4 CVP Analysis

8/4/2019 4 CVP Analysis

1/36

Managerial Accounting

by James JiambalvoChapter 4:

Cost-Volume-Profit-

Analysis

Slides Prepared by:

Scott PetersonNorthern State

University


2/36

Objectives

1. Identify common cost behaviorpatterns.

2. Estimate the relation between cost andactivity using account analysis and thehigh-low method.

3. Perform cost-volume-profit-analysis forsingle products.

4. Perform cost-volume-profit-analysis formultiple products.


3/36

Objectives(continued)

5. Discuss the effect of operatingleverage.

6. Use the contribution margin per unit ofthe constraint to analyze situationsinvolving a resource constraint.


4/36

Common Cost Behavior

Patterns

1. Cost-Volume-Profit-Analysis (C-V-P)2. Variable Costs

3. Fixed Costsa. Discretionary Fixed Costsb. Committed Fixed Costs

4. Mixed Costs5. Step Costs
http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/


5/36

Variable Costs


6/36

Fixed Costs


7/36

Mixed Costs


8/36

Cost Estimation MethodsCost Estimation Methods are frequentlyrequired to separate the fixed and variable

components of a total cost pool. Methodsinclude:

1. Account Analysis

2. Scattergraph3. High-Low Method

4. Regression

5. Relevant Range
http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/


9/36

Scattergraph


10/36

High-Low MethodExample: Let total costs at 500 units ofoutput be $150,000 and at 3,000 units of

output be $400,000. Calculate variable andfixed costs, respectively.


11/36

High-Low MethodSolution: High Low Change

Costs: $400,000 $150,000 $250,000

Units: 3,000 500 2,500

Calculate Variable Cost Per Unit:

$250,000/2,500 = $100

Calculate Total Fixed Costs:

$400,000 (3,000 x 100) = $100,000


12/36

High-Low Method


13/36

Regression Analysis


14/36

Relevant Range


15/36

Cost-Volume-Profit Analysis1. The Profit Equation

2. Breakeven Point

3. Margin of Safety

4. Contribution Margin

5. Contribution Margin Ratio

6. What-if Analysis
http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/


16/36

The Profit EquationProfit = SP(x) VC(x) TFC

X = Quantity of units produced and sold

SP = Selling price per unit

VC = Variable cost per unit

TFC = Total fixed cost


17/36

Break-Even PointTFC/CM(per unit) = Break-Even (units)

X = Quantity of units produced and sold



CM = Contribution margin

TFC = Total fixed cost
http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/


18/36

Break-Even Point


19/36

Contribution MarginSP(u) VC(u) = CM (u)



CM = Contribution margin

u = per unit
http://glossary.htm/http://glossary.htm/


20/36

Contribution Margin Ratio(SP VC) / SP = CM%

SP = Selling Price per unit

VC = Variable Cost per unit

CM = Contribution Margin


21/36

What If AnalysisExamples include analyzing changes in:

1. Selling price per unit

2. Variable cost per unit

3. Total fixed cost


22/36

Multiproduct AnalysisC-V-P applied to multiple products.

1. Contribution Margin Approach (used forsimilar products).

2. Contribution Margin Ratio Approach

(used for substantially differentproducts).
http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/


23/36

Contribution Margin ApproachExample: the contribution margin of productA is $8 and B is $5. Two units of B are sold

for each unit of A. The Weighted AverageContribution Margin is $6.00.


24/36

Contribution Margin Ratio

ApproachExample: the contribution margin ratio ofproduct A is 20% and B is 50%. Two units

of B are sold for each unit of A. TheWeighted Average Contribution MarginRatio is 40%.


25/36

Assumptions in C-V-P Analysis1. Costs can be accurately separated into

variable and fixed components.

2. Fixed costs remain fixed.

3. Variable costs per unit do not changeover the relevant range.


26/36

Operating LeverageExample of Operating Leverage:

Firm 1 Firm 2

Sales $10,000,000 $10,000,000

VC 5,000,000 7,000,000

CM 5,000,000 3,000,000

FC 3,000,000 1,000,000

Profit $2,000,000 $2,000,000

Which firm has more?


27/36

Constraints1. A reference to scarce resources.

2. Examples of constraints includemanufacturing space, labor, parts andmaterials etc..

3. The focus shifts away from Contribution

Margin and to the scarce resource orconstraint.


28/36

Quick Review Question #11. At Winford Corp., the selling price per

unit for lawn mowers is $120, variable

cost per unit is $55. Fixed costs are$130,000. Contribution Margin per unitis?

a. $65

b. $75c. $175

d. $30


29/36

Quick Review Answer #11. At Winford Corp., the selling price per


cost per unit is $55. Fixed costs are$130,000. Contribution margin per unitis?

a. $65

b. $75c. $175

d. $30


30/36



cost per unit is $55. Fixed costs are$130,000. Break-Even Point is?

a. 1,000 units

b. 1,083 unitsc. 2,000 units

d. None of these
http://glossary.htm/http://glossary.htm/http://glossary.htm/http://glossary.htm/


31/36



cost per unit is $55. Fixed costs are$130,000. Break-Even Point is?

a. 1,000 units

b. 1,083 unitsc. 2,000 units

d. None of these


32/36



cost per unit is $55. Fixed costs are$130,000. Expected sales are 4,200units. The Margin of Safety is?

a. $264,000

b. $384,000c. $143,000

d. $121,000


33/36



cost per unit is $55. Fixed costs are$130,000. Expected sales are 4,200units. The Margin of Safety is?

a. $264,000

b. $384,000c. $143,000

d. $121,000


34/36



cost per unit is $55. Fixed costs are$130,000. Expected sales are 4,200units. What is profit expected to be?

Answer here: _________________


35/36



cost per unit is $55. Fixed costs are$130,000. Expected sales are 4,200units. What is profit expected to be?

Answer here: $143,000


36/36

Copyright 2004 John Wiley & Sons, Inc. All rights reserved.Reproduction or translation of this work beyond thatpermitted in Section 117 of the 1976 United States

Copyright Act without the express written permission of thecopyright owner is unlawful. Request for further informationshould be addressed to the Permissions Department, JohnWiley & Sons, Inc. The purchaser may make back-upcopies for his/her own use only and not for distribution or

resale. The Publisher assumes no responsibility for errors,omissions, or damages, caused by the use of theseprograms or from the use of the information containedherein.

Documents

4 CVP Analysis