8e_ch18CVP_inst

Transcript 8e_ch18CVP_inst

Chapter 18

Identify how changes in volume affect costs

Variable Fixed Mixed

 Total variable costs change in direct proportion to ◦ changes in the volume of activity If activity increases, so does the cost  Unit variable cost remains constant

Units produced

100 200 300 400 500

Direct materials cost per unit

$25 $25 $25 $25 $25

Total direct materials cost

 Do not change over wide ranges in volume  ◦ ◦ Examples: Straight-line depreciation Salaries for managers  Fixed cost per unit is inversely proportional to ◦ activity The more activity, the less the fixed cost per unit Copyright (c) 2009 Prentice Hall. All rights reserved 6

$4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 $0 Variable Fixed $10,000 $20,000 $30,000 $40,000 Total Sales

 Method to separate mixed costs into variable and fixed components  Select the highest level and the lowest level of activity over a period of time Copyright (c) 2009 Prentice Hall. All rights reserved 10

Variable cost per unit Variable cost per unit Variable cost per unit Change in total cost Change in activity $4,400 - $4,000 1,400 - 900 $0.80 per inspection Copyright (c) 2009 Prentice Hall. All rights reserved 14

Total fixed costs Total fixed costs Total fixed costs Total mixed cost minus Total variable cost $4,000 minus 900 inspections x $0.80

$3,280

Total mixed cost

$4,080

 ◦ Band of volume: Where total fixed costs remain constant and variable cost per unit remains constant  Outside the relevant range, costs can differ Copyright (c) 2009 Prentice Hall. All rights reserved 17

Use CVP analysis to compute breakeven points

Costs can be classified as fixed or variable.

Volume is only factor that affects costs. Fixed costs don’t change.

 ◦ ◦ Sales level at which operating income is zero Sales above breakeven result in a profit Sales below breakeven result in a loss  ◦ ◦ Two methods: Income statement approach Contribution margin approach Copyright (c) 2009 Prentice Hall. All rights reserved 20

Sales – Variable costs – Fixed costs = Operating income Selling price per unit x units sold Variable cost per unit x units sold Solve for units sold Fixed costs Operating income Copyright (c) 2009 Prentice Hall. All rights reserved Set to zero 21

Sales revenue per unit Variable costs per unit Fixed costs Contribution margin per unit Contribution margin per unit

Breakeven point in units

Contribution margin Sales revenue Fixed costs Contribution margin ratio Contribution margin ratio

Breakeven point in sales dollars

1. Which of the following is most likely a variable cost?

2. This type of cost per unit remains constant, while the total cost increases with activity.

3. This type of unit cost decreases with activity, but the total cost remains constant.

4. Which of the following would most likely be a mixed cost?

Use CVP analysis for profit planning, and graph the CVP relations

Fixed costs + Desired operating income Contribution margin ratio

Target sales in dollars

$20,000 $15,000 $10,000

•

$5,000 $0 0 500 1,000 Volume of Units 1,500 Revenues

$20,000 $15,000 $10,000 $5,000 $0 0 500 1,000 1,500 Volume of Units Revenues Fixed costs

$20,000 $15,000 $10,000 $5,000 $0 0 500 1,000 1,500 Volume of Units Revenues Fixed costs Total cost

$20,000 $15,000 $10,000 $5,000 $0 0

Loss Breakeven point

500 1,000 Volume of Units

Profit

1,500

Use CVP methods to perform sensitivity analysis

Change selling price Change in variable costs

breakeven point

Change in fixed costs

Cause Change

Selling price increases Selling price decreases Variable cost per unit increases Variable cost per unit decreases Fixed costs increase Fixed costs decrease

Effect

Decrease

Result Contribution margin

Increase

Breakeven point

 Excess of expected sales over breakeven sales  Cushion company can absorb without incurring a loss Expected sales in units Breakeven sales in units Margin of safety in units Expected sales in dollars Breakeven sales in dollars Margin of safety in dollars Copyright (c) 2009 Prentice Hall. All rights reserved 43

Sales price per unit $230 Variable costs per unit $70 Fixed costs Contribution margin per unit $112,000 $160 Contribution margin per unit Breakeven point in units 700 $160 students Copyright (c) 2009 Prentice Hall. All rights reserved 44

Decreased Sales price per unit $200 Variable costs per unit $70 Fixed costs Contribution margin per unit $112,000 $130 Decreased Contribution margin per unit $130 New Breakeven point in units 862 students Copyright (c) 2009 Prentice Hall. All rights reserved 45

Sales price per unit $230 Decreased variable costs per unit $50 Fixed costs Contribution margin per unit $112,000 $180 Increased Contribution margin per unit $180 New Breakeven point in units 623 students Copyright (c) 2009 Prentice Hall. All rights reserved 46

Sales price per unit $230 Variable costs per unit $70 Decreased fixed costs Contribution margin per unit $102,000 $160 Contribution margin per unit Breakeven point in units 638 $160 students Copyright (c) 2009 Prentice Hall. All rights reserved 47

Calculate the breakeven point for multiple product lines or services

 Selling prices and variable costs differ for each ◦ product Different contribution to profits  Weighted-average contribution margin computed  ◦ Sales mix provides weights Combination of products that make up total sales Copyright (c) 2009 Prentice Hall. All rights reserved 49

 Calculate weighted average contribution margin per unit A company has two products with the sales prices and variable costs per unit indicated in the table

Product A Product B Total

Sales price per unit Variable cost per unit $100 58 42 added as well as the 60 90 margins sold 5,000 units of A and Sales mix per unit 3,000 units of B. This 5 210 3 270 8 480 Weighted average contribution margin

$60

 Calculate breakeven point for the package of products Fixed costs Weighted average contribution margin per unit assumed $600,000 $60 10,000 units Copyright (c) 2009 Prentice Hall. All rights reserved 51

 Calculate the breakeven point for each product ◦ line Multiply the package breakeven point by each product line’s proportion of the sales mix Breakeven point Product A Breakeven point Product B 10,000 x 5/8 6,250 units 10,000 x 3/8 3,750 units Copyright (c) 2009 Prentice Hall. All rights reserved 52



Questions?

5. The simplest method to split a mixed cost into its fixed and variable components is called: A. B. C. D. fixed-variable separation.

high-low method.

multiple regression.

breakeven analysis.

5. The simplest method to split a mixed cost into its fixed and variable components is called: A. B. C. D. fixed-variable separation.

high-low method.

multiple regression.

breakeven analysis.

6. Which of the following is an assumption of CVP analysis?

A. Costs can be classified as either fixed or variable.

B. C. Volume is the only factor that impacts costs.

Fixed costs don’t change.

D. All of the above are true.

6. Which of the following is an assumption of CVP analysis?

A. Costs can be classified as either fixed or variable.

B. C. Volume is the only factor that impacts costs.

Fixed costs don’t change.

D. All of the above are true.

7. The sales level where net income equals zero is called: A. B. C. D. the breakeven point.

zero sum sales.

net loss.

deficit earnings.

7. The sales level where net income equals zero is called: A. B. C. D. the breakeven point.

zero sum sales.

net loss.

deficit earnings.

8. Excess sales over breakeven sales is referred to as: A. B. C. D. absorption potential.

margin of safety.

margin of error.

contribution margin.

8. Excess sales over breakeven sales is referred to as: A. B. C. D. absorption potential.

margin of safety.

margin of error.

contribution margin.

9. Indicate how the following changes would impact the breakeven point:

Change Impact on breakeven point

9. Indicate how the following changes would impact the breakeven point:

Change

Increase in fixed costs Decrease in selling price Increase in variable costs Decrease in variable costs

Impact on breakeven point

10. Contribution margin equals: A. B. C. D. sales – variable costs.

sales – fixed costs.

fixed costs – variable costs.

sales – variable costs – fixed costs.