1、21-1PowerPoint Authors:Susan Coomer Galbreath,Ph.D.,CPACharles W.Caldwell,D.B.A.,CMAJon A.Booker,Ph.D.,CPA,CIACynthia J.Rooney,Ph.D.,CPACopyright 2013 by The McGraw-Hill Companies,Inc.All rights reserved.Chapter 21Cost-Volume-Profit Analysis21-2 Cost-volume-profit analysis is used to answer question
2、s such as:What sales volume is needed to earn a target income?What is the change in income if selling prices decline and sales volume increases?How much does income increase if we install a new machine to reduce labor costs?What is the income effect if we change the sales mix of our products or serv
3、ices?Identifying Cost Behavior21-3Fixed CostsNumber of Local CallsMonthly Basic Telephone BillNumber of Local Calls Monthly Basic Telephone Bill per Local CallC 121-4Variable CostsMinutes TalkedTotal CostsCost per MinuteMinutes TalkedactivityC 121-5Mixed CostsMixed costs contain a fixed portion that
4、 is incurred even when the facility is unused,and a variable portion that increases withusage.Utilities typically behave in this manner.Fixed MonthlyUtility ChargeVariable Cost per KWActivity(Kilowatt Hours)Total Utility CostTotal mixed cost C 121-6Step-Wise CostsTotal cost increases to a new higher
5、 cost for the next higher range of activity,but remains constant within a range of activity.C 121-7Curvilinear Costs Costs that increase when activityincreases,but in a nonlinear manner.C 121-8 Measuring Cost BehaviorThe objective is to classify all costs as either fixed or variable.We will look at
6、three methods:1.Scatter diagrams.2.The high-low method.3.Leastsquares regression.A scatter diagram is a plot of cost data points on a graph.It is almost always helpful to plot cost data to be able to observe a visual picture of the relationship between cost and activity.P 121-90 1 2 3 4 5 6*Total Co
7、st in1,000s of Dollars10200*Activity,1,000s of Units ProducedEstimated fixed cost=10,000Draw a line through the plotted data points so that about equal numbers of points fall above and below the line.Scatter DiagramsP 121-10Vertical distance is the change in cost.Horizontal distance is the change in
8、 activity.Unit Variable Cost =Slope =in cost in units0 1 2 3 4 5 6*Total Cost in1,000s of Dollars10200*Activity,1,000s of Units ProducedScatter DiagramsP 121-11The following relationships between unitsproduced and total cost are observed:Using these two levels of activity,compute:the variable cost p
9、er unit.the total fixed cost.The High-Low MethodP 121-12The High-Low MethodTotal cost =$17,525 +$0.17 per unit producedP 1 Variable cost per unit is determined as follows:Fixed costs are determined as follows:21-13The objective of the cost analysis remains the same:determination of total fixed cost
10、and the variable unit cost.Least-Squares RegressionLeast-squares regression is usually covered in advanced cost accounting courses.It is commonly used with spreadsheet programs or calculators.P 121-14Using Break-Even AnalysisThe break-even point(expressed in units of product or dollars of sales)is t
11、he unique sales level at which a company earns neither a profit nor incurs a loss.A 121-15Contribution margin is the amount by which revenue exceeds the variable costs of producing the revenue.Contribution Margin and its MeasuresTotal contribution margin is$60,000 and the contribution margin per uni
12、t sold is$30.A 121-16Contribution Margin and its MeasuresContributionmargin ratio Contribution margin per unitSales price per unit=Contributionmargin ratio=$30 per unit$100 per unit=30%A 121-17How much contribution margin must Rydell Company have to cover its fixed costs(break-even)?Answer:$24,000Co
13、mputing the Break-Even PointHow many units must Rydell sell to cover its fixed costs(break-even)?Answer:$24,000$30 per unit=800 unitsP 221-18We have just seen one of the basic CVP relationships the break-even computation.Computing the Break-Even PointBreak-even point in units =Fixed costsContributio
14、n margin per unitP 2Unit sales price less unit variable cost($30 in previous example)21-19The break-even formula may also be expressed in sales dollars.Unit contribution margin Unit sales priceBreak-even point in dollars =Fixed costsContribution margin ratioP 2Computing the Break-Even Point21-20Prep
15、aring a CVP ChartP 321-21 A limited range of activity called the relevant range,where CVP relationships are linear.Unit selling price remains constant.Unit variable costs remain constant.Total fixed costs remain constant.Production=sales(no inventory changes).Making Assumptions inCost-Volume-Profit
16、AnalysisP 321-22Working with Changesin EstimatesWhat happens to the break-even point if management can increase the sales price to$105,with no changes in fixed or variable costs?Break-even point in units =Fixed costsContribution margin per unitBreak-even point in units =$24,000$105$70=686 units P 32
17、1-23Income(pretax)=Sales Variable costs Fixed costsComputing Income from Sales and CostsIncome(pretax)=Sales Variable costs Fixed costs =1,500 units$100 1,500 units$70$24,000 =$21,000C 221-24Computing Salesfor a Target IncomeBreak-even formulas may be adjusted to show the sales volume needed to earn
18、 any amount of income.Unit sales =Fixed costs+Target pretax incomeContribution margin per unit Dollar sales =Fixed costs+Target pretax incomeContribution margin ratioC 221-25Before-tax income =Target net income1-tax rateComputing Sales(Dollars)for aTarget Net IncomeTo convert target net income to be
19、fore-tax income,use the following formula:C 221-26Computing Sales(Dollars)for aTarget Net IncomeRydell has a monthly target net income of$9,000.The unit selling price is$100.Monthly fixed costs are$24,000,the unit variable cost is$70,and the tax rate is 25 percent.What is Rydells target pretax incom
20、e?Pretax income =Target net income1-tax ratePretax income =$12,000$9,0001-0.25C 221-27Rydell has a monthly target after-tax income of$9,000.The unit selling price is$100.Monthly fixed costs are$24,000,the unit variable cost is$70,and the tax rate is 25 percent.Lets compute the sales revenue that Ryd
21、ell will need to earn$12,000 of pretax income?Dollar sales =Fixed costs +Target pretax income Contribution margin ratioDollar sales =$120,000$24,000 +$12,00030%C 2Computing Sales(Dollars)for aTarget Net Income21-28Contribution margin per unitUnit sales =Fixed costs +Target pretax incomeUnit sales =1
22、,200 units$24,000 +$12,000$30 per unitComputing Sales(Units)for a Target Net IncomeThe formula for computing dollar sales may be used to compute unit sales by substituting contribution per unit in the denominator.C 221-29Computing the Margin of SafetyMargin of safety is the amount by which sales can
23、 drop before the company incurs a loss.Margin of safety maybe expressed as a percentage of expected sales.Margin of safety Expected sales -Break-even sales percentage Expected sales=If Rydells sales are$100,000 and break-even sales are$80,000,what is the margin of safety percentage?C 2Margin of safe
24、ty$100,000 -$80,000 percentage$100,000=20%21-30 Rydell Company is considering buying a new machine that would increase monthly fixed costs from$24,000 to$30,000,but decrease unit variable costs from$70 to$60.The$100 per unit selling price would remain unchanged.What is the new break-even point in do
25、llars?Using Sensitivity AnalysisRevised Break-evenpoint in dollars Revised fixed costsRevised contribution margin ratioRevised Break-evenpoint in dollars$30,00040%=$75,000=C 221-31 The CVP formulas can be modified for use when a company sells more than one product.The unit contribution margin is rep
26、laced with the contribution margin for a composite unit.A composite unit is composed of specific numbers of each product in proportion to the product sales mix.Sales mix is the ratio of the volumes of the various products.Computing a MultiproductBreak-Even PointP 421-32The resulting break-even formu
27、lafor composite unit sales is:Break-even pointin composite unitsFixed costsContribution marginper composite unit=Consider the following example:ContinueComputing a MultiproductBreak-Even PointP 421-33Hair-Today offers three cuts as shown below.Annual fixed costs are$192,000.Compute the break-even po
28、int in composite units and in number of units for each haircut at the given sales mix.A 4:2:1 sales mix means that if there are 500 budget cuts,then there will be 1,000 ultra cuts,and 2,000 basic cuts.Computing a MultiproductBreak-Even PointP 421-34Contribution margin per composite unitStep 1:Comput
29、e contribution margin per composite unit.Computing a MultiproductBreak-Even PointP 421-35Break-even pointin composite unitsFixed costsContribution marginper composite unit=Step 2:Compute break-even point in composite units.Break-even pointin composite units$192,000$64.00 per composite unit=Break-eve
30、n pointin composite units=3,000 composite unitsComputing a MultiproductBreak-Even PointP 421-36Step 3:Determine the number of each haircut that must be sold to break-even.Computing a MultiproductBreak-Even PointP 421-37Step 4:Verify the results.Multiproduct Break-EvenIncome StatementP 421-38Global V
31、iewOver 90 percent of German companies surveyed report their cost accounting systems focus on contribution margin.This focus helps German companies like Volkswagen control costs and plan their production levels.21-39A measure of the extent to which fixed costs are being used in an organization.A mea
32、sure of how a percentage change in sales will affect profits.Contribution margin Pretax income=Degree of operating leverageDegree of Operating LeverageA 221-40$36,000$12,000=3.0Contribution margin Net income=Degree of operating leverage=If Rydell increases sales by 10 percent,what will the percentage increase in income be?Operating LeverageA 221-41Appendix 21A:Using Excel toEstimate Least-Squares Regression=INTERCEPT(C2:C13,B2:B13)=SLOPE(C2:C13,B2:B13)21-42End of Chapter 21
