Top Banner
Chapter Chapter 20 20 Cost Behavior and Cost- Cost Behavior and Cost- Volume-Profit Analysis Volume-Profit Analysis Accounting, 21 st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South- Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.
65
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Page 1: Cost Behavior and CostVolume-Profit Analysis

Chapter Chapter 2020Cost Behavior and Cost-Cost Behavior and Cost-Volume-Profit AnalysisVolume-Profit Analysis

Accounting, 21st Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.

Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

Page 2: Cost Behavior and CostVolume-Profit Analysis

Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand

corner of the screen. You can point and click anywhere on the screen.

Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand

corner of the screen. You can point and click anywhere on the screen.

Page 3: Cost Behavior and CostVolume-Profit Analysis

1. Classify costs by their behavior as variable costs, fixed costs, or mixed costs.

2. Compute the contribution margin, the contribution margin ratio, and the unit contribution margin, and explain how they may be useful to management.

3. Using the unit contribution margin, determine the break-even point and the volume necessary to achieve a target profit.

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

Page 4: Cost Behavior and CostVolume-Profit Analysis

4. Using a cost-volume profit chart and a profit-volume chart, determine the break-even point and the volume necessary to achieve a target profit.

ObjectivesObjectivesObjectivesObjectives

5. Calculate the break-even point for a business selling more than one product.

6. Compute the margin of safety and the operating leverage, and explain how managers use this concept.

7. List the assumptions underlying cost-volume-profit analysis.

Page 5: Cost Behavior and CostVolume-Profit Analysis

Cost BehaviorCost BehaviorCost BehaviorCost Behavior

Page 6: Cost Behavior and CostVolume-Profit Analysis

Jason Inc. produces stereo sound systems under the brand name of J-Sound. The parts for the stereo are purchased from an outside supplier for $10 per unit (a variable cost).

Variable CostVariable CostVariable CostVariable Cost

Page 7: Cost Behavior and CostVolume-Profit Analysis

Total Variable Cost GraphT

otal

Cos

ts$300,000$250,000$200,000$150,000$100,000 $50,000

10 20 300Units Produced (in thousands)

Variable CostVariable CostVariable CostVariable Cost

Page 8: Cost Behavior and CostVolume-Profit Analysis

Unit Variable Cost Graph

$20

$15

$10

$5

0

Cos

t p

er U

nit

10 20 30Units Produced

(000)

Variable CostVariable CostVariable CostVariable Cost

Page 9: Cost Behavior and CostVolume-Profit Analysis

Tot

al C

osts

$300,000$250,000$200,000$150,000$100,000 $50,000

10 20 300

$20$15$10

$5

0

Cos

t per

Uni

t

10 20 30

Number ofUnits

Produced

Units Produced (000)

Units Produced (000)

Direct Materials

Cost per Unit

Total Direct Materials

Cost

5,000 units $10 $ 50,00010,000 10 l00,00015,000 10 150,00020,000 10 200,00025,000 10 250,00030,000 10 300,000

Variable CostVariable CostVariable CostVariable Cost

Page 10: Cost Behavior and CostVolume-Profit Analysis

The production supervisor for Minton

Inc.’s Los Angeles plant is Jane Sovissi. She is paid $75,000 per year.

The plant produces from 50,000 to 300,000 bottles of perfume.

La Fleur

Fixed CostsFixed CostsFixed CostsFixed Costs

Page 11: Cost Behavior and CostVolume-Profit Analysis

Number ofBottles

Produced

Total Salary for Jane Sovissi

50,000 bottles $75,000 $1.500100,000 75,000 0.75015,000 75,000 0.50020,000 75,000 0.37525,000 75,000 0.30030,000 75,000 0.250

Salary per Bottle

Produced

Fixed CostsFixed CostsFixed CostsFixed Costs

Page 12: Cost Behavior and CostVolume-Profit Analysis

Fixed CostsFixed Costs

Total Fixed Cost GraphTotal Fixed Cost GraphT

otal

Cos

ts

$150,000$125,000$100,000$75,000$50,000

$25,000

100 200 3000

Unit Fixed Cost GraphUnit Fixed Cost Graph

Bottles Produced (000)

Number ofBottles

Produced

Cos

t per

Uni

t $1.50$1.25$1.00

$.75$.50

$.25

100 200 3000

Units Produced (000)

Total Salary for Jane Sovissi

50,000 bottles $75,000 $1.500100,000 75,000 0.75015,000 75,000 0.50020,000 75,000 0.37525,000 75,000 0.30030,000 75,000 0.250

Salary per Bottle

Produced

Page 13: Cost Behavior and CostVolume-Profit Analysis

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.

Page 14: Cost Behavior and CostVolume-Profit Analysis

Mixed CostsMixed CostsMixed CostsMixed Costs

Total Mixed Cost GraphTotal Mixed Cost Graph

Tot

al C

osts

0

Total Machine Hours (000)

$45,000$40,000 $35,000$30,000$25,000$20,000$15,000$10,000 $5,000

10 20 30 40

Mixed costs are usually separated into

their fixed and variable components

for management analysis.

Mixed costs are usually separated into

their fixed and variable components

for management analysis.

Mixed costs are sometimes called semivariable or semifixed costs.

Mixed costs are sometimes called semivariable or semifixed costs.

Page 15: Cost Behavior and CostVolume-Profit Analysis

The high-low method is a simple way to separate mixed costs into their fixed and variable components.

Mixed CostsMixed CostsMixed CostsMixed Costs

Low

High

Page 16: Cost Behavior and CostVolume-Profit Analysis

Actual costs incurred

ProductionTotal(Units) Cost

June 1,000 $45,550July 1,500 52,000August 2,100 61,500September 1,800 57,500October 750 41,250

High-Low MethodHigh-Low Method

Variable cost per unit =

Highest level of activity ($) minus lowest level of activity ($)

Highest level of activity (n) minus lowest level of activity (n)

What month has the highest level

of activity in terms of cost?

Page 17: Cost Behavior and CostVolume-Profit Analysis

Actual costs incurred

ProductionTotal(Units) Cost

June 1,000 $45,550July 1,500 52,000August 2,100 61,500September 1,800 57,500October 750 41,250

Variable cost per unit =

$61,500 minus lowest level of activity ($)

What month has the highest level

of activity in terms of cost?

Highest level of activity (n) minus lowest level of activity (n)

High-Low MethodHigh-Low Method

Page 18: Cost Behavior and CostVolume-Profit Analysis

Actual costs incurred

ProductionTotal(Units) Cost

June 1,000 $45,550July 1,500 52,000August 2,100 61,500September 1,800 57,500October 750 41,250

Variable cost per unit =

$61,500 minus lowest level of activity ($)

For the highest level of cost,

what is the level of production?

Highest level of activity (n) minus lowest level of activity (n)

2,100 minus lowest level of activity (n)

High-Low MethodHigh-Low Method

Page 19: Cost Behavior and CostVolume-Profit Analysis

2,100 minus lowest level of activity (n)

Actual costs incurred

ProductionTotal(Units) Cost

June 1,000 $45,550July 1,500 52,000August 2,100 61,500September 1,800 57,500October 750 41,250

Variable cost per unit =

$61,500 minus lowest level of activity ($)

What month has the lowest level of activity in terms

of cost?

$57,500 – $41,250

2,100 – 750

High-Low MethodHigh-Low Method

Page 20: Cost Behavior and CostVolume-Profit Analysis

2,100 – 750

Actual costs incurred

ProductionTotal(Units) Cost

June 1,000 $45,550July 1,500 52,000August 2,100 61,500September 1,800 57,500October 750 41,250

What is the variable cost per

unit?

$57,500 – $41,250

High-Low MethodHigh-Low Method

$20,250

1,350Variable cost per unit = $15

Page 21: Cost Behavior and CostVolume-Profit Analysis

Actual costs incurred

ProductionTotal(Units) Cost

Variable cost per unit = $15

What is the total fixed cost (using the

highest level)?

Total cost = (Variable cost per unit x Units of production) + Fixed cost

June 1,000 $45,550July 1,500 52,000August 2,100 61,500September 1,800 57,500October 750 41,250

$61,500 = ($15 x 2,100) + Fixed cost

$61,500 = ($15 x 2,100) + $30,000

High-Low MethodHigh-Low Method

Page 22: Cost Behavior and CostVolume-Profit Analysis

Actual costs incurred

ProductionTotal(Units) Cost

Variable cost per unit = $15

The fixed cost is the same at the lowest level.

Total cost = (Variable cost per unit x Units of production) + Fixed cost

June 1,000 $45,550July 1,500 52,000August 2,100 61,500September 1,800 57,500October 750 41,250

$41,250 = ($15 x 750) + Fixed cost

$41,250 = ($15 x 750) + $30,000

High-Low MethodHigh-Low Method

Page 23: Cost Behavior and CostVolume-Profit Analysis

Variable CostsVariable Costs

Total Fixed Costs

Total Units Produced

Tot

al C

osts

Total Units Produced

Per

Uni

t Cos

t

Total Variable Costs

Total Units Produced

Unit Variable Costs

Total Units Produced

Tot

al C

osts

Per

Uni

t Cos

t

Fixed CostsFixed Costs

ReviewReviewUnit Fixed CostsUnit costs remain the same regardless of

activity.

Total costs increase and decreases with

activity level.Total costs increase and

decreases proportionately with activity level.

Unit costs remain the same per unit regardless

of activity.

Page 24: Cost Behavior and CostVolume-Profit Analysis
Page 25: Cost Behavior and CostVolume-Profit Analysis

Contribution Margin Income StatementContribution Margin Income Statement

Sales (50,000 units) $1,000,000Variable costs 600,000Contribution margin $ 400,000 Fixed costs 300,000Income from operations $ 100,000

The contribution margin is

available to cover the fixed costs

and income from operations.

The contribution margin is

available to cover the fixed costs

and income from operations.

FIXED FIXED COSTSCOSTS

Contribution margin

Income from Operations

Page 26: Cost Behavior and CostVolume-Profit Analysis

Contribution Margin Income StatementContribution Margin Income Statement

Sales Sales VariableVariablecosts costs

FixedFixedcosts costs

Income Income fromfrom

operations operations = + +

Sales Sales VariableVariablecosts costs

ContributionContributionmarginmargin

– =

Sales (50,000 units) $1,000,000Variable costs 600,000Contribution margin $ 400,000 Fixed costs 300,000Income from operations $ 100,000

Page 27: Cost Behavior and CostVolume-Profit Analysis

Contribution Margin RatioContribution Margin Ratio

100% 60%

40% 30%

10%

Contribution margin ratio =Sales – Variable costs

Sales

Contribution margin ratio =$1,000,000 – $600,000

$1,000,000

Contribution margin ratio = 40%

Sales (50,000 units) $1,000,000Variable costs 600,000Contribution margin $ 400,000 Fixed costs 300,000Income from operations $ 100,000

Page 28: Cost Behavior and CostVolume-Profit Analysis

100% 60%

40% 30%

10%

The contribution margin can be expressed three ways:1. Total contribution margin in dollars.2. Contribution margin ratio (percentage).3. Unit contribution margin (dollars per unit).

The contribution margin can be expressed three ways:1. Total contribution margin in dollars.2. Contribution margin ratio (percentage).3. Unit contribution margin (dollars per unit).

$20 12$ 8

Sales (50,000 units) $1,000,000Variable costs 600,000Contribution margin $ 400,000 Fixed costs 300,000Income from operations $ 100,000

Contribution Margin RatioContribution Margin Ratio

Page 29: Cost Behavior and CostVolume-Profit Analysis

What is the break-even

point?

What is the break-even

point?

Revenues Costs=

Break-even

Page 30: Cost Behavior and CostVolume-Profit Analysis

Calculating the Break-Even PointCalculating the Break-Even PointCalculating the Break-Even PointCalculating the Break-Even Point

At the break-even point, fixed costs and the contribution

margin are equal.

At the break-even point, fixed costs and the contribution

margin are equal.

Sales (? units) $ ?Variable costs ?Contribution margin $ 90,000 Fixed costs 90,000Income from operations $ 0

$25 15$10

Page 31: Cost Behavior and CostVolume-Profit Analysis

Sales ($25 x ? units) $ ?Variable costs ($15 x ? units) ?Contribution margin $ 90,000 Fixed costs 90,000Income from operations $ 0

$25 15$10

Break-even sales (units) =Unit contribution margin

Fixed costs$90,000

$109,000 units

Sales ($25 x 9,000) $225,000Variable costs ($15 x 9,000) 135,000Contribution margin $ 90,000Fixed costs 90,000Income from operations $ 0

PROOF!PROOF!PROOF!PROOF!

Calculating the Break-Even PointCalculating the Break-Even PointCalculating the Break-Even PointCalculating the Break-Even PointIn UnitsIn Units

Page 32: Cost Behavior and CostVolume-Profit Analysis

Sales ($250 x ? units) $ ?Variable costs ($145 x ? units) ?Contribution margin $ ? Fixed costs 840,000Income from operations $ 0

$250 145$105

Break-even sales (units) =Unit contribution margin

Fixed costs$840,000

$1058,000 units

Calculating the Break-Even PointCalculating the Break-Even PointCalculating the Break-Even PointCalculating the Break-Even PointIn UnitsIn Units

The unit selling price is $250 and unit variable cost is $145. Fixed costs are $840,000.

Page 33: Cost Behavior and CostVolume-Profit Analysis

Sales ($25 x ? units) $ ?Variable costs ($15 x ? units) ?Contribution margin $ ? Fixed costs 840,000Income from operations $ 0

$250 145$105

Break-even sales (units) =Unit contribution margin

Fixed costs$840,000

$1008,400 units

$250 150$100

Next, assume Next, assume variable costs is variable costs is increased by $5.increased by $5.

Next, assume Next, assume variable costs is variable costs is increased by $5.increased by $5.

Calculating the Break-Even PointCalculating the Break-Even PointCalculating the Break-Even PointCalculating the Break-Even PointIn UnitsIn Units

The unit selling price is $250 and unit variable cost is $145. Fixed costs are $840,000.

Page 34: Cost Behavior and CostVolume-Profit Analysis

Sales $ ?Variable costs ?Contribution margin $ ? Fixed costs $600,000Income from operations $ 0

Break-even sales (units) =Unit contribution margin

Fixed costs$600,000

$2030,000 units

$50 30

$20

Calculating the Break-Even PointCalculating the Break-Even PointCalculating the Break-Even PointCalculating the Break-Even PointIn UnitsIn Units

A firm currently sells their product at $50 per unit and it has a related unit variable cost of

$30. The fixed costs are $600,000.

Page 35: Cost Behavior and CostVolume-Profit Analysis

Sales $ ?Variable costs ?Contribution margin $ ? Fixed costs $600,000Income from operations $ 0

Break-even sales (units) =Unit contribution margin

Fixed costs$600,000

$3020,000 units

$50 30

$20

$60 30$30

Calculating the Break-Even PointCalculating the Break-Even PointCalculating the Break-Even PointCalculating the Break-Even PointIn UnitsIn Units

Management increases Management increases the selling price from the selling price from

$50 to $60.$50 to $60.

Management increases Management increases the selling price from the selling price from

$50 to $60.$50 to $60.

Page 36: Cost Behavior and CostVolume-Profit Analysis

Summary of Effects of Changes on Summary of Effects of Changes on Break-Even PointBreak-Even Point

Summary of Effects of Changes on Summary of Effects of Changes on Break-Even PointBreak-Even Point

Page 37: Cost Behavior and CostVolume-Profit Analysis

Target ProfitTarget ProfitTarget ProfitTarget Profit

Fixed costs are estimated at $200,000, and the desired profit is $100,000. The unit selling

price is $75 and the unit variable cost is $45. The firm wishes to make a $100,000 profit.

Sales (? units) $ ?Variable costs ?Contribution margin $ ? Fixed costs 200,000Income from operations $ 0

$75 45$35

In Units

In Units

Page 38: Cost Behavior and CostVolume-Profit Analysis

Sales (? units) $ ?Variable costs ?Contribution margin $ ? Fixed costs 200,000Income from operations $ 0

Sales (units) =Unit contribution margin

Fixed costs + desired profit$200,000 + $100,000

$3010,000 units

Target ProfitTarget ProfitTarget ProfitTarget Profit In Units

In Units

$75 45$35

Target profit is Target profit is used here to refer used here to refer to “Income from to “Income from

operations.”operations.”

Target profit is Target profit is used here to refer used here to refer to “Income from to “Income from

operations.”operations.”

Page 39: Cost Behavior and CostVolume-Profit Analysis

$75 45$30

Sales (10,000 units x $75) $750,000Variable costs (10,000 x $45) 450,000Contribution margin $300,000Fixed costs 200,000Income from operations $100,000

Proof that sales of 10,000 units Proof that sales of 10,000 units will provide a profit of $100,000.will provide a profit of $100,000.Proof that sales of 10,000 units Proof that sales of 10,000 units

will provide a profit of $100,000.will provide a profit of $100,000.

Target ProfitTarget ProfitTarget ProfitTarget Profit

Page 40: Cost Behavior and CostVolume-Profit Analysis

Graphic Approach to Cost-Volume-Profit

Analysis

Page 41: Cost Behavior and CostVolume-Profit Analysis

Cost-Volume-Profit ChartCost-Volume-Profit ChartSa

les

and

Cos

ts (

$000

)

0

Units of Sales (000)

$500$450$400$350$300$250$200$150$100$ 50

Unit selling price $ 50Unit variable cost 30Unit contribution margin $ 20

Total fixed costs $100,000

Unit selling price $ 50Unit variable cost 30Unit contribution margin $ 20

Total fixed costs $100,000

60%60%

Total Sales

Variable Costs

1 2 3 4 5 6 7 8 9 10

Page 42: Cost Behavior and CostVolume-Profit Analysis

Cost-Volume-Profit ChartCost-Volume-Profit ChartSa

les

and

Cos

ts (

$000

)

0

Units of Sales (000)

$500$450$400$350$300$250$200$150$100$ 50

Unit selling price $ 50Unit variable cost 30Unit contribution margin $ 20

Total fixed costs $100,000

Unit selling price $ 50Unit variable cost 30Unit contribution margin $ 20

Total fixed costs $100,000

60%60%

40%

Contribution Margin

100% 60%

40%

1 2 3 4 5 6 7 8 9 10

Page 43: Cost Behavior and CostVolume-Profit Analysis

Cost-Volume-Profit ChartCost-Volume-Profit ChartSa

les

and

Cos

ts (

$000

)

0

Units of Sales (000)

$500$450$400$350$300$250$200$150$100$ 50

Unit selling price $ 50Unit variable cost 30Unit contribution margin $ 20

Total fixed costs $100,000

Unit selling price $ 50Unit variable cost 30Unit contribution margin $ 20

Total fixed costs $100,000

Fixed CostsFixed Costs

100% 60%

40%

TotalTotalCostsCosts

1 2 3 4 5 6 7 8 9 10

Page 44: Cost Behavior and CostVolume-Profit Analysis

Cost-Volume-Profit ChartCost-Volume-Profit ChartSa

les

and

Cos

ts (

$000

)

0

$500$450$400$350$300$250$200$150$100$ 50

1 2 3 4 5 6 7 8 9 10

Break-Even Point

Units of Sales (000)

Unit selling price $ 50Unit variable cost 30Unit contribution margin $ 20

Total fixed costs $100,000

Unit selling price $ 50Unit variable cost 30Unit contribution margin $ 20

Total fixed costs $100,000

100% 60%

40%$100,000

$20= 5,000 units

Page 45: Cost Behavior and CostVolume-Profit Analysis

Cost-Volume-Profit ChartCost-Volume-Profit ChartSa

les

and

Cos

ts (

$000

)

0

Units of Sales (000)

$500$450$400$350$300$250$200$150$100$ 50

Unit selling price $ 50Unit variable cost 30Unit contribution margin $ 20

Total fixed costs $100,000

Unit selling price $ 50Unit variable cost 30Unit contribution margin $ 20

Total fixed costs $100,000

100% 60%

40%

Operating Profit Area

Operating Loss Area

Page 46: Cost Behavior and CostVolume-Profit Analysis
Page 47: Cost Behavior and CostVolume-Profit Analysis

$100$75$50$25$ 0

$(25)$(50)$(75)

$(100)

Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000

Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000

Operating profit $100,000

Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000

Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000

Operating profit $100,000

Units of Sales (000’s)

1 2 3 4 5 6 7 8 9 10

Relevant range is

10,000 units

Relevant range is

10,000 units

Op

erat

ing

Pro

fit

(Los

s) $

000’

s

Page 48: Cost Behavior and CostVolume-Profit Analysis

Units of Sales (000’s)

1 2 3 4 5 6 7 8 9 10

Maximum loss is equal to the

total fixed costs.

Maximum loss is equal to the

total fixed costs.

Profit Line

Operating loss

Operating Operating profitprofit

$100$75$50$25$ 0

$(25)$(50)$(75)

$(100)

Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000

Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000

Operating profit $100,000

Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000

Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000

Operating profit $100,000

Maximum profit within the relevant

range.

Maximum profit within the relevant

range.

Op

erat

ing

Pro

fit

(Los

s) $

000’

s

Page 49: Cost Behavior and CostVolume-Profit Analysis

Op

erat

ing

Pro

fit

(Los

s) $

000’

s

Units of Sales (000’s)

1 2 3 4 5 6 7 8 9 10

Operating loss

Operating Operating profitprofit

Break-Even Point

Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000

Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000

Operating profit $100,000

Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000

Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000

Operating profit $100,000

$100$75$50$25$ 0

$(25)$(50)$(75)

$(100)

Page 50: Cost Behavior and CostVolume-Profit Analysis

Sales Mix Considerations

Page 51: Cost Behavior and CostVolume-Profit Analysis

Cascade Company sold 8,000 units of Product A and 2,000 units of Product B during the past year. Cascade Company’s fixed costs are $200,000. Other relevant data are as follows:

Sales $ 90 $140 Variable costs 70 95 Contribution margin $ 20 $ 45 Sales mix 80% 20%

Products A B

Page 52: Cost Behavior and CostVolume-Profit Analysis

Sales $ 90 $140 Variable costs 70 95 Contribution margin $ 20 $ 45 Sales mix 80% 20%

Sales Mix ConsiderationsSales Mix Considerations Sales Mix ConsiderationsSales Mix Considerations

Products A B

Product contribution margin $16 $ 9

$25

Fixed costs, $200,000Fixed costs, $200,000

Page 53: Cost Behavior and CostVolume-Profit Analysis

Sales Mix ConsiderationsSales Mix Considerations Sales Mix ConsiderationsSales Mix Considerations

Products A BProduct contribution

margin $16 $ 9

$25

Break-even sales unitsBreak-even sales units

$200,000

$25

Fixed costs, $200,000Fixed costs, $200,000

Page 54: Cost Behavior and CostVolume-Profit Analysis

Sales Mix ConsiderationsSales Mix Considerations Sales Mix ConsiderationsSales Mix Considerations

Products A BProduct contribution

margin $16 $ 9

$25

Break-even sales unitsBreak-even sales units

$200,000

$25

Fixed costs, $200,000Fixed costs, $200,000

= 8,000 units

Page 55: Cost Behavior and CostVolume-Profit Analysis

Sales Mix ConsiderationsSales Mix Considerations Sales Mix ConsiderationsSales Mix Considerations

Products A BProduct contribution

margin $16 $ 9

$25

A: 8,000 units x Sales Mix (80%) = 6,400

B: 8,000 units x Sales Mix (20%) = 1,600

Page 56: Cost Behavior and CostVolume-Profit Analysis

PROOFPROOF

Product A Product B Total

Sales:6,400 units x $90 $576,000 $576,0001,600 units x $140 $224,000 224,000Total sales $576,000 $224,000 $800,000

Variable costs:6,400 x $70 $448,000 $448,0001,600 x $95 $152,000 152,000Total variable costs $448,000 $152,000 $600,000

Contribution margin $128,000 $ 72,000 $200,000

Fixed costs 200,000Income from operations $ 0Break-even point

Page 57: Cost Behavior and CostVolume-Profit Analysis

Margin of Safety

Page 58: Cost Behavior and CostVolume-Profit Analysis

Margin of Safety =Sales – Sales at break-even point

Sales

The margin of safety indicates the possible decrease in sales that may occur

before an operating loss results.

Margin of Safety =$250,000 – $200,000

$250,000

Margin of Safety = 20%

Page 59: Cost Behavior and CostVolume-Profit Analysis

Operating LeverageOperating Leverage

Page 60: Cost Behavior and CostVolume-Profit Analysis

Both companies have the same contribution margin.Both companies have the same contribution margin.

Operating LeverageOperating Leverage

Jones Inc. Wilson Inc.

Contribution margin

Income from operations

Sales $400,000 $400,000Variable costs 300,000 300,000Contribution margin $100,000 $100,000Fixed costs 80,000 50,000Income from operations $ 20,000 $ 50,000Contribution margin ? ?

Page 61: Cost Behavior and CostVolume-Profit Analysis

Contribution margin

Income from operations

Jones Inc. Wilson Inc.

$100,000

$20,000= 5.0 Jones Inc.:

Operating LeverageOperating Leverage

5.0

Sales $400,000 $400,000Variable costs 300,000 300,000Contribution margin $100,000 $100,000Fixed costs 80,000 50,000Income from operations $ 20,000 $ 50,000Contribution margin ?

Page 62: Cost Behavior and CostVolume-Profit Analysis

Contribution margin

Income from operations

Jones Inc. Wilson Inc.

= 5.0$100,000

$20,000Jones Inc.

Operating LeverageOperating Leverage

Sales $400,000 $400,000Variable costs 300,000 300,000Contribution margin $100,000 $100,000Fixed costs 80,000 50,000Income from operations $ 20,000 $ 50,000Contribution margin 5.0 ?

Page 63: Cost Behavior and CostVolume-Profit Analysis

Contribution margin

Income from operations

Jones Inc. Wilson Inc.

= 2.0$100,000

$50,000Wilson Inc.:

Capitalintensive?

Laborintensive?

2.0

Operating LeverageOperating Leverage

Sales $400,000 $400,000Variable costs 300,000 300,000Contribution margin $100,000 $100,000Fixed costs 80,000 50,000Income from operations $ 20,000 $ 50,000Contribution margin 5.0

Page 64: Cost Behavior and CostVolume-Profit Analysis

Assumptions of Cost-Volume-Profit AnalysisAssumptions of Cost-Volume-Profit AnalysisAssumptions of Cost-Volume-Profit AnalysisAssumptions of Cost-Volume-Profit Analysis

1. Total sales and total costs can be represented by straight lines.

2. Within the relevant range of operating activity, the efficiency of operations does not change.

3. Costs can be accurately divided into fixed and variable components.

4. The sales mix is constant.5. There is no change in the inventory quantities

during the period.

The reliability of cost-volume-profit analysis depends upon several assumptions.

Page 65: Cost Behavior and CostVolume-Profit Analysis

The EndThe End

Chapter 20Chapter 20