Embed Size (px)
Citation preview
6
Slide 1
Cost Volume Profit AnalysisChapter 6
INTRODUCTIONINTRODUCTION
The Profit FunctionThe Profit Function
Breakeven AnalysisBreakeven Analysis
Differential Cost AnalysisDifferential Cost Analysis
6
Slide 2
The Profit Equation
OperatingProfit
TotalRevenue
TotalCosts = –
Operating profit equals total revenue Operating profit equals total revenue less total costs.less total costs.
6
Slide 3
The Profit Equation
OperatingProfit
TotalRevenue
TotalCosts
= TR – TC
= –
6
Slide 4
The Profit Equation
TotalRevenue
Average SellingPrice Per Unit
Units ofOutput
= ×
TR = P × X
6
Slide 5
The Profit Equation
TotalCosts
Variable CostsPer Unit
Units ofOutput= ×
TC = (V × X) + F
FixedCosts+
6
Slide 6
The Profit Equation
Now, we’ll expand our Now, we’ll expand our original equation for profits!original equation for profits!
(P × X) - [(V × X) + F]=
6
Slide 7
The Profit Equation
Now, we’ll expand our Now, we’ll expand our original equation for profits!original equation for profits!
(P × X) - [(V × X) + F]=
(P – V)X – F=
6
Slide 8
Example
Here is the information from the Hap Bikes:
Total Per Unit PercentSales (500 bikes) 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$
6
Slide 9
Example
(P – V)X – F=
6
Slide 10
Finding Target Volumes
The formula to find a volume expressed in units for a target profit is . . .
TargetVolume(units)
=Fixed costs + Target profit
Contribution margin per unit
How many bikes must Hap sell to earn an annual profit of $100,000?
6
Slide 11
Finding Target Volumes
TargetVolume(units)
=Fixed costs + Target profit
Contribution margin per unit
6
Slide 12
Proof
If Hap sells 900 bikes, its operating profit would be . . .
(P – V)X – F=
6
Slide 13
Finding the Break-Even Point
The Break-Even Point Break-Even Point is the volume level where profits equal zero.
To find the break-even point in unitsunits, we use the target volume in units target volume in units equation and set the profit to zero.
To find the break-even point in sales dollarssales dollars, we use the target volume in sales dollars target volume in sales dollars equation and set the profit to zero.
6
Slide 14
Break-Even in Units
Let’s use the Hap Bikes information again.
Total Per Unit PercentSales (500 bikes) 250,000$ 500$ 100%Less: variable expenses 150,000 300 60%Contribution margin 100,000$ 200$ 40%Less: fixed expenses 80,000 Net income 20,000$
Contribution margin ratio
6
Slide 15
Break-Even in Units
Break-EvenVolume(units)
=Fixed costs + Target profit
Contribution margin per unit
6
Slide 16
Break-Even in Sales Dollars
= $80,000 + $0 .40
Fixed costs + Target profit Contribution margin ratio
Break-EvenVolume(sales $)
=
6
Slide 17
Target Volume in Sales Dollars
We can calculate the target volume in sales dollars using the contribution margin ratiocontribution margin ratio.
Contribution margin per unit Sales price per unit
6
Slide 18
Target Volume in Sales Dollars
The equation for finding the target volume in sales dollars is . . .
Fixed costs + Target profit Contribution margin ratioContribution margin ratio
TargetVolume(sales $)
=
6
Slide 19
Graphic PresentationConsider the following information for Hap Bikes:
Income 300 units
Income 400 units
Income 500 units
Sales 150,000$ 200,000$ 250,000$Less: variable expenses 90,000 120,000 150,000 Contribution margin 60,000$ 80,000$ 100,000$Less: fixed expenses 80,000 80,000 80,000 Net income (loss) (20,000)$ -$ 20,000$
6
Slide 20
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
- 100 200 300 400 500 600 700 800
Graphic Presentation
Volume per period (X)
Dol
lars
6
Slide 21
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
- 100 200 300 400 500 600 700 800
Graphic Presentation
Break-even point
Dol
l ars
Volume per period (X)
6
Slide 22
Using CVP to Analyze Different Cost Structures
Cost structure Cost structure - The proportion of fixed and variable to total costs of an organization.
Operating leverage Operating leverage - The extent to which an organization’s costs structure is made up of fixed costs.
Let’s look at an example of different costsLet’s look at an example of different costsstructures for different companies.structures for different companies.
6
Slide 23
Using CVP to Analyze Different Cost Structures
High Variable Company %
Hi Fixed Company %
(50,000 units) (50,000 units)Sales 500,000$ 100% 500,000$ 100%Variable costs 400,000 80% 100,000 20%Contribution margin 100,000 20% 400,000 80%Fixed costs 40,000 8% 340,000 68%Operating profit 60,000$ 12% 60,000$ 12%
Break-even units 20,000 42,500 Contribution margin per unit 2.00$ 8.00$
6
Slide 24
Using CVP to Analyze Different Cost Structures
Let’s see what happens when both companiesLet’s see what happens when both companiesexperience a 10% increase in sales.experience a 10% increase in sales.
High Variable Company %
Hi Fixed Company %
(50,000 units) (50,000 units)Sales 500,000$ 100% 500,000$ 100%Variable costs 400,000 80% 100,000 20%Contribution margin 100,000 20% 400,000 80%Fixed costs 40,000 8% 340,000 68%Operating profit 60,000$ 12% 60,000$ 12%
Break-even units 20,000 42,500 Contribution margin per unit 2.00$ 8.00$
6
Slide 25
Using CVP to Analyze Different Cost Structures
High Variable Company %
Hi Fixed Company %
(55,000 units) (55,000 units)Sales 550,000$ 100% 550,000$ 100%Variable costs 440,000 80% 110,000 20%Contribution margin 110,000 20% 440,000 80%Fixed costs 40,000 7% 340,000 62%Operating profit 70,000$ 13% 100,000$ 18%
Break-even units 20,000 42,500 Contribution margin per unit 2.00$ 8.00$
6
Slide 26
Margin of Safety
Excess of projected (or actual) sales over the break-even volume.
The amount by which sales can fall before the company is in the loss area of the break-even graph.
Sales Break-even Sales Break-even volume sales volumevolume sales volume = = Margin of SafetyMargin of Safety––
6
Slide 27
Margin of Safety
Hap is currently selling 500 bikes, and we calculated the break-even to be 400 units
($80,000 fixed costs ÷ $200 contribution margin).
