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    Chap005 CVP Relationship

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    Chap005 CVP Relationship

    Uploaded by

    setia.brighty
    6 views18 pages

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    Download as ppt, pdf, or txt
    6 views18 pages

    Chap005 CVP Relationship

    Uploaded by

    setia.brighty

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
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    You are on page 1of 18

    Cost-Volume-Profit Relationships

    Chapter 05

    PowerPoint Authors:
    Susan Coomer Galbreath, Ph.D., CPA
    Charles W. Caldwell, D.B.A., CMA
    Jon A. Booker, Ph.D., CPA, CIA
    Cynthia J. Rooney, Ph.D., CPA
    McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
    5-2

    Basics of Cost-Volume-Profit Analysis


    The contribution income statement is helpful to managers
    in judging the impact on profits of changes in selling price,
    cost, or volume. The emphasis is on cost behavior.
    Racing Bicycle Company
    Contribution Income Statement
    For the Month of June
    Sales (500 bicycles) $ 250,000
    Less: Variable expenses 150,000
    Contribution margin 100,000
    Less: Fixed expenses 80,000
    Net operating income $ 20,000

    Contribution Margin (CM) is the amount remaining from


    sales revenue after variable expenses have been deducted.
    5-3

    1. Contribution Margin Ratio (CM Ratio)


    The CM ratio is calculated by dividing the total
    contribution margin by total sales.
    Racing Bicycle Company
    Contribution Income Statement
    For the Month of June
    Total Per Unit CM Ratio
    Sales (500 bicycles) $ 250,000 $ 500 100%
    Less: Variable expenses 150,000 300 60%
    Contribution margin 100,000 $ 200 40%
    Less: Fixed expenses 80,000
    Net operating income $ 20,000

    $100,000 ÷ $250,000 = 40%


    5-4

    Contribution Margin Ratio (CM Ratio)


    The contribution margin ratio at Racing Bicycle is:

    CM per unit $200


    CM Ratio = = = 40%
    SP per unit $500

    The CM ratio can also be calculated by


    dividing the contribution margin per unit by
    the selling price per unit.
    5-5

    Contribution Margin Ratio (CM Ratio)


    If Racing Bicycle increases sales from 400 to 500 bikes ($50,000),
    contribution margin will increase by $20,000 ($50,000 × 40%).
    Here is the proof:
    400
    400 Units
    Units 500
    500 Units
    Units
    Sales
    Sales $$200,000
    200,000 $$250,000
    250,000
    Less:
    Less: variable
    variable expenses
    expenses 120,000
    120,000 150,000
    150,000
    Contribution
    Contribution margin
    margin 80,000
    80,000 100,000
    100,000
    Less:
    Less: fixed
    fixed expenses
    expenses 80,000
    80,000 80,000
    80,000
    Net
    Net operating
    operating income
    income $$ -- $$ 20,000
    20,000

    A $50,000 increase in sales revenue results in a $20,000


    increase in CM ($50,000 × 40% = $20,000).
    5-6

    Target Profit Analysis


    Equation Method :
    Profit = Contribution Margin – Fixed expenses
    = (Unit CM × Q) – Fixed expenses

    Our goal is to solve for the unknown “Q” which


    represents the quantity of units that must be sold
    to attain the target profit.
    5-7

    Target Profit Analysis


    Suppose RBC’s management wants to know
    how many bikes must be sold to earn a target
    profit of $100,000.

    Profit = Unit CM × Q – Fixed expenses


    $100,000 = $200 × Q – $80,000
    $200 × Q = $100,000 – $80,000
    Q = ($100,000 + $80,000) ÷ $200
    Q = 900
    5-8

    The Formula Method

    The formula uses the following equation.

    Unit sales to attain Target profit + Fixed expenses


    =
    the target profit CM per unit
    5-9

    Target Profit Analysis in Terms of


    Unit Sales
    Suppose Racing Bicycle Company wants
    to know how many bikes must be sold to
    earn a profit of $100,000.

    Unit sales to attain Target profit + Fixed expenses


    =
    the target profit CM per unit

    $100,000 + $80,000
    Unit sales =
    $200
    Unit sales = 900
    5-10

    3. Break-even in Dollar Sales

    Suppose Racing Bicycle wants to compute


    the sales dollars required to break-even (earn
    a target profit of $0). Let’s use the equation
    method to solve this problem.

    Profit = Contribution Margin – Fixed expenses


    = CM ratio × Sales – Fixed expenses

    Solve for the unknown “Sales.”


    5-11

    Break-even in Dollar Sales

    Profit = CM ratio × Sales – Fixed expenses


    $ 0 = 40% × Sales – $80,000

    40% × Sales = $80,000

    Sales = $80,000 ÷ 40%

    Sales = $200,000
    5-12

    Break-even in Dollar Sales:


    Formula Method
    Now, let’s use the formula method to calculate the
    dollar sales at the break-even point.

    Dollar sales to Fixed expenses


    =
    break even CM ratio

    $80,000
    Dollar sales =
    40%
    Dollar sales = $200,000
    5-13

    The Margin of Safety


    The margin of safety is the excess of budgeted
    or actual sales dollars over the break-even
    volume of sales dollars

    • Margin of safety in dollars = Total budgeted (or


    actual) sales – (Break-even sales)

    • Margin of safety in percentage =


    Margin of safety in dollars : Total budgeted (or
    actual) sales in dollars
    5-14

    The calculation of margin of safety :

    Sales (at the current volume of 400 speakers) (a) . . $100,000


    • Sales (at the current volume of 400 speakers) (a) . . . . . . . $100,000
    Break-even sales
    • Break-even sales (at 350 speakers) . . . . . . . . . . . . . .
    (at 350 speakers) . . . . . . . . . . . . . . . . .
    87,500

    Margin of safety in dollars (b) . . . . . . . . . . . . . . . . . . . $ 12,500


    Margin of safety percentage, (b) : (a) . . . . . . . . . . . . 12.5%
    5-15

    Cost Structure and Profit Stability


    There are advantages and disadvantages to high fixed cost
    (or low variable cost) and low fixed cost (or high variable
    cost) structures.
    An advantage of a high fixed
    cost structure is that income A disadvantage of a high fixed
    will be higher in good years cost structure is that income
    compared to companies will be lower in bad years
    with lower proportion of compared to companies
    fixed costs. with lower proportion of
    fixed costs.
    Companies with low fixed cost structures enjoy greater
    stability in income across good and bad years.
    5-16

    Operating Leverage
    Operating leverage is a measure of how sensitive net
    operating income is to a given percentage change in
    dollar sales. Operating leverage acts as a multiplier. If
    operating leverage is high, a small percentage increase
    in sales can produce a much larger percentage increase
    in net operating income

    Degree of operating Contribution margin


    leverage = Net operating income

    Percentage change in Degree of operating Percentage change


    Net operating income = leverage x change in sales
    5-17

    Key Assumptions of CVP Analysis


     Selling price is constant.
     Costs are linear and can be accurately
    divided into variable (constant per unit) and
    fixed (constant in total) elements.
     In multiproduct companies, the sales mix is
    constant.
     In manufacturing companies, inventories do
    not change (units produced = units sold).
    5-18

    End of Chapter 05

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