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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 PointThe Break-Even Point
The break-even point is the point in the volume of activity where the organization’s
revenues and expenses are equal.
Sales 250,000$ Less: variable expenses 150,000 Contribution margin 100,000 Less: fixed expenses 100,000 Net income -$
7-3
Equation ApproachEquation Approach
Sales revenue – Variable expenses – Fixed expenses = Profit
UnitUnitsalessalespriceprice
SalesSalesvolumevolumein unitsin units
××UnitUnit
variablevariableexpenseexpense
SalesSalesvolumevolumein unitsin units
××
($500 × X)× X) ($300 × X)× X)–– –– $80,000 = $0
($200X)X) –– $80,000 = $0
X = 400 surf boardsX = 400 surf boards
7-4
Contribution-Margin ApproachContribution-Margin Approach
For each additional surf board sold, Curl generates $200 in contribution margin.
Total Per Unit PercentSales (500 surf boards) 250,000$ 500$ 100%Less: variable expenses 150,000 300 60%Contribution margin 100,000$ 200$ 40%Less: fixed expenses 80,000 Net income 20,000$
Consider the following information developed by the accountant at Curl, Inc.:
7-5
Contribution-Margin ApproachContribution-Margin Approach
Fixed expensesFixed expenses Unit contribution margin Unit contribution margin ==
Break-even pointBreak-even point(in units)(in units)
Total Per Unit PercentSales (500 surf boards) 250,000$ 500$ 100%Less: variable expenses 150,000 300 60%Contribution margin 100,000$ 200$ 40%Less: fixed expenses 80,000 Net income 20,000$
$$80,00080,000 $$200200 = 400 surf boards= 400 surf boards
7-6
Contribution-Margin ApproachContribution-Margin Approach
Here is the proof!
Total Per Unit PercentSales (400 surf boards) 200,000$ 500$ 100%Less: variable expenses 120,000 300 60%Contribution margin 80,000$ 200$ 40%Less: fixed expenses 80,000 Net income -$
400 × $500 = $200,000400 × $500 = $200,000 400 × $300 = $120,000400 × $300 = $120,000
7-7
Contribution Margin RatioContribution Margin Ratio
Calculate the break-even point in sales dollars rather than units by using the contribution margin ratio.
Contribution margin Sales
= CM Ratio
Fixed expenseFixed expense CM RatioCM Ratio
Break-even pointBreak-even point(in sales dollars)(in sales dollars)==
7-8
Total Per Unit PercentSales (400 surf boards) 200,000$ 500$ 100%Less: variable expenses 120,000 300 60%Contribution margin 80,000$ 200$ 40%Less: fixed expenses 80,000 Net income -$
Contribution Margin RatioContribution Margin Ratio
$80,000$80,000 40%40% $200,000 sales$200,000 sales==
7-9
Graphing Cost-Volume-Profit Graphing Cost-Volume-Profit RelationshipsRelationships
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 GraphCost-Volume-Profit GraphD
olla
rs
600 700 800Units
200 300 400 500
450,000
100
200,000
150,000
100,000
50,000
400,000
350,000
300,000
250,000
Fixed expensesTotal expenses
Total sales
Break-evenpoint Profit a
rea
Loss area
7-11
Target Net ProfitTarget 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 = 900 surf boards
See the Equation Approach example in text book (LO1)See the Equation Approach example in text book (LO1)
7-12
Applying CVP AnalysisApplying 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.
See example the Safety Margin example in text book (LO4)See example the Safety Margin example in text book (LO4)
7-13
What would happen to BREAK What would happen to BREAK EVEN POINT if there is a: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
7-14
Predicting Profit Given Expected Predicting Profit Given Expected VolumeVolume
Fixed expensesUnit contribution marginTarget net profit
Find: {req’d sales volume}Given:Given:
Fixed expensesUnit contribution marginExpected sales volume
Find: {expected profit}GivenGiven::
See the example in text book (LO4)See the example in text book (LO4)
7-15
CVP Analysis with Multiple CVP Analysis with Multiple ProductsProducts
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)See the example in text book (LO5)
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