Manac II T erm I I –PGP 18 Batch Pankaj Baag Faculty Block 01, Room No 21 Mo! 8"#$%1&2&" Ph '()! 0#"*+280"121 -t. 121 ma/l! aagankaj//mk.ac./n
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Manac II
Term II –PGP 18 Batch
Pankaj Baag
Faculty Block 01, Room No 21
Mo! 8"#$%1&2&"
Ph '()! 0#"*+280"121
-t. 121
ma/l! aagankaj//mk.ac./n
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ap er
3Cost
Volume
Proft
Analysis
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SYNOPSIS
• This chapter presents the cost-volume-profit (CVP) analysis model and
illustrates how managers use that model to help answer important “what-if”
business uestions!
• CVP analysis also helps management accountants alert managers to the
ris"s and rewards of decisions they are considering by illustrating how the
“bottom-line” is affected by changes in activity levels or "ey pricing or cost
components!
• CVP analysis is based on several assumptions# one of which is that fi$edcosts can be distinguished from variable costs!
• %owever# whether a cost is variable or fi$ed depends on the time period for
the decision and also the range of activity (relevant range) being
considered!
• &e also loo" at a method for applying CVP analysis to companies with
multiple products and to situations where there is more than one cost driver!
• The applicability of CVP to manufacturers# service organi'ations# and
nonprofits is discussed!
• Contribution margin is also defined and distinguished from gross margin
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Process o Management
ec/3/onMak/ng
/rect/ng4ontrol
Plann/ng5trategyFormulat/on
Manager3 nee6 co3t /n7ormat/on toer7orm each o7 the3e 7unct/on3.
-
Management
accountinginormationhelpsmanagers
perormeach otheseunctionsmoreeectively.
Theprocess omanageme
nt involvesormulating strategy,planning,
control,ecisionma!inganirectingoperationalactivities.
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•Calculating the cost of products,services, and other cost objects
•"#taining inormation orplanning $ control, anperormance evaluation
•Analy%ing the relevantinormation or ma!ing ecisions
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&asis o
classifcation '(CA) *+
i+ ature o
e-penses
//) Relat/on tooject +tracea/l/ty
iii+ unctions/activ
itiesiv+ &ehaviour
v+ Managementecisionma!ing
vi+ Prouctionprocess
vii+ Time perio
/rect co3t3 0 can #e convenientlyan economically trace (trac!e+ toa cost o#1ect
In6/rect co3t3 0 cannot #econveniently or economically trace(trac!e+ to a cost o#1ect. Instea o
#eing trace, these costs areallocate to a cost o#1ect in arational an systematic manner2hether a cost is a irect cost or aninirect cost o a epartment oten
epens on hich epartment isuner consieration.
A cost can #e a irect cost o oneepartment or su#unit in the
organi%ation #ut an inirect cost o
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&asis o
classifcation '(CA) *+
i) Nature ofexpenses
ii+ 4elation too#1ect 5tracea#ility
iii+ unctions/activities
/) Beha/our +9-e6, 3em/+ar/ale orar/ale
v+ Managementecision ma!ing
vi+ Prouction
process
vii+ Time perio
2hen management e-amine therelationship o various costs to theactivities perorme.
It is reerre to as cost #ehavior.
Costs are classife into to types o cost#ehavior' varia#le an f-e costs.
A ar/ale co3t changes in total inirect proportion to a change in the levelo activity (or cost river+. It varies
irectly ith the output. )o, these arealso !non as direct costs
A 9-e6 co3t remains unchange in total
as the level o activity (or cost river+varies. Also !non as er/o6 co3t
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Total Varia#le Cost
6our total ca#le pay5per5vie #ill is #ase on homany movies you atch.
Pay5Per5Vie
Movies
T o t a l P
a y 5 P e r 5 V i e 3
& i l l
-*
Varia#le Cost Per 7nit
The cost per movieatche is constant.or e-ample, 89.::
per movie.
P e r M o
v i e C h a r g e
Movies
2atche
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Total i-e Cost 6our monthly ca#le #ill pro#a#ly oes
not change hen you atch movies
on channels that you have electe to#e pai on a monthly #asis (;&"+.
um#er o ;&"
Movies 2atche
M o n t h
l y C h a r g e f o r
;
& " & i l l
-+
i-e Cost Per7nit
The average cost per ;&"
movie ecreases as more;&" movies are
atche.
M o n t h l y ; & " & i l l p e r
M o v i e 2 a t c h e
um#er o ;&"
Movies 2atche
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*:
Introuction
• Till no e allocate allmanuacturing costs to prouctsregarless o hether they are f-e
or varia#le. This approach is !nonas a#sorption costing/ull costing
• ;oever, no, e ill use only
varia#le costs hich are relevant toecision5ma!ing (hy<+. This is!non as marginal costing/varia#le
costing
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• )o, in Marginal costing, The coststhat ary ith a ecision shoul only
#e inclue in ecision analysis.• This is rt short term, so, or many
ecisions that involve relatively smallvariations rom e-isting practicean/or are or relatively limiteperios o time, f-e costs are notrelevant to the ecision.
• This is #ecause either f-e coststen to #e impossi#le to alter in theshort term or managers are reluctantto alter them in the short term.
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• )ince f-e costs are not inclue in prouctcosts, it #ecomes easy to fn out irectly theeect on proft ue to change in volume or
type o output• Also commonly !non as direct costing,
variable costing
• The term 4o3t+:olume+Pro9t '4:P )analy3/3 is also re=uently use in thisconte-t.
• CVP analysis examines the behaviour of
total revenues , total costs and operatingincome as changes occur in the outputlevel , selling price , the variable cost per
unit or the xed cost of a product.
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B ;naly3/3
• "r,
• CVP analysis reers to the stuy o the eects onuture profts o changes in f-e cost, varia#lecost, sales price, =uantity an mi-.
• The analysis provies solutions to various
alternative #usiness plans• Cost5volume proft analysis is also !non as
Breakeven analysis an is use or ecision ma!ing
• Thereore, Breakeen analy3/3 is the stuy o the
relationship #eteen selling prices, sales volumes,f-e costs, varia#le costs an profts at variouslevels o activity
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Theory o Marginal Costing
• ;3 3et out y 4IM; <on6on. In relation to a given volume o output,
aitional output can normally #e o#taine at
less than proportionate cost #ecause ithinlimits, the aggregate o certain items o costill ten to remain f-e an only the aggregateo the remainer ill ten to riseproportionately ith an increase in output.
Conversely, a ecrease in the volume o outputill normally #e accompanie #y less thanproportionate all in the aggregate cost.
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5/mle 5te3 to =n6er3tan6 theaoe theory
• I the volume o output increases, thecost per unit in normal circumstances reuces. Conversely, i an output
reuces, the cost per unit increases.
>g' I a actory prouces *::: units at atotal cost o 4s.3,::: an i #y
increasing the output #y one unit thecost goes up to 4s.3,::?, themarginal cost o aitional output ill
#e 4s.?. (3::?53:::+
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Continue@@.
• I an increase in output is more than one, thetotal increase in cost ivie #y the totalincrease in output ill give the averagemarginal cost per unit.
>g' The output is increase to *:?: units rom*::: units an the total cost to proucethese units is 4s.*,:9, the average marginalcost per unit is 4s.?.?.
(i.e. Aitional cost/AitionalunitsB9/?:B4s.?.?+
; / 7 M / l / 4:P l /
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• ;33umt/on o7 Marg/nal co3t/ng or 4:P analy3/3!
• All costs can #e classife into to categories5 f-e an varia#le.
• i-e costs remain constant at all level o activity
• Prices o varia#le cost actors remain unchange ie. it is constant
per unit, so that varia#le cost are truly varia#le ie. Varia#le costsvary in total
• )emi varia#le/semi f-e cost can #e segregate into varia#lean f-e elements
• "perating eciency ill remain uniorm
• Prouct specifcations an metho o manuacturing an sellingill not change, prouct mi- ill not change, prouct ris!remains unchange
• Pricing policy remains unchange even uner ierent volume,competitions ie. )elling price remains unchange at ierentlevel o activity
• The num#er o unit o sales ill coincie ith the units prouce,so that there is no opening/closing stoc!. Alternatively, thechanges in opening an closing stoc!s are insignifcant an that
they are value at the same prices or at varia#le cost
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• Marg/nal co3t!• It is the aitional cost o proucing an aitional unit
o a prouct.
• Defne as' the amount at any given volume o output#y hich aggregate costs are change i the volume ooutput is increase or ecrease #y one unit. Thus, it ismeasure #y the total varia#le cost attri#uta#le to oneunit
•DE are inclue inmarginal cost on the
assumption that theyare varia#le. I not,they shoul #ee-clue•It has to #eunerstoo that all
varia#le costs aregenerally irect costs#ut all irect costsnee not #e varia#le•In Inia Direct la#our
cost are generallytreate as f-e onl
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*F
Cost
Manuacturing cost on5manuacturing cost
DirectMaterials
DirectEa#our
"verheas
inishe goos Cost o goos sol
Perio cost
Proft an loss account
A#sorption Costing
Cost
Manuacturing cost on5manuacturing cost
DirectMaterials
DirectEa#our
Varia#le"verheas
inishe goos Cost o goos sol
Perio cost
Proft an loss account
Marginal Costing
i-eoverhea
Varia#le G i-e 0ivie into sol $unsol
7nsol isae tostoc!
Varia#le into sol $unsol
7nsolisaetostoc!
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• Thereore, Marginal cost B Prime cost G total varia#le cost
• or total co3t – 9-e6 co3t
• Marg/nal 4o3t/ng! efne as the ascertainment o marginal
cost an o the eect on proft o changes in volume or type ooutput #y ierentiating #eteen f-e costs an varia#lecosts.
• Feature3!
1. Cost classication! The marginal costing techni=ue ma!es a
sharp istinction #eteen varia#le costs an f-e costs.It is the varia#le cost on the #asis o hich prouction an sales
policies are esigne #y a frm olloing the marginal costing
techni=ue.
In other ors, marginal costing is a techni=ue o control orecision ma!ing.
7ner marginal costing the total cost is classife as f-e anvaria#le cost. i-e costs are treate as perio cost ancharge to proft an loss a/c or the perio or hich they are
incurre. The varia#le costs are regare as the costs o theproucts
F t ' t6 )
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Feature3 'cont6>)!
?. "tock#$nventory %aluation ' 7ner marginal costing,inventory/stoc! or proft measurement is value at marginalcost. It is in sharp contrast to the total unit cost uner
a#sorption costing metho.3. Marginal Contribution! Marginal costing techni=ue ma!es use o
marginal contri#ution or mar!ing various ecisions. Marginalcontri#ution is the ierence #eteen sales an marginal cost.It orms the #asis or 1uging the profta#ility o ierent
proucts or epartments.9. Prices are etermine on the #asis o marginal cost
;6antage3 o7 marg/nal co3t/ng!
• )imple, less conusing an less complicate
• )toc! valuation557ner this techni=ue net proft is not eecte#y the changes in prouction level or changes in stoc! volumeHin act proft is irectly relate to sales.
• Meaningul reporting554eports #ase on this techni=ue provie
inormation #ase on sales rather than prouction conveyingreal estate o eciency.
;6 t 7 / l t/ ' t6 )
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• ;6antage3 o7 marg/nal co3t/ng 'cont6>)!• i-ation o selling price
• Proft planning, particularly o short term nature
• Cost control an cost reuction
• Pricing policy an its etermination• Management ecision ma!ing
• Prouction planning
• Ma!e or #uy ecisions
</m/tat/on o7 marg/nal co3t/ng!• Classifcation o cost assumptions• It lays too much emphasis on selling unction, an as such
prouction unction has #een consiere to #e less signifcant.• Valuation o stoc! only at Marginal cost may amount to uner5
valuation rom the fnancial managers vie point an this mayhave or!ing capital pro#lem.• ot suita#le or e-ternal reporting, vi%., or ta- authorities here
marginal income is not consiere to #e ta-a#le proft.• This techni=ue oes not attach ue importance to time actor.• Eac! o long term perspective• ot applica#le in all type o #usiness
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5o>>
?hat /3 Marg/nal co3t @
The cost o proucing one more unit"r the cost hich coul #e avoie #y
not proucing a unit
?hat /3 Marg/nal co3t/ng @
An approach in hich only ar/ale costsare inclue in cost o sales
9-e6 co3t3 are treate6 a3 er/o6 co3t3
an are &ritten o' as incurred
Contri#ution Margin
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Sales revenue
– Variable costs
= Contribution margin – Fixed costs
= Profit
Contri#ution Margin
•Profit (Net Margin) = ross margin – fixed cost•ross margin is also !no"n as t#e contribution
margin•Contribution margin is t#e $ortion of sales revenue
available to cover fixed costs and $rovide a $rofit%
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?
Contri#ution
• Is the ierence #eteen the sales value an themarginal or varia#le cost o sales
• Contri#ution may #e efne as the proft #eore therecovery o f-e costs
• contri#ution goes toar the recovery o f-e cost anproft, an is e=ual to f-e cost plus proft (C B G P+.
• In case a frm neither ma!es proft nor suers loss,
contri#ution ill #e 1ust e=ual to f-e cost (C B +.• This is !non as reak een o/nt.
&rea! >ven Analysis 55is the stuy o the relationship#eteen selling prices, sales volumes, f-e costs, varia#lecosts an profts at various levels o activity
;ere, e also use a &rea! even Chart to o the analysis. The &rea! even chart is a graphical representation o
marginal costing or CVP analysis an helps in proft planning
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Contri#ution Margin Approach
&f a com$uter sells for 's *** "it# 's +** variable costs $er com$uter and 's
,-**** fixed costs $er .ear/ 0#at is t#e total contribution margin on -** com$uters1 0#at is t#e contribution margin $er unit1 0#at is t#e contribution margin ratio1 0#at is t#e total 's% $rofit after one .ear1
2otal Per 3nit 'atio
Sales revenue 's4****** 's*** 4**5
6ess variable costs 7***** +** 7*5
Contribution margin 's 8***** 's4** 8*56ess fixed costs ,-****
Profit 's -****
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2e have alreay seen that@Contri#ution is the ierence #eteen salesAn the marginal (Varia#le+ cost@an@Contri#ution Bsales5
varia#le cost CB )5VContri#ution B i-e CostGProft CB GP
Thereore
)5V B GPI any 3 actors in the e=uationare !non The 9th coul #e oun out
PB)5V5 PBC5 BC5P )BGPGV VB)5C@@@.
)ales B4s *?,:::V CostB4) J,::: CostB4s 9,:::
P4"IT <
CB)5V B*?,:::5J:::B:::PBC5B,:::59:::B4s *,:::
)AE>)< )BCGV B,:::GJ,::: B4s *?,:::
C")T< BC5P
B,:::5*,:::
B4s 9,:::
V Cost<VB)5C
B*?,:::5::: B4s J,:::
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Contribution margin is the difference between total
revenues and total variable costs! This is an indication
of why operating income changes as the number of
units sold changes!
Contribution margin per unit is the difference between
selling price and variable cost per unit, i!e!# contribution
margin per unit is the change in operating income foreach additional unit sold!
Contribution income statement is an income statement
that groups costs into their variable and fi$ed
components! Variable costs are subtracted fromrevenues to highlight contribution margin! i$ed costs
are subtracted from contribution margin to arrive at
operating income!
B k ; l / h th ft #ilit
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Cost5 Volume5 ProftAnalysis
Break en ;naly3/3 0 shos the profta#ility orotherise o an unerta!ing at various levels o activityAn, as a result it inicates the@
A point o no proft no loss
A point here revenue e=uals coIt epicts the olloing inormation atvarious levels o activity
*. Varia#le costs, f-e costs an total costs?. )ales value3. Proft or loss9. &rea! even point 0the point at hich total costs 1ust e=ual or
#rea! even ith sales. This is the activity point at hich neitherproft is mae nor loss is incurre
. Margin o saety
At ierent activity levels, the interaction o volume,selling price, varia#le costs an f-e costs, the relevantvaria#les an their impact upon proft are considered
si(ultaneously .
) Th & ! > P i t
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)o, @.The &rea!5>ven Point
The #rea!5even point is the point in the volume o activity here theorgani%ations revenues an e-penses are e=ual. At this amount o
sales, the organi%ation has no proft or lossH it breaks even.
The statement also shos the total contr/ut/on marg/n, hich istotal sales revenue minus total varia#le e-penses. Total contri#utionmargin is the amount o revenue that is availa#le to contribute tocovering f-e e-penses ater all varia#le e-penses have #een covere.
.-/0
Sales 250,000$
Less: variable expenses 50,000 !ontribution margin 00,000
Less: "ixe# expenses 00,000
Net income $
hat are &>P assumptions •Proft ay
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hat are &>P555assumptions
All costs are f-e orvaria#leVC remains Constant Total C remainsConstant)elling Price ontchange 2ith Volume
)ynchroni%ation o Pro $)ales o Change inProuctivity per or!ers
Methos
>=uationMetho
KraphicMetho
Proft ay@•At the output level hen totalrevenue e=ual to total cost. '5ell/ng r/ce A numer o7un/t3) – 'ar/ale co3t er un/t
- numer o7 un/t3) – 9-e6 co3t oerat/ng ro9t
•At &rea! even level operatingincome is %ero
&rea! even =uantity B i-e
cost / (selling price 0 varia#lecost+
Contri#ution margin ay
• (Contri#ution margin - =uantity+ 0
f-e cost B operating income• &rea! even =uantity B i-e cost /contri#ution margin
>-pressing CVP relationship
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CVP relationships and the calculation of operating income can
be illustrated using three methods1
Equation Method. The equation method is based on the
following formula1
(2elling price 3 4uantity of units sold) 5 (Variable cost per
unit 3 4uantity of units sold) 5 i$ed costs 6 7perating
income
Contribution Margin Method. 8nder this approach fi$ed
costs are divided by the unit contribution margin to give
the brea"even point in units!
Graph Method. The graph method represents total costs and totalrevenues graphically! &hen costs and revenues are netted and
graphed as one line# this is often referred to as a profit-volume or
PV graph
CP * ? 3
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CP *5?53
2hich o the olloing is not a actor in cost5volume5proft analysis<
a. 7nits sol
#. )elling pricec. Total varia#le costs
. i-e costs o a prouct
2hich o the olloing is not an assumption o cost5volume5proft analysis<
a. The time value o money is incorporate in the analysis.#. Costs can #e classife into varia#le an f-e components.
c. The #ehavior o revenues an e-penses is accurately portraye as linearover the relevant range.
. The num#er o output units is the only river.
Contri#ution margin is calculate as
a. total revenue 0 total f-e costs.
#. total revenue 0 total manuacturing costs (CK)+.
c. total revenue 0 total varia#le costs.
. operating income G total varia#le costs.
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>=uation Approach
Sales revenue – Variable expenses – Fixed expenses = Profit
=n/t3ale3r/ce
5ale3olume/n un/t3
C
=n/tar/alee-en3e
5ale3olume/n un/t3
C
'R3*00 C A) 'R3$00 C A)– –R380,000 R30
'R3200A)–R380,000 R30
A #00 un/t3
.-/
The e=uation approachcan #e use to fn the#rea!5even point.
This approach is #ase onthe proft e=uation. That
is ..Income (or proft+ ise=ual to sales revenue
>-penses can #e separate in varia#lean f-e e-penses. At the #rea!5even point, income is 4s:.
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Contri#ution5Margin Approach
or each aitional sur #oarsol, Curl generates 8?:: incontri#ution margin.
Consier the olloing inormation evelope #y theaccountant at Curl, Inc.'
.-/9
Curl, Inc. manuactures sur
#oars. >ach sur #oar sellsor 8:: an has varia#lecosts o 83::.
%otal Per &nit Percent
Sales '500 sur" boar#s( 250,000$ 500$ 00)
Less: variable expenses 50,000 *00 +0)
!ontribution margin 00,000$ 200$ 0)Less: "ixe# expenses -0,000
Net income 20,000$
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Contri#ution5Margin Approach
i-e e-penses
7nit contri#ution margin
B&rea!5even point
(in units+
D:,:::
D?::B 9:: sur #oars
.-/:
Thereore, the contri#ution marginper unit is 8?::. 2hen enough sur#oars are sol so that the totalcontri#ution margin is 8:,:::, Curl
Inc. ill #rea! even or the perio.
To compute the #rea!5even volumeo sur #oars, ivie the total f-ee-penses #y the unit contri#utionmargin. or Curl, Inc., 8:,::: isivie #y 8?::, hich is 9:: sur#oars. That means that the #rea!5even point is 9:: sur #oars.
%otal Per &nit Percent
Sales '500 sur" boar#s( 250,000$ 500$ 00)
Less: variable expenses 50,000 *00 +0)
!ontribution margin 00,000$ 200$ 0)Less: "ixe# expenses -0,000
Net income 20,000$
C t i# ti M i A h
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Contri#ution5Margin Approach
;ere is the prooN
9:: O 8:: B 8?::,::: 9:: O 83:: B 8*?:,:::.-/.
The #rea!5even point o 9:: units can #e proven #y frstcalculating total sales' multiply 8:: - 9:: units or 8?::,:::in total sales. The varia#le e-penses are 83:: per unit - 9::
units hich is 8*?:,:::. Total sales less total varia#lee-penses is total contri#ution margin o 8:,:::. 2hen f-ee-penses : 8:,::: are eucte rom the total contri#utionmargin, that leaves 8: in net income.
%otal Per &nit PercentSales '00 sur" boar#s( 200,000$ 500$ 00)
Less: variable expenses 20,000 *00 +0)
!ontribution margin -0,000$ 200$ 0)
Less: "ixe# expenses -0,000 Net income $
Contri#ution Margin 4atio
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Contri#ution Margin 4atio
8:,:::
9:
8?::,::: salesB.-/*
or Curl, Inc., the f-e costs o 8:,::: are
ivie #y the contri#ution margin ratio o 9:to etermine the #rea!5even sales o 8?::,:::.
%otal Per &nit PercentSales '00 sur" boar#s( 200,000$ 500$ 00)
Less: variable expenses 20,000 *00 +0)
!ontribution margin -0,000$ 200$ 0)
Less: "ixe# expenses -0,000
Net income $
C i# i i i
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Contri#ution Margin 4atio
2e can also@Calculate the #rea!5even point in sales s.*r + rather than units #y using the contri#ution margin
ratio.
Contri#utionmargin
)ales
B CM
4atio i-e e-pense
CM 4atio&rea!5even point(in sales ollars+
B
.-/+
)ometimes management preers that the #rea!5even point #ee-presse in sales dollars rather than units. This can #eaccomplishe #y using the contri#ution margin ratio. Theormula or the contri#ution margin ratio is contri#ution margin
ivie #y sales. Then ivie f-e e-penses #y the contri#utionmargin ratio to etermine the total sales ollars at the #rea!5even point.
This isalso!non as
theP/Vratio
AD
Thereore@@@
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Cost5 Volume5 ProftAnalysis
>=uationM>T;"D i-e Cost
&>P (7nits+ B 555555555555555 B Contri#ution P7 )5V
i-e Cost&>P (4s + B 55555555555555555 - )ales
Contri#ution
i-e Cost i-e Cost&>P (4s+ B 555555555555555555 B 555555555555555555
P/V 4atio C/)
2hen P/V is calculate using unit contri#ution
an unit selling prices . 2e can rite Total f-e costs&>P B 5555555555555555555555 - 7nit sellingprices 7nit contri#utionAn i P/V is calculate at given level o
activity Total f-e costs
B k P i t (BEP) Th b " i i h i
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Breakeven Point (BEP). The brea"even point is that uantity
of output sold at which total revenues eual total costs!
ollowing is the formula for calculating ;<P in units1
i$ed costs8nit contribution margin
%owever# ;<P# and therefore -0- profit is not what companies
should strive for# managers are concerned with how they can
achieve their goals for operating profit!Target Operating ncome is the level of sales needed to attain
a specified dollar amount of operating income!
=n order to determine T7=# add the desired operating income to
fi$ed cost in the brea"even calculation!
Target et Proft
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Target et Proft
2e can etermine the num#er o sur#oars that Curl
must sell to earn a proft o 8*::,::: using thecontri#ution margin approach.
2e can etermine the num#er o sur#oars that Curl
must sell to earn a proft o 8*::,::: using thecontri#ution margin approach.
/-e6 e-en3e3 E Target ro9t =n/t contr/ut/on marg/n
=n/t3 3ol6 to earnthe target ro9t
D:,::: E 8*::,::: 8?::
D:,::: E 8*::,:::
8?:: B F:: sur #oarsB F:: sur #oars .-
2hen a company has a net proft they are trying to achieve,or a target net ro9t, the contri#ution margin approachcan #e use to etermine the num#er o units that must #esol. This is very similar to fning the #rea!5even point. The numerator is f-e e-penses plus the target proft. Theenominator is the contri#ution margin per unit. The resultis the units that nee to #e sol to earn the target net proft
>=uation Approach
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>=uation Approach
Sales revenue – Variable expenses – Fixed expenses = Profit
'D*00 C A) 'D$00 C A)– –D80,000 D100,00D80,000 D100,00
'D200A) D180,000 D180,000
A "00 3ur7 oar63
.-/
The e=uation approach also can #e use to fn the units o sales re=uireto earn a target net proft. 4ecall that in the proft e=uation, proft is e=ualto revenues minus varia#le an f-e e-penses. 4ecall that proft as set to%ero to etermine the #rea!5even point. 2hen management hasetermine a target net proft greater than %ero, that num#er #ecomesproft varia#le in the e=uation
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!et income is operating income plus nonoperating
revenues (such as interest revenues) minus nonoperating
e$penses (such as interest e$pense) minus income ta$es!
To this point# we have ignored the effect of income ta$es
in our CVP analysis! To ma"e net income evaluations#
however# we must state results in terms of target netincome rather than target operating income!
The T7= calculation can be easily ad>usted to
accommodate this change1• Target ?= 6 T7= 5 (T7= × Ta$ rate) or stated another
way
• Target ?= 6 T7= × (@5 Ta$ rate)
>ect o Income Ta-es
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>ect o Income Ta-es
Target ater5ta- net
income
B&eore5ta-
net
Income ta-es aect a companysCVP relationships. To earn a
particular ater5ta- net income, a
greater #eore5ta- income ill#e re=uire.
.-9
The re=uirement that companies pay income ta-es aects their cost5volume5proft relationships. To earn a particular ater5ta- net income, agreater #eore5ta- income ill #e re=uire. To etermine hat the #eore5ta- net income is, the ater5ta- net income is ivie #y * minus the ta-
rate. The ormulas presente in this chapter can no #e use ith the#eore5ta- net income to provie or the eect o ta-es.
• Tee Times, Inc. prouces an
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Tee Times, Inc. prouces ansells the fnest =uality golclu#s in all o Clay County. Thecompany e-pects the olloing
revenues an costs in ?::9 orits >lite Quality gol clu# sets'
• 4evenues (9:: sets sol R S::per set+ ?9:,:::
• Varia#le costs *S:,:::
• i-e costs :,:::
9.;o many sets o clu#s must #esol or Tee Times, Inc. to reachtheir #rea!even point<
a. 9::
#. ?:
c. ?::
. *:
S. 2hat amount o salesmust Tee Times, Inc.have to earn a target net
income o S3,::: i theyhave a ta- rate o 3:percent<a. 9F,:::#. 9?F,:::
c. 9?:,:::
.;o many sets o clu#smust #e sol to earn atarget operating income
o F:,:::<a. J::#. ::c. 9::
. 3::
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9. Varia#le costs per unit B *S:,:::/9::units sol B 9::
• Contri#ution Margin B S:: 0 9:: B ?::per unit
• &rea!even point B :,:::/?:: B ?:
units
. T"I B :,::: G F:,:::/?:: B J:: units
S. TI B :,::: G S3,:::/(* 0 .3:+/?::
B J:: units O S::
B 9?:,:::
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&rea!5>ven Analysis 5 Kraphical Presentation
CostsABevenu
e
7utputA2ales
=nitially a firm will
incur fi$ed costs#
these do not depend
on output or sales!
C
4@
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&rea!5>ven Analysis
CostsABevenu
e
7utputA2ales
=nitially a firm will incur
fi$ed costs# these do not
depend on output or sales!
C
s output is generated# the firm will
incur variable costs 5 these vary directly
with the amount produced
VC
The total costs therefore
(assuming accurate
forecastsD) is the sum of
CEVC
TC
Total revenue is determined by the price
charged and the uantity sold 5 again this
will be determined by e$pected forecast
sales initially!
TB
The lower the
price# the less
steep the total
revenue curve!
TB
4@
The ;rea"-even point occurs where total revenue euals total costs 5 the firm# in this e$ample would have to
sell 4@ to generate sufficient revenue to cover its costs!
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Break-Even Analysis
CostsABevenue
7utputA2ales
C
VCTCTB
4@
=f the firm chose to set
price higher than Bs
(say Bs/) the TB curve
would be steeper 5 they
would not have to sell as
many units to brea"even
TB
4
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Break-Even Analysis
CostsABevenue
7utputA2ales
C
VCTCTB
4@
=f the firm chose to set
prices lower it would
need to sell more units before covering its
costs
TB)
4/
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Break-Even Analysis
CostsABevenue
7utputA2ales
C
VC
TCTB
4@
Foss
Profit
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Break-Even Analysis
CostsABevenue
7utputA2ales
C
VC
TCTB
4@ 4
ssume
current
sales at 4
Gargin of 2afety
Gargin of safety shows
how far sales can fall
before losses made! =f 4@
6 @000 and 4 6 @*00#
sales could fall by *00units before a loss would
be made
TB
4/
higher price would lower the brea" even point and
the margin of safety would widen
Angle oIncience
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)aety Margin4url, Inc. ha3 a reak+een o/nt o7 D200,000. /7actual 3ale3 are D2*0,000, the 3a7ety marg/n /3D*0,000 or 100 3ur7 oar63.
.-9
pplying &>
The
ierence#eteen#ugetesalesrevenuean#rea!5even
sales
• The
amount #yhichsales
canrop#eorelosses#egin
to #eincurre.
.rea/even
sales
00 units
ctual sales
500 units
Sales 200,000$ 250,000$
Less: variable expenses 20,000 50,000
!ontribution margin -0,000 00,000 Less: "ixe# expenses -0,000 -0,000
Net income $ 20,000$
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CostsABevenue
7utputA2ales
C
VC
TCTB
4@ 4
Gargin of 2afety
TB
4/
;ngle o7Inc/6ence
• ;ngle o7
Inc/6ence! The angle#eteensales antotal costline. This
angle is aninicator oproftearningcapacityover the
• A large angle o incience ith high M) inicates monopolyconitions
• The aim othe
management /ll e tohae largeangle h/ch/ll/n6/cate
earn/ng o7h/gh marg/no7 ro9tonce 9-e6( arecoere6.
• lo angle 555lo rate proft555varia#le costs are high