it is to Take the Sales Mix Percentage for Each Area (Which in Total Must Add up to 100%) and Multiply That Percentage by the CMR for the Particular Area. Then Add All Results to Get the Weighted CMR.

Weighted Contribution Margin Percent n Divide the Weighted CMR Into the Fixed Costs (and Profit if Applicable) and the Result is the Required Sales Level.

Margin of Safety n Excess of Budgeted or Actual Sales Over Sales at Break-Even n Expressed in Units or Dollars

Sensitivity Analysis n Study of the Sensitivity of Dependent Variables to Changes in Independent Variables n Looks at the Incremental Number of Units Required to Sold to Cover Additional Costs

Operating Leverage n Extent to Which Expenses Are Fixed Rather Than Variable n Highly Levered When Fixed Costs to Variable Costs Is High n Highly Levered Means a Small Increase in Sales Yields a Large Profit (Above Break-Even)

Assignment n None