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Chapter 3 Cost/Volume/Profit Relationships

Chapter 3 Cost/Volume/Profit Relationships . Principles of Food, Beverage, and Labor Cost Controls, Ninth Edition. Cost/Volume/Profit Assumptions. - Costs can be fixed or variable - VC are directly variable - Fixed costs are stable - Sales prices are constant

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Chapter 3 Cost/Volume/Profit Relationships

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  1. Chapter 3Cost/Volume/Profit Relationships Principles of Food, Beverage, and Labor Cost Controls, Ninth Edition

  2. Cost/Volume/Profit Assumptions • - Costs can be fixed or variable • - VC are directly variable • - Fixed costs are stable • - Sales prices are constant • - Sales mix will remain constant

  3. Cost/Volume/Profit Analysis • Each foodservice operator knows that some accounting periods are more profitable than others. Profitability, then, can be viewed as existing on a scale. The midpoint on the scale, indicated by the zero, is called the break-even point. At the break-even point, operational expenses are exactly equal to sales revenue. Large Small 0 Small Large $ $ $ $ $ Losses Profits

  4. CVP calculations can be done either on the dollar sales volume required to break even or achieve the desired profit, or on the basis of the number of units required. • A cost/volume/profit (CVP) analysis helps predict the sales dollars and volume required to achieve desired profit (or break even) based on your known costs.

  5. Contribution margin for the overall operation is defined as the dollar amount that contributes to covering fixed costs and providing for a profit. • Contribution margin is calculated for as follows: Total Sales - Variable Costs = Contribution Margin

  6. Important Equations • 1. Sales = VC + FC + Profit • 2. Variable rate = VC/Sales • 3. Contribution rate = 1 - VR

  7. Cost/Volume/Profit Equation • Sales = Sales cost + Labor cost + OH + Profit • $325,000 = $108,875 + $81,250 + 97,500 + $37,375 S = VC + FC + P • VC = Food & Beverage Cost + Variable LC (40% Total Labor) • FC = Fixed LC ( 60% Total Labor) + Overhead • S ($325,000) = VC ($141,375) + FC ($146,250) + Profit ($37,375)

  8. Variable Rate • Ratio of variable cost to dollar sales • Variable rate = VC/Sales • VR = VC($141,375)/Sales($325,000) • VR = .435 Contribution Rate • CR = 1 - VR • 1 - .435 = .565 • CR = .565

  9. Break-Even Point • Point at which the sum of all costs equals sales, thus profit = 0 • BE = Fixed Costs/CR • BE = $146,250/.565 • BE = $258,849 • $325,000 - $258,850 = $66,150 • Profit = Sales after BE x CR • $66,150 x .565 = $37,375

  10. To determine sales dollars to achieve the profit goal, use the following formula: Fixed Costs + Profit Contribution Rate = Sales Dollars to Achieve Desired Profit • To determine break-even point, compute the following:  FC + 0 CR = Break-even point

  11. To determine the dollar sales required to break even, use the following formula: Fixed Costs Contribution Rate = Break-Even Point in Sales • In terms of the number of units that must be served in order to break even, use the following formula: Fixed Costs Contribution Margin per Unit = Break-Even Point in Unit Sales © John Wiley & Sons, Inc. 2009

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