1. Cost Behavior and Cost-Volume-Profit Analysis
Power Notes
Chapter M3
Cost Behavior and Cost-Volume-Profit Analysis
Learning Objectives
1. Cost Behavior
2. Cost-Volume-Profit Relationships
3. Mathematical Approach to Cost-Volume-Profit Analysis
4. Graphic Approach to Cost-Volume-Profit Analysis
5. Sales Mix Considerations
6. Special Cost-Volume-Profit Relationships
7. Assumptions of Cost-Volume-Profit Analysis C3

2. Cost Behavior and Cost-Volume-Profit Analysis
Power Notes
Chapter M3
Cost Behavior and Cost-Volume-Profit Analysis
Slide # Power Note Topics 3 21 25 35 49 55
Variable, Fixed, and Mixed Costs
Contribution Margin Income Statement
Break-Even Point, Planned Sales Level
Cost-Volume-Profit Charts
Sales Mix Considerations
Margin of Safety, Operating Leverage
Note: To select a topic, type the slide # and press Enter.

3. Total Variable Cost Graph Unit Variable Cost Graph
Variable Costs
Total Variable Cost Graph
Unit Variable Cost Graph
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$20
$15
$10 $5
Total Costs
Cost per Unit
Units Produced (000)
Units Produced (000)
Units Total Cost
Produced Cost per Unit
5, $ 50,000 $10
10, ,
15, ,
20, ,
25, ,
30, ,

4. Total Variable Cost Graph Unit Variable Cost Graph
Variable Costs
Total Variable Cost Graph
Unit Variable Cost Graph
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$20
$15
$10 $5
Total Costs
Cost per Unit
Units Produced (000)
Units Produced (000)
Units Total Cost
Produced Cost per Unit
5, $ 50,000 $10
10, ,
15, ,
20, ,
25, ,
30, ,

5. Total Variable Cost Graph Unit Variable Cost Graph
Variable Costs
Total Variable Cost Graph
Unit Variable Cost Graph
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$20
$15
$10 $5
Total Costs
Cost per Unit
Units Produced (000)
Units Produced (000)
Units Total Cost
Produced Cost per Unit
5, $ 50,000 $10
10, ,
15, ,
20, ,
25, ,
30, ,

6. Fixed Costs Total Fixed Cost Graph Unit Fixed Cost Graph $150,000
$125,000
$100,000
$75,000
$50,000
$25,000
$1.50
$1.25
$1.00
$.75
$.50
$.25
Total Costs
Cost per Unit
Units Produced (000)
Units Produced (000)
Units Total Cost
Produced Cost per Unit
50, $75,000 $1.500
100, ,
150, ,
200, ,
250, ,
300, ,

7. Fixed Costs Total Fixed Cost Graph Unit Fixed Cost Graph $150,000
$125,000
$100,000
$75,000
$50,000
$25,000
$1.50
$1.25
$1.00
$.75
$.50
$.25
Total Costs
Cost per Unit
Units Produced (000)
Units Produced (000)
Units Total Cost
Produced Cost per Unit
50, $75,000 $1.500
100, ,
150, ,
200, ,
250, ,
300, ,

8. Fixed Costs Total Fixed Cost Graph Unit Fixed Cost Graph $150,000
$125,000
$100,000
$75,000
$50,000
$25,000
$1.50
$1.25
$1.00
$.75
$.50
$.25
Total Costs
Cost per Unit
Units Produced (000)
Units Produced (000)
Units Total Cost
Produced Cost per Unit
50, $75,000 $1.500
100, ,
150, ,
200, ,
250, ,
300, ,

9. Mixed Costs Total Mixed Cost Graph
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
Mixed costs are sometimes called semivariable or semifixed costs.
Total Costs
Mixed costs are usually separated into their fixed and variable components for management analysis.
Total Machine Hours (000)

10. Mixed Costs: High-Low Method
Actual costs incurred
Highest and lowest levels
Production Total
Units Cost
Production Total
Units Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,800 57,500
October ,250
Highest level
Lowest level
Difference

11. Mixed Costs: High-Low Method
Actual costs incurred
Highest and lowest levels
Production Total
Units Cost
Production Total
Units Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,800 57,500
October ,250
Highest level 2,100 $61,500
Lowest level
Difference

12. Mixed Costs: High-Low Method
Actual costs incurred
Highest and lowest levels
Production Total
Units Cost
Production Total
Units Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,800 57,500
October ,250
Highest level 2,100 $61,500
Lowest level ,250
Difference

13. Mixed Costs: High-Low Method
Actual costs incurred
Highest and lowest levels
Production Total
Units Cost
Production Total
Units Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,800 57,500
October ,250
Highest level 2,100 $61,500
Lowest level ,250
Difference 1,350 $20,250 1
Variable cost
per unit
Difference in total cost
Difference in production =

14. Mixed Costs: High-Low Method
Actual costs incurred
Highest and lowest levels
Production Total
Units Cost
Production Total
Units Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,800 57,500
October ,250
Highest level 2,100 $61,500
Lowest level ,250
Difference 1,350 $20,250 1
Variable cost
per unit
Difference in total cost
Difference in production
$20,250
1,350 units = = =
$15

15. Mixed Costs: High-Low Method
Actual costs incurred
Highest and lowest levels
Production Total
Units Cost
Production Total
Units Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,800 57,500
October ,250
Highest level 2,100 $61,500
Lowest level ,250
Difference 1,350 $20,250 1
Variable cost
per unit
Difference in total cost
Difference in production
$20,250
1,350 units = = =
$15
Fixed
cost 2
Total
cost
Variable cost
per unit
Units of
production = – x

16. Mixed Costs: High-Low Method
Actual costs incurred
Highest and lowest levels
Production Total
Units Cost
Production Total
Units Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,800 57,500
October ,250
Highest level 2,100 $61,500
Lowest level ,250
Difference 1,350 $20,250 1
Variable cost
per unit
Difference in total cost
Difference in production
$20,250
1,350 units = = =
$15
Fixed
cost 2
Total
cost
Variable cost
per unit
Units of
production = – x
Highest level: =
$61,500 –
( $15 x 2,100 ) =
$30,000

17. Mixed Costs: High-Low Method
Actual costs incurred
Highest and lowest levels
Production Total
Units Cost
Production Total
Units Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,800 57,500
October ,250
Highest level 2,100 $61,500
Lowest level ,250
Difference 1,350 $20,250 1
Variable cost
per unit
Difference in total cost
Difference in production
$20,250
1,350 units = = =
$15
Fixed
cost 2
Total
cost
Variable cost
per unit
Units of
production = – x
Highest level: =
$61,500 –
( $15 x 2,100 ) =
$30,000
Lowest level: =
$41,250 –
( $15 x 750 ) =
$30,000

18. Mixed Costs: High-Low Method
Actual costs incurred
Highest and lowest levels
Production Total
Units Cost
Production Total
Units Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,800 57,500
October ,250
Highest level 2,100 $61,500
Lowest level ,250
Difference 1,350 $20,250 1
Variable cost
per unit
Difference in total cost
Difference in production
$20,250
1,350 units = = =
$15
Fixed
cost 2
Total
cost
Variable cost
per unit
Units of
production = – x
Highest level: =
$61,500 –
( $15 x 2,100 ) =
$30,000
Lowest level: =
$41,250 –
( $15 x 750 ) =
$30,000

19. Variable Costs Fixed Costs
Total Variable Costs
Total Fixed Costs
Total Costs
Total Costs
Total Units Produced
Total Units Produced
Unit Fixed Costs
Unit Variable Costs
Per Unit Cost
Per Unit Cost
Total Units Produced
Total Units Produced

20. regardless of activity level.
Variable Costs
Fixed Costs
Total Variable Costs
Total Fixed Costs
Used for planning.
Remains the same
regardless of activity level.
Total Costs
Total Costs
$75,000
total
Total Units Produced
Total Units Produced
Unit Fixed Costs
Unit Variable Costs
Per Unit Cost
Per Unit Cost
$10 per unit
Total Units Produced
Total Units Produced

21. Contribution Margin Income Statement
The contribution margin is available to cover the fixed costs and income from operations.
Total
Sales (50,000 units) $1,000,000
Variable costs ,000
Contribution margin $400,000
Fixed costs 300,000
Income from operations $100,000
Variable costs
Sales
Fixed costs
Income from operations

22. Contribution Margin Income Statement
Total Per Unit Percent
Sales (50,000 units) $1,000,000 $ %
Variable costs , %
Contribution margin $400,000 $ %
Fixed costs ,000
Income from operations $100,000
The statement can be extended to include per unit dollars and percentage numbers.

23. Contribution Margin Income Statement
Total Per Unit Percent
Sales (50,000 units) $1,000,000 $ %
Variable costs , %
Contribution margin $400,000 $ %
Fixed costs ,000
Income from operations $100,000
Income
from
operations
Variable
costs
Fixed
costs
Sales = + +
Variable
costs
Contribution
margin
Sales – =

24. Contribution Margin Income Statement
Total Per Unit Percent
Sales (50,000 units) $1,000, $ %
Variable costs , %
Contribution margin $400,000 $ %
Fixed costs ,000
Income from operations $100,000
Unit Contribution Margin
Contribution Margin Ratio
The contribution margin can be expressed three ways:
1. Total contribution margin in dollars.
2. Unit contribution margin (dollars per unit).
3. Contribution margin ratio (percentage).

25. Calculating the Break-Even Point
Total Per Unit Percent
Sales (50,000 units) ? $ %
Variable costs ? %
Contribution margin $300,000 $ %
Fixed costs ,000
Income from operations $
At the break-even point, fixed costs and the contribution margin are equal.

26. Calculating the Break-Even Point Divide by either: $8 per unit or 40%
Total Per Unit Percent
Sales (50,000 units) ? $ %
Variable costs ? %
Contribution margin $ 300,000 $ %
Fixed costs ,000
Income from operations $ / or
Divide by either: $8 per unit or 40%
Break-even
sales
Fixed
costs
Contribution
margin = /

27. Calculating the Break-Even Point
Total Per Unit Percent
Sales (50,000 units) ? $ %
Variable costs ? %
Contribution margin $ 300,000 $ %
Fixed costs ,000
Income from operations $  or
Break-even
sales
Fixed
costs
Contribution
margin = /
What is the break-even sales in units?

28. Calculating the Break-Even Point
Total Per Unit Percent
Sales (50,000 units) ? $ %
Variable costs ? %
Contribution margin $ 300,000 $ %
Fixed costs ,000
Income from operations $ / or
Break-even
sales
Fixed
costs
Contribution
margin = /
Break-even sales = $300,000 / $8 = 37,500 units
What is the break-even sales in dollars?

29. Calculating the Break-Even Point
Total Per Unit Percent
Sales (50,000 units) ? $ %
Variable costs ? %
Contribution margin $ 300, $ %
Fixed costs ,000
Income from operations $ / or
Break-even
sales
Fixed
costs
Contribution
margin = /
Break-even sales = $300,000 / $8 = 37,500 units
Break-even sales = $300,000 / 40% = $750,000

30. Calculating a Planned Sales Level
Total Per Unit Percent
Sales (50,000 units) ? $ %
Variable costs ? %
Contribution margin $ 400,000 $ %
Fixed costs ,000
Income from operations $ 100,000 / or
Fixed Target costs profit
Planned
sales
Contribution
margin + = /
Fixed costs plus the target profit equals the required total contribution margin.

31. Calculating a Planned Sales Level
Total Per Unit Percent
Sales (50,000 units) ? $ %
Variable costs ? %
Contribution margin $ 400,000 $ %
Fixed costs ,000
Income from operations $ 100,000 / or
Planned
sales
Fixed Target
costs profit
Contribution
margin + = /
$8 per unit or 40%

32. Calculating a Planned Sales Level
Sales (50,000 units) ? $ %
Variable costs ? %
Contribution margin $ 400, $ %
Fixed costs ,000
Income from operations $ 100,000
Total Per Unit Percent / or
Planned
sales
Fixed Target
costs profit
Contribution
margin + = /
What is the planned sales level in units?

33. Calculating a Planned Sales Level
Sales (50,000 units) ? $ %
Variable costs ? %
Contribution margin $ 400, $ %
Fixed costs ,000
Income from operations $ 100,000
Total Per Unit Percent / or
Planned
sales
Fixed Target
costs profit
Contribution
margin + = /
Planned sales = ($300,000 + $100,000) / $8 = 50,000 units
What is the planned sales level in dollars?

34. Calculating a Planned Sales Level
Total Per Unit Percent
Sales (50,000 units) $1,000, $ %
Variable costs , %
Contribution margin $ 400, $ %
Fixed costs ,000
Income from operations $ 100,000 / or
Planned
sales
Fixed Target
costs profit
Contribution
margin = + /
Planned sales = ($300,000 + $100,000) / $8 = 50,000 units
Planned sales = ($300,000 + $100,000) / 40% = $1,000,000
$1,000,000

35. Cost-Volume-Profit Chart
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Total Sales
Sales and Costs ($000)
Units of Sales (000)
Unit selling price $ 50
Unit variable cost 30
Unit contribution margin $ 20
Total fixed costs $100,000

36. Cost-Volume-Profit Chart
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Total Sales
Sales and Costs ($000)
60%
Variable Costs
Units of Sales (000)
Unit selling price $ 50
Unit variable cost 30
Unit contribution margin $ 20
Total fixed costs $100,000

37. Cost-Volume-Profit Chart
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Total Sales
Contribution Margin
40%
Sales and Costs ($000)
60%
Variable Costs
Units of Sales (000)
100%
60%
40%
Unit selling price $ 50
Unit variable cost 30
Unit contribution margin $ 20
Total fixed costs $100,000

38. Cost-Volume-Profit Chart
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Total Sales
Total Costs
Sales and Costs ($000)
Fixed Costs
Variable Costs
Units of Sales (000)
Unit selling price $ 50
Unit variable cost 30
Unit contribution margin $ 20
Total fixed costs $100,000

39. Cost-Volume-Profit Chart
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Total Sales
Total Costs
Sales and Costs ($000)
Units of Sales (000)
Unit selling price $ 50
Unit variable cost 30
Unit contribution margin $ 20
Total fixed costs $100,000

40. Cost-Volume-Profit Chart
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Total Sales
Operating Profit Area
Total Costs
Sales and Costs ($000)
Operating Loss Area
Units of Sales (000)
Unit selling price $ 50
Unit variable cost 30
Unit contribution margin $ 20
Total fixed costs $100,000

41. Cost-Volume-Profit Chart
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Total Sales
Total Costs
Sales and Costs ($000)
Break-Even Point
Units of Sales (000)
Unit selling price $ 50
Unit variable cost 30
Unit contribution margin $ 20
Total fixed costs $100,000

42. Cost-Volume-Profit Chart
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Total Sales
Total Costs
Sales and Costs ($000)
Break-Even Point
Units of Sales (000)
Unit selling price $ 50
Unit variable cost 30
Unit contribution margin $20
Total fixed costs $100,000
$100,000
$20
= 5,000 units

43. Cost-Volume-Profit Chart (Break-Even)
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Total Sales
Operating Profit Area
Total Costs
Sales and Costs ($000)
Break-Even Point
Operating Loss Area
Units of Sales (000)
Unit selling price $ 50
Unit variable cost 30
Unit contribution margin $ 20
Total fixed costs $100,000
$100,000
$20
= 5,000 units

44. Revised Cost-Volume-Profit Chart
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Total Sales
Operating Profit Area
Total Costs
Sales and Costs ($000)
Revised Break-Even Point
Operating Loss Area
Units of Sales (000)
Unit selling price $ 50
Unit variable cost 30
Unit contribution margin $ 20
Total fixed costs $80,000
$80,000
$20
= 4,000 units

45. Profit-Volume Chart Relevant range is 10,000 units.
$100
$75
$50
$25
$ 0
$(25)
$(50)
$(75)
$(100)
Operating Profit
(Loss) $000’s
Relevant range is 10,000 units.
Units of Sales (000’s)
Sales (10,000 units x $50) $500,000
Variable costs (10,000 units x $30) ,000
Contribution margin (10,000 units x $20) $200,000
Fixed costs ,000
Operating profit $100,000

46. Profit-Volume Chart Maximum profit within the relevant range.
$100
$75
$50
$25
$ 0
$(25)
$(50)
$(75)
$(100)
Operating Profit
(Loss) $000’s
Maximum profit within the relevant range.
Units of Sales (000’s)
Maximum loss is equal to the total fixed costs.
Sales (10,000 units x $50) $500,000
Variable costs (10,000 units x $30) ,000
Contribution margin (10,000 units x $20) $200,000
Fixed costs ,000
Operating profit $100,000

47. Profit-Volume Chart Sales (10,000 units x $50) $500,000
$100
$75
$50
$25
$ 0
$(25)
$(50)
$(75)
$(100)
Profit Line
Operating
Profit
Operating Profit
(Loss) $000’s
Operating
Loss
Units of Sales (000’s)
Sales (10,000 units x $50) $500,000
Variable costs (10,000 units x $30) ,000
Contribution margin (10,000 units x $20) $200,000
Fixed costs ,000
Operating profit $100,000

48. Profit-Volume Chart Sales (10,000 units x $50) $500,000
$100
$75
$50
$25
$ 0
$(25)
$(50)
$(75)
$(100)
Profit Line
Operating
Profit
Operating Profit
(Loss) $000’s
Operating
Loss
Break-Even Point
Units of Sales (000’s)
Sales (10,000 units x $50) $500,000
Variable costs (10,000 units x $30) ,000
Contribution margin (10,000 units x $20) $200,000
Fixed costs ,000
Operating profit $100,000

49. Sales Mix Considerations
Contribution margin
Products
A B
Sales $ 90 $140
Variable costs
Contribution margin $ 20 $ 45
Sales mix % 20%
What is the average contribution for each product?

50. Sales Mix Considerations
Contribution margin
Products
A B
Sales $ 90 $140
Variable costs
Contribution margin $ 20 $ 45
Sales mix x 80% x 20%
Product contribution $ 16 $ 9
What is the total product contribution?

51. Sales Mix Considerations
Contribution margin
Products
A B
Sales $ $140
Variable costs
Contribution margin $ $ 45
Sales mix x 80% x 20%
Product contribution $ $ 9
Total product contribution $ 25
Break-even sales units
Total fixed costs $200,000
Product contribution $25
What is the break-even sales units?

52. Sales Mix Considerations
Contribution margin
Products
A B
Sales $ 90 $140
Variable costs
Contribution margin $ 20 $ 45
Sales mix x 80% x 20%
Product contribution $ 16 $ 9
Total product contribution $ 25
Break-even sales units
Total fixed costs $200,000
Product contribution $25
Break-even sales units ,000
Product A units (80%) ,400
Product B units (20%) ,600
= 8,000 units

53. Sales Mix Considerations
Contribution margin
Products
A B
Sales $ 90 $ 140
Variable costs
Contribution margin $ $ 45
Sales mix % 40%
If the sales mix is 60% for product A and 40% for product B, what is the break-even sales units?

54. Sales Mix Considerations
Contribution margin
Products
A B
Sales $ 90 $140
Variable costs
Contribution margin $ 20 $ 45
Sales mix x 60% x 40%
Product contribution $ 12 $ 18
Total product contribution $ 30
Break-even sales units
Total fixed costs $200,000
Product contribution $30
Break-even sales units ,667
Product A units (60%) ,000
Product B units (40%) ,667
= 6,667 units

55. Sales – Sales at break-even point
Margin of Safety
Sales – Sales at break-even point
Sales
Dollars Units
Sales $250,000 10,000
Break-even sales , ,000
Excess $ 50, ,000

56. Sales – Sales at break-even point
Margin of Safety
Sales – Sales at break-even point
Sales
Dollars Units A
Sales $250,000 10,000
Break-even sales , ,000
Excess $ 50, ,000
Actual sales level.

57. Sales – Sales at break-even point
Margin of Safety
Sales – Sales at break-even point
Sales
Dollars Units A
Sales $250,000 10,000
Break-even sales , ,000
Excess $ 50, ,000
Margin of safety (B/A) B
Excess of actual sales over the break-even sales.
What is the margin of safety as a percentage?

58. Sales – Sales at break-even point
Margin of Safety
Sales – Sales at break-even point
Sales
Dollars Units A
Sales $250,000 10,000
Break-even sales , ,000
Excess $ 50, ,000
Margin of safety (B/A) 20% B
Margin of safety expressed in units.
Margin of safety indicates the decrease in sales that may occur before an operating loss results.

59. Operating Leverage
Contribution margin
Operating income
Operating leverage is a measure of the relative mix of variable costs and fixed costs.
Jones Inc Wilson Inc.
Sales $400, $400,000
Variable costs , ,000
Contribution margin $100, $100,000
Fixed costs , ,000
Income from operations $20,000 $ 50,000

60. Both companies have the same contribution margin.
Operating Leverage
Contribution margin
Operating income
Operating leverage is a measure of the relative mix of variable costs and fixed costs.
Jones Inc Wilson Inc.
Sales $400, $400,000
Variable costs , ,000
Contribution margin $100, $100,000
Fixed costs , ,000
Income from operations $20,000 $ 50,000 A
Both companies have the same contribution margin.

61. What is the operating leverage?
Contribution margin
Operating income
Operating leverage is a measure of the relative mix of variable costs and fixed costs.
Jones Inc Wilson Inc.
Sales $400, $400,000
Variable costs , ,000
Contribution margin $100, $100,000
Fixed costs , ,000
Income from operations $20,000 $ 50,000
Operating leverage (A/B) A B
What is the operating leverage?

62. What do these numbers mean?
Operating Leverage
Contribution margin
Operating income
Operating leverage is a measure of the relative mix of variable costs and fixed costs.
Jones Inc Wilson Inc.
Sales $400, $400,000
Variable costs , ,000
Contribution margin $100, $100,000
Fixed costs , ,000
Income from operations $20,000 $ 50,000
Operating leverage (A/B) A B
What do these numbers mean?

63. Operating Leverage Contribution margin Operating income
Operating leverage is a measure of the relative mix of variable costs and fixed costs.
Jones Inc Wilson Inc.
Sales $400, $400,000
Variable costs , ,000
Contribution margin $100, $100,000
Fixed costs , ,000
Income from operations $20,000 $ 50,000
Operating leverage (A/B) A B
Capital
intensive?
Labor
intensive?

64. Assumptions of Cost-Volume-Profit Analysis
The reliability of cost-volume-profit analysis depends upon several assumptions.
1. Total sales and total costs can be represented by straight lines.
2. Within the relevant range of operating activity, the efficiency of operations does not change.
3. Costs can be accurately divided into fixed and variable components.
4. The sales mix is constant.
5. There is no change in the inventory quantities during the period.

65. Cost Behavior and Cost-Volume-Profit Analysis
Power Notes
Chapter M3
Cost Behavior and Cost-Volume-Profit Analysis
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