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Cost-Volume-Profit Analysis

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    1. Chapter 22 Cost-Volume-Profit Analysis

    2. Objective 1 Identify how changes in volume affect costs.

    3. Types of Costs

    4. Total Variable Cost

    5. Variable costs per unit do not change as activity increases. Variable Cost Per Unit

    6. Variable Costs Example Consider Grand Canyon Railway. Assume that breakfast costs Grand Canyon Railway $3 per person. If the railroad carries 2,000 passengers, it will spend $6,000 for breakfast services.

    7. Variable Costs Example

    8. Total Fixed Cost

    9. Mixed Costs Contain fixed portion that is incurred even when facility is unused & variable portion that increases with usage. Example: monthly electric utility charge Fixed service fee Variable charge per kilowatt hour used

    10. Mixed Costs

    11. Relevant Range... …is a band of volume in which a specific relationship exists between cost and volume. Outside the relevant range, the cost either increases or decreases. A fixed cost is fixed only within a given relevant range and a given time span.

    12. Relevant Range

    13. Objective 2 Use CVP analysis to compute breakeven point.

    14. Assumptions of CVP Analysis Expenses can be classified as either variable or fixed. CVP relationships are linear over a wide range of production and sales. Sales prices, unit variable cost, and total fixed expenses will not vary within the relevant range.

    15. Assumptions of CVP Analysis Volume is the only cost driver. The relevant range of volume is specified. Inventory levels will be unchanged. The sales mix remains unchanged during the period.

    16. Contribution Margin Income Statement Sales - Variable Costs Contribution Margin - Fixed Costs Operating Income

    17. Contribution Margin Example Luis and Tom manufacture a device that allows users to take a closer look at icebergs from a ship. The usual price for the device is $100. Variable costs are $70 per unit. They receive a proposal from a company in Newfoundland to sell 20,000 units at a price of $85.

    18. Contribution Margin Example There is sufficient capacity to produce the order. How do we analyze this situation? $85 – $70 = $15 contribution margin. $15 × 20,000 units = $300,000 (total increase in contribution margin)

    19. Contribution Margin Income Statement Sales (20,000 x $85) $1,700,000 Variable costs (20,000 x $70) (1,400,000) Contribution margin $300,000

    20. The unique sales level at which a company earns neither a profit nor incurs a loss. Sales – Variable Costs – Fixed Costs = 0 Computing Break-Even Point

    21. Breakeven Point Example

    22. Objective 3 Use CVP analysis for profit planning and graph the cost-volume-profit relations

    23. Preparing a CVP Chart

    24. Preparing a CVP Chart

    25. Various Sales Levels Example What operating income is expected when sales are _____ units?

    26. Target Operating Income Example Suppose that our business would be content with operating income of _________________. How many units must be sold?

    27. Objective 4 Use CVP method to perform sensitivity analysis.

    28. Change in Sales Price Example Suppose that the sales price per device is _____ rather than ____ What is the revised breakeven sales in units?

    29. Change in Variable Costs Example Suppose that variable expenses per device are ____ instead of ____ Other factors remain unchanged.

    30. Change in Fixed Costs Example Suppose that fixed costs increased by $30,000. What are the new fixed costs? What is the new breakeven point?

    31. Margin of Safety Example Excess of expected sales over breakeven sales.

    32. E22-7

    33. Effect of sales mix on CVP analysis.

    34. Computing Multiproduct Break-Even Point Unit contribution margin is replaced with 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.

    35. The resulting break-even formula for composite unit sales is: Computing Multiproduct Break-Even Point

    36. Computing Multiproduct Break-Even Point A company sells windows and doors. They sell 4 windows for every door.

    37. Computing Multiproduct Break-Even Point

    38. Computing Multiproduct Break-Even Point

    39. Computing Multiproduct Break-Even Point

    40. Computing Multiproduct Break-Even Point

    41. Multiproduct Break-Even Income Statement