© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost Behavior  Cost behavior is the manner in which a cost changes as a related activity changes. Understanding the behavior of a cost depends on:  Identifying the activities that cause the cost to change, called activity bases (or activity drivers).  Specifying the range of activity over which the changes in the cost are of interest. This range of activity is called the relevant range. LO 1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Variable Costs  Variable costs are costs that vary in proportion to changes in the level of activity. LO 1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 1 Variable Costs Jason Sound Inc. produces stereo systems. The parts for the stereo systems are purchased from suppliers for $10 per unit (a variable cost) and are assembled by Jason Sound Inc. For Model JS-12, the direct materials costs for the relevant range of 5,000 to 30,000 units of production are shown on the next slide. Jason Sound

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 1 Variable Costs Jason Sound

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  As shown in the previous slides, the variable costs have the following characteristics:  Cost per unit remains the same regardless of changes in the activity base.  Total cost changes in proportion to changes in the activity base. LO 1 Variable Costs

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Total Direct Materials Cost $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 102030 0 $20 $15 $10 $5 0 102030 Number of Units of Model JS-12 Produced Units Produced (000) Direct Materials Cost per Unit Total Direct Materials Cost 5,000 units$10$ 50,000 10,00010l00,000 15,00010150,000 20,00010200,000 25,00010250,000 30,00010300,000 LO 1 Variable Costs Cost per Unit Note: Fixed per unit; variable in total

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Fixed Costs  Fixed costs are costs that remain the same in total dollar amount as the activity base changes. LO 1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Fixed Costs LO 1 Minton Inc. manufactures, bottles, and distributes perfume. The production supervisor is Jane Sovissi. She is paid $75,000 per year. The plant produces from 50,000 to 300,000 bottles of perfume.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Fixed Costs LO 1 The more units produced, the lower the fixed cost per unit.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Fixed costs have the following characteristics:  Cost per unit changes inversely to changes in the activity base.  Total cost remains the same regardless of changes in the activity base. Fixed Costs LO 1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 1 Total Salary $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 100200300 0 Units Produced (000) Number of Bottles of Perfume Produced Salary per Unit $1.50 $1.25 $1.00 $.75 $.50 $.25 100200300 0 Units Produced (000) Total Salary for Jane Sovissi 50,000 bottles$75,000$1.500 100,00075,0000.750 150,00075,0000.500 200,00075,0000.375 Salary per Bottle of Perfume Produced Fixed Costs

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Mixed Costs  Mixed costs have characteristics of both a variable and a fixed cost. Mixed costs are sometimes called semivariable or semifixed costs.  Over one range of activity, the total mixed cost may remain the same. Over another range of activity, the mixed cost may change in proportion to changes in the level of activity. LO 1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Simpson Inc. manufactures sails, using rented equipment. The rental charges are $15,000 per year, plus $1 for each machine hour used over 10,000 hours. Mixed Costs LO 1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The rental charges for various hours used within the relevant range of 8,000 hours to 40,000 hours are as follows: Mixed Costs LO 1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Mixed Costs LO 1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The high-low method is a cost estimation method that may be used to separate mixed costs into their fixed and variable components. Mixed Costs LO 1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Mixed Costs LO 1 The Equipment Maintenance Department of Kason Inc. incurred the following costs during the past five months:

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Mixed Costs LO 1 The number of units produced is the activity base, and the relevant range is the units produced between June and October. The next series of slides for Kason Inc. illustrate how the high-low method is used to determine the fixed and variable costs.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Mixed Costs LO 1 First, select the highest and lowest levels of activity. ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 Actual costs incurred Variable Cost per Unit = Difference in Total Cost Difference in Production

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Mixed Costs LO 1 ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 Next, fill in the formula for difference in total cost. $61,500 41,250 $20,250 Variable Cost per Unit = Difference in Total Cost Difference in Production $20,250

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Mixed Costs LO 1 2,100 750 1,350 Then, fill in the formula for difference in production. ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 Variable Cost per Unit = Difference in Total cost Difference in Production $20,250 1,350

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Mixed Costs LO 1 Variable cost per unit is $15 ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 = $15 Variable Cost per Unit = $20,250 1,350

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Mixed Costs LO 1 The fixed cost is estimated by subtracting the total variable costs from the total costs for the units produced as shown below: Fixed Cost = Total Costs – (Variable Cost per Unit x Units Produced)

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Mixed Costs LO 1 The fixed cost is the same at the highest and the lowest levels of production as shown below for Kason Inc. Fixed Cost = $61,500 – ($15 x 2,100 units) Fixed Cost = $61,500 – $31,500 Fixed Cost = $30,000 Highest Level Fixed Cost = Total Costs – (Variable Cost per Unit x Units Produced)

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The fixed cost is the same at the highest and the lowest levels of production as shown below for Kason Inc. Lowest Level Mixed Costs LO 1 Fixed Cost = $41,250 – ($15 x 750 units) Fixed Cost = $41,250 – $11,250 Fixed Cost = $30,000 Fixed Cost = Total Costs – (Variable Cost per Unit x Units Produced)

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Mixed Costs LO 1 With fixed costs and variable costs estimated at $30,000 plus $15 per unit, a formula is in place to estimate production at any level. If the company is expected to produce 2,000 units in November, the estimated total cost would be calculated as follows: Total Cost = ($15 x 2,000) + $30,000 Total Cost = $30,000 + $30,000 Total Cost = $60,000 Total Cost = ($15 x Units Produced) + $30,000

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EE 19-1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Total Variable Costs Total Units Produced Unit Variable Costs Total Units Produced Per-Unit Cost Total variable costs increase and decrease proportionately with activity level. Per-unit variable costs remain the same regardless of activity level. Total Costs Summary of Cost Behavior Concepts LO 1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Total Units Produced Total Costs Total Units Produced Total fixed costs remain the same regardless of activity level. Per-unit fixed costs decrease as activity level increases. Total Fixed Costs Unit Fixed Costs Per-Unit Cost Summary of Cost Behavior Concepts LO 1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Summary of Cost Behavior Concepts LO 1  Some examples of variable, fixed, and mixed costs for the activity base units produced are as follows:

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  One method of reporting variable and fixed costs is called variable costing or direct costing.  Under variable costing, only the variable manufacturing costs are included in the product cost.  The fixed factory overhead is treated as an expense of the period in which it is incurred. Summary of Cost Behavior Concepts LO 1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 2 Compute the contribution margin, the contribution margin ratio, and the unit contribution margin.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost-Volume-Profit Relationships  Cost-volume-profit analysis is the examination of the relationships among selling prices, sales and production volume, costs, expenses, and profits. LO 2

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost-Volume-Profit Relationships LO 2  Some of the ways cost-volume-profit analysis may be used include: 1.Analyzing the effects of changes in selling prices on profits 2.Analyzing the effects of changes in costs on profits (continued)

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost-Volume-Profit Relationships LO 2 3.Analyzing the effects of changes in volume on profits 4.Setting selling prices 5.Selecting the mix of products to sell 6.Choosing among marketing strategies

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Contribution Margin  Contribution margin is the excess of sales over variable costs, as shown in the formula below. LO 2 Contribution Margin = Sales – Variable Costs

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Contribution Margin LO 2 Assume the following data for Lambert, Inc.: Lambert

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Contribution Margin LO 2Lambert

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The contribution margin ratio, sometimes called the profit-volume ratio, indicates the percentage of each sales dollar available to cover fixed costs and to provide income from operations. It is computed as follows: Contribution Margin Ratio LO 2 Contribution Margin Ratio = Contribution Margin Sales

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Contribution Margin Ratio LO 2 The contribution margin ratio is 40% for Lambert Inc., computed as follows: Contribution Margin Ratio = Contribution Margin Sales Contribution Margin Ratio = $400,000 $1,000,000 Contribution Margin Ratio = 40% Lambert

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 100% 60% Contribution Margin Ratio = 40% Contribution Margin Ratio = Sales – Variable Costs Sales $1,000,000 – $600,000 $1,000,000 Contribution Margin Ratio = 40% 30% 10% Contribution Margin Ratio LO 2Lambert

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Unit Contribution Margin  The unit contribution margin is useful for analyzing the profit potential of proposed decisions. The unit contribution margin is computed as follows: Unit Contribution Margin = Sales Price per Unit Variable Cost per Unit – LO 2

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Unit Contribution Margin  The unit contribution margin is most useful when the increase or decrease in sales volume is measured in sales units (quantities).  The change in income from operations can be determined using the following formula: Change in Income from Operations Change in Sales Units = x Unit Contribution Margin

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Unit Contribution Margin Lambert Inc.’s sales could be increased by 15,000 units, from 50,000 to 65,000 units. Lambert’s income from operations would increase by $120,000 (15,000 x $8), as shown below. Change in Income from Operations Change in Sales Units = x Unit Contribution Margin Change in Income from Operations = 15,000 units x $8 = $120,000 Lambert

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Unit Contribution Margin Lambert Inc.’s contribution margin income statement, shown below, confirms that income increased to $220,000 when 65,000 units are sold. Lambert

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Review 100% 60% 40% 30% 10% $20 12 $ 8 Sales (50,000 units)$1,000,000 Variable costs 600,000 Contribution margin$ 400,000 Fixed costs 300,000 Income from operations$ 100,000 Unit contribution margin analyses can provide useful information for managers. LO 2

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Review LO 2 1. Total contribution margin in dollars. 2. Contribution margin ratio (percentage). The contribution margin can be expressed in three ways: 3. Unit contribution margin (dollars per unit). 100% 60% 40% 30% 10% $20 12 $ 8 Sales (50,000 units)$1,000,000 Variable costs 600,000 Contribution margin$ 400,000 Fixed costs 300,000 Income from operations$ 100,000

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 3 Determine the break- even point and sales necessary to achieve a target profit.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Break-Even Point  The break-even point is the level of operations at which a company’s revenues and expenses are equal. LO 3

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Break-Even Point LO 3 Fixed costs$90,000 Unit selling price$25 Unit variable cost 15 Unit contribution margin$10 Assume the following data for Baker Corporation:

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The break-even point (in sales units) is calculated using the following equation: Break-Even Sales (units) = Fixed Costs Unit Contribution Margin Break-Even Sales (units) = $90,000 $10 Break-Even Sales (units) = 9,000 units Break-Even Point LO 3

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Break-Even Point LO 3 Income from operations is zero when 9,000 units are sold— hence, the break-even point is 9,000 units.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Break-Even Point LO 3 The break-even point (in sales dollars) is calculated using the following equation: Break-Even Sales (dollars) = Fixed Costs Contribution Margin Ratio Break-Even Sales (dollars) = $225,000 $90,000.40 Break-Even Sales (dollars) = $10 $25

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Effect of Changes in Fixed Costs Fixed Costs If Break- Even Break- Even then Fixed Costs Fixed Costs If then Break- Even Break- Even LO 3

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Effect of Changes in Fixed Costs Bishop Co. is evaluating a proposal to budget an additional $100,000 for advertising. The data for Bishop Co. are as follows: LO 3

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Effect of Changes in Fixed Costs LO 3 Break-Even Sales (units) = Fixed Costs Unit Contribution Margin Without additional advertising: Break-Even Sales (units) = $600,000 $20 = 30,000 units With additional advertising: Break-Even Sales (units) = $700,000 $20 = 35,000 units

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Unit Variable Cost If Break- Even Break- Even then Unit Variable Costs Unit Variable Costs If then Break- Even Break- Even Effect of Changes in Unit Variable Costs LO 3

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Effect of Changes in Unit Variable Costs LO 3 Park Co. is evaluating a proposal to pay an additional 2% commission on sales to its salespeople (a variable cost) as an incentive to increase sales. Fixed costs are estimated at $840,000. The other data for Park Co. are as follows:

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Effect of Changes in Unit Variable Costs LO 3 $250 – [$145 + ($250 x 2%)] = $100 Without additional 2% commission: Break-Even Sales (units) = $840,000 $105 = 8,000 units Break-Even Sales (units) = Fixed Costs Unit Contribution Margin With additional 2% commission: Break-Even Sales (units) = $840,000 $100 = 8,400 units

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Effect of Changes in Unit Selling Price Unit Selling Price If Unit Selling Price Unit Selling Price If Break- Even Break- Even then Break- Even Break- Even LO 3

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Effect of Changes in Unit Selling Price LO 3 Graham Co. is evaluating a proposal to increase the unit selling price of a product from $50 to $60. The estimated fixed costs are $600,000. The following additional data have been gathered:

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Effect of Changes in Unit Selling Price LO 3 Break-Even Sales (units) = Fixed Costs Unit Contribution Margin Without price increase: Break-Even Sales (units) = $600,000 $20 = 30,000 units With price increase: Break-Even Sales (units) = $600,000 $30 = 20,000 units

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Summary of Effects of Changes on B/E Point LO 3

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Target Profit  The sales volume required to earn a target profit is determined by modifying the break-even equation. LO 3 Sales (units) = Fixed Costs + Target Profit Unit Contribution Margin

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Target Profit LO 3 Assume the following data for Waltham Co.: What would be the necessary sales to earn the target profit of $100,000? WALTHAM

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Target Profit LO 3 Sales (units) = Fixed Costs + Target Profit Unit Contribution Margin Sales (units) = 10,000 units Sales (units) = $200,000 + $100,000 $30 WALTHAM

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 3 Proof ) Target Profit WALTHAM

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Contribution Margin Ratio = Unit Contribution Margin Unit Selling Price Contribution Margin Ratio = $30 $75 From an earlier slide Contribution Margin Ratio = 40% Sales (dollars) = Fixed Costs + Target Profit Contribution Margin Ratio Sales (dollars) = $200,000 + $100,000 40% = $750,000 Necessary sales to earn a $100,000 target profit Target Profit LO 3 WALTHAM

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 5 Compute the break-even point for a company selling more than one product, the operating leverage, and the margin of safety.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Sales Mix Considerations  Many companies sell more than one product at different selling prices. In addition, the products normally have different unit contribution margins.  The sales mix is the relative distribution of sales among the various products sold by a company. LO 5

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Sales Mix Considerations LO 5 Cascade Company sold Products A and B during the past year as follows:

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Sales Mix Considerations LO 5 It is useful to think of the individual products as components of one overall enterprise product. For Cascade Company, the overall enterprise product is called E. The unit selling price, unit variable cost, and unit contribution margin for E are computed as follows:

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Break-Even Sales (units) = Fixed Costs Unit Contribution Margin Break-Even Sales (units) = $200,000 $25 Break-Even Sales (units) = 8,000 units Sales Mix Considerations LO 5

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Sales Mix Considerations LO 5 Break-even point

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Margin of Safety  The margin of safety indicates the possible decrease in sales that may occur before an operating loss results.  The margin of safety may be expressed in the following ways:  Dollars of sales  Units of sales  Percent of current sales LO 5

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Margin of Safety LO 5 Margin of Safety = Sales – Sales at Break-Even Point Sales Margin of Safety = 20% If sales are $250,000, the unit selling price is $25, and the sales at the break-even point are $200,000, the margin of safety is 20%, computed as follows: Margin of Safety = $250,000 – $200,000 $250,000

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license.

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© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license.

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Presentation on theme: "© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license."— Presentation transcript:

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About project

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