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Cost-Volume-

Profit

Analysis: A

Managerial

Planning Tool

CHAPTER

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1. Determine the number of units that must be

sold to break even or earn a target profit.2. Calculate the amount of revenue required to

break even or to earn a targeted profit.

3. Apply cost-volume-profit analysis in amultiple-product setting.

4. Prepare a profit-volume graph and a cost-

volume-profit graph, and explain the meaning

of each.

Objectives

After studying this chapter, you should be ableto:

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Break-Even Point in Units

The break-even point is the point where total

revenue equals total cost, the point of zero profit.

The firms initial decision in implementing a units-

sold approach to CVP analysis is thedetermination of just what a unit is.

A second decision centers on the separation of

costs into fixed and variable components. CVPanalysis focuses on the factors that effect a

change in the components of profits.

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Using Operating Income in CVP Analysis

Narrative Equation

Sales revenue

Variable expenses

Fixed expenses

= Operating income

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Sales (1,000 units @ $400) $400,000

Less: Variable expenses 325,000

Contribution margin $ 75,000

Less: Fixed expenses 45,000

Operating income $ 30,000

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Break Even in Units

0 = ($400 x Units) ($325 x Units) $45,000

0 = ($75 x Units)

$45,000$75 x Units = $45,000

Units = 600Proof

Sales (600 units) $240,000

Less: Variable exp. 195,000

Contribution margin $ 45,000


Operating income $ 0

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Shortcut to Calculating Break-Even Units

Number of units = Fixed cost/Unit contribution margin

To calculate the break-even number of units forWhitter Company, use the fundamental break-even

equation as follows :

Number of units = $45,000/($400-$325)

= $45,000/$75= 600

Of course, the answer is identical to that computed

using the income statement,

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Achieving a Targeted Profit

Desired Operating Income of $60,000

$60,000 = ($400 x Units) ($325 x Units) $45,000

$105,000 = $75 x UnitsUnits = 1,400

Proof

Sales (1,400 units) $560,000


Contribution margin $105,000



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Desired Operating Income of

15% of Sales Revenue

0.15($400)(Units) = ($400 x Units) ($325 x Units) $45,000

$60 x Units = ($400 x Units) $325 x Units) $45,000

Units = 3,000

Targeted Income as a Percent of Sales Revenue

$60 x Units = ($75 x Units) $45,000

$15 x Units = $45,000

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Net income = Operating income Income taxes

= Operating income (Tax rate x Operating income)

After-Tax Profit Targets

= Operating income (1 Tax rate)

Or

Operating income = Net income(1 Tax rate)

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$48,750 = Operating income (0.35 x Operating income)

$48,750 = 0.65 (Operating income)


$75,000 = Operating income

If the tax rate is 35 percent and a firm wants

to achieve a profit of $48,750. How much is

the necessary operating income?

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How many units would have to be sold to

earn an operating income of $48,750?

Units = ($45,000 + $75,000)/$75

Units = $120,000/$75

Units = 1,600Proof

Sales (1,600 units) $640,000


Contribution margin $120,000



Less: Income tax (35%) 26,250

Net income $ 48,750

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Break-Even Point in Sales Dollars

EXHIBIT 16.1

Contribution

margin

Variablecost

Revenue6

$10

0 10 Unit

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First, the contribution margin

ratio must be calculated.

Sales $400,000 100.00%

Less: Variable

expenses 325,000 81.25%

Contributionmargin $ 75,000 18.75%

Less: Fixed exp. 45,000


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Given a contribution margin ratio of 18.75%, how

much sales revenue is required to break even?

Operating income = Sales Variable costs Fixed costs

$0 = Sales (Variable costs ratio x Sales)$45,000

Sales = $240,000

$0 = Sales (1 0.8125) $45,000

Sales (0.1875) = $45,000

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Relationships Among Contribution

Margin, Fixed Cost, and Profit

Contribution Margin

Total Variable Cost

Revenue

Fixed Cost

Fixed Cost = Contribution Margin

EXHIBIT 16.2

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Relationships Among Contribution

Margin, Fixed Cost, and Profit

Contribution Margin

Total Variable Cost

Revenue

Fixed Cost

Fixed Cost > Contribution Margin

Loss

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Profit Targets and Sales Revenue

How much sales revenue must a firm generate to

earn a before-tax profit of $60,000. Recall that

fixed costs total $45,000 and the contribution

margin ratio is .1875.Sales = ($45,000 + $60,000)/0.1875

= $105,000/0.1875

= $560,000

PPT CH 16 B.INDO

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