Transcript Cost-Volume-Profit Analysis

Chapter 3
Cost-Volume-Profit Analysis
Copyright © 2003 Pearson Education Canada Inc.
Slide 3-28
Cost-Volume-Profit Analysis
•
Examines the behaviour of total revenues, total costs,
and operating income as changes occur in the output
level, selling price, variable costs or fixed costs
Assumptions of CVP Analysis
1. revenues change in relation to production and sales
2. costs can be divided in variable and fixed categories
3. revenues and costs behave in a linear fashion
4. costs and prices are known
5. if more than one product exists, the sales mix is
constant
6. we can ignore the time value of money
Copyright © 2003 Pearson Education Canada Inc.
Page 67
Slide 3-29
Contribution Margin
• Contribution margin is equal to the difference
between total revenue and total variable costs
Contribution margin per unit
= Selling price - Variable cost per unit
Contribution margin percentage
= Contribution margin per unit / selling price per unit
Revenue
Variable costs
Contribution margin
Copyright © 2003 Pearson Education Canada Inc.
Per Unit
Total for
2 units
%
$200
120
$80
$400
240
$160
100%
60%
40%
Pages 68 - 69
Slide 3-30
Contribution Margin Income Statement
• Income statement that groups line items by cost
behaviour to highlight the contribution margin
0
Revenue
Packages Sold
1
2
25
$0
$200
Variable costs
0
120
240
3,000
4,800
Contribution margin
0
80
160
2,000
3,200
2,000
2,000
2,000
2,000
2,000
Operating income $(2,000) $(1,920) $(1,840)
$0
$1,200
Fixed costs
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$400 $5,000
40
Page 69
$8,000
Slide 3-31
Breakeven Point
• Quantity of output where total revenues equal total
costs
• Point where operating income equals zero
Breakeven point in units
= Fixed costs / Contribution margin per unit
= $2,000 / $80
= 25 units
Breakeven point in dollars
= Fixed costs / contribution margin %
= $2,000 / 40%
= $5,000
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Page 71
Slide 3-32
Cost-Volume-Profit Graph
Total revenues
line
Breakeven
Point
25 units
$10,000
$8,000
Total costs
line
$6,000
Operating
income
$4,000
$2,000
Operating
loss
$0
0
10
20
30
40
50
Units Sold
Copyright © 2003 Pearson Education Canada Inc.
Page 72
Slide 3-33
Target Operating Income
• For most firms in the private sector, the main
objective is not to breakeven
• Convert after-tax desired net income to its before-tax
equivalent operating income
Target operating income
= Target net income / (1 - tax rate)
Target Unit Sales
= (Fixed costs + Target operating income)
/ Contribution margin per unit
Target Dollar Sales
= (Fixed costs + Target operating income)
/ Contribution margin %
Copyright © 2003 Pearson Education Canada Inc.
Pages 73 - 75
Slide 3-34
Sensitivity Analysis
• sensitivity analysis is a “what-if” technique that
examines how a result will change if the original
predicted data are not achieved or if an underlying
assumption changes
• What will happen to operating income if volume
declines by 5%?
• What will happen to operating income if variable
costs increase by 10% per unit?
• sensitivity analysis broadens management’s
perspectives about possible outcomes
Copyright © 2003 Pearson Education Canada Inc.
Pages 76 - 77
Slide 3-35
Alternative Cost Structures
• CVP helps managers assess the risks and potential
benefits of adopting alternative cost structures
Example: Alternative rental arrangements
Option 2
$1,400 Fixed Fee
+ 5% Commission
Option 1
$2,000 Fixed Fee
$
Rev
Rev
$
Cost
Units
Breakeven = 25 units
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Option 3
20% Commission
Rev
$
Cost
Cost
Units
Units
Breakeven = 20 units
Breakeven = 0 units
Pages 77 - 78
Slide 3-36
Revenue Mix
• Revenue mix (or sales mix) is the relative
combination of quantities of products or services
that make up total revenue
Do-All
Do-All
Superword
• Sales mix of Do-All : Superword = 2 : 1
Breakeven point in units
= 30 units
20 units of Do-All
10 units of Superword
Copyright © 2003 Pearson Education Canada Inc.
Pages 73 - 75
Slide 3-37
Multiple Cost Drivers
• In many cases there may be multiple cost drivers
Do-All Software Example
Variable costs:
$40 per software package sold
$15 per invoice issued
Operating income
= Revenue – ($40 x packages sold) – ($15 x invoices
issued) – Fixed costs
• In cases where there are multiple cost drivers there
are multiple breakeven points
Copyright © 2003 Pearson Education Canada Inc.
Pages 81 - 82
Slide 3-38
Contribution Margin & Gross Margin
Merchandising Sector
Contribution Margin
Format
Revenues
$200
Variable costs:
Cost of goods sold $120
Other variable
43 163
Contribution margin
37
Fixed costs:
Cost of goods sold
5
Other fixed
19 24
Operating income
$13
Copyright © 2003 Pearson Education Canada Inc.
Gross Margin
Format
Revenues
$200
Cost of goods sold (120+5)
125
Gross margin
75
Operating costs (43+19)
62
Operating income
$13
Pages 82 - 83
Slide 3-39
Contribution Margin & Gross Margin
Manufacturing Sector
Contribution Margin
Format
Revenues
$1,000
Variable costs:
Manufacturing
$250
Non-manufacturing 270 520
Contribution margin
480
Fixed costs:
Manufacturing
160
Non-manufacturing 138 298
Operating income
$182
Copyright © 2003 Pearson Education Canada Inc.
Gross Margin
Format
Revenues
$1,000
Cost of goods sold (250+160) 410
Gross margin
590
Non-manufacturing (270+138) 408
Operating income
$182
Pages 81 - 82
Slide 3-40
Decision Models and Uncertainty
• Managers make predictions and decisions in a world
of uncertainty
• Estimate events that are likely to occur and assign
probabilities to each outcome
• Probability distribution describes the likelihood of
each mutually exclusive and collectively exhaustive
set of events (must add to 1.00)
• Expected value is a weighted average of the
outcomes with the probability of each outcome
serving as the weight
Copyright © 2003 Pearson Education Canada Inc.
Pages 86 - 87
Slide 3-41
Uncertainty Example
Probability
Proposal A:
Spy Novel
0.5
0.4
0.3
0.2
0.1
1 2 3 4 5 6 7 8 9
Cash Inflow ($000,000)
Expected value
= (0.1*$300,000) + (.02*$350,000) + (.04*$400,000) +
(0.2*$450,000) + (0.1*$500,000)
= $400,000
Copyright © 2003 Pearson Education Canada Inc.
Page 87
Slide 3-42