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  • 1. Chapter 19 McGraw-Hill/Irwin Cost-Volume-Profit Analysis © The McGraw-Hill Companies, Inc., 2002
  • 2. Questions Addressed by Questions Addressed by Cost-Volume-Profit Analysis Cost-Volume-Profit Analysis CVP analysis is used to answer questions CVP analysis is used to answer questions such as: such as:  How much must I sell to earn my desired income?  How much must I sell to earn my desired income?  How will income be affected  How will income be affected if II reduce selling prices to if reduce selling prices to increase sales volume? increase sales volume?  What will happen to  What will happen to profitability if II expand profitability if expand capacity? capacity? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 3. Total Fixed Cost Total Fixed Cost Monthly Basic Telephone Bill Total fixed costs remain unchanged when activity changes. Number of Local Calls McGraw-Hill/Irwin Your monthly basic telephone bill probably does not change when you make more local calls. © The McGraw-Hill Companies, Inc., 2002
  • 4. Fixed Cost Per Unit Fixed Cost Per Unit Your average cost per local call decreases as more local calls are made. McGraw-Hill/Irwin Monthly Basic Telephone Bill per Local Call Fixed costs per unit decline as activity increases. Number of Local Calls © The McGraw-Hill Companies, Inc., 2002
  • 5. Total Variable Cost Total Variable Cost Total Long Distance Telephone Bill Total variable costs change when activity changes. Minutes Talked McGraw-Hill/Irwin Your total long distance telephone bill is based on how many minutes you talk. © The McGraw-Hill Companies, Inc., 2002
  • 6. Variable Cost Per Unit Variable Cost Per Unit The cost per long distance minute talked is constant. For example, 10 cents per minute. McGraw-Hill/Irwin Per Minute Telephone Charge Variable costs per unit do not change as activity increases. Minutes Talked © The McGraw-Hill Companies, Inc., 2002
  • 7. Cost Behavior Summary Cost Behavior Summary Summary of Variable and Fixed Cost Behavior Cost In Total Per Unit Variable Changes as activity level changes. Remains the same over wide ranges of activity. Fixed Remains the same even when activity level changes. Dereases as activity level increases. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 8. Mixed Costs Mixed Costs Mixed costs contain a fixed portion that is incurred even when facility is unused, and a variable portion that increases with usage. Example: monthly electric utility charge  Fixed service fee  Variable charge per kilowatt hour used McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 9. Total Utility Cost Mixed Costs Mixed Costs Slope is variable cost per unit of activity. tal To ixe m os dc t Variable Utility Charge Fixed Monthly Utility Charge Activity (Kilowatt Hours) McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 10. Stair-Step Costs Stair-Step Costs Cost Total cost remains constant within a narrow range of activity. Activity McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 11. Stair-Step Costs Stair-Step Costs Cost Total cost increases to a new higher cost for the next higher range of activity. Activity McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 12. Curvilinear Costs Curvilinear Costs Total Cost Curvilinear Cost Function Relevant Range A straight line closely (constant unit variable cost) approximates a curvilinear variable cost line within the relevant range. Volume of Output McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 13. Cost-Volume-Profit Cost-Volume-Profit (CVP) Analysis (CVP) Analysis Let’s extend our knowledge of cost behavior to CVP analysis. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 14. Computing Break-Even Point Computing Break-Even Point The break-even point (expressed in units of product or dollars of sales) is the unique sales level at which a company neither earns a profit nor incurs a loss. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 15. Computing Break-Even Point Computing Break-Even Point Sales Revenue (2,000 units) Less: Variable costs Contribution margin Less: Fixed costs Operating income Total $ 100,000 60,000 $ 40,000 30,000 $ 10,000 Unit $ 50 30 $ 20 Contribution margin is amount by which revenue Contribution margin is amount by which revenue exceeds the variable costs of producing the revenue. exceeds the variable costs of producing the revenue. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 16. Computing Break-Even Point Computing Break-Even Point Sales Revenue (2,000 units) Less: Variable costs Contribution margin Less: Fixed costs Operating income Total $ 100,000 60,000 $ 40,000 30,000 $ 10,000 Unit $ 50 30 $ 20 How much contribution margin must this company How much contribution margin must this company have to cover its fixed costs (break even)? have to cover its fixed costs (break even)? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 17. Computing Break-Even Point Computing Break-Even Point Sales Revenue (2,000 units) Less: Variable costs Contribution margin Less: Fixed costs Operating income Total $ 100,000 60,000 $ 40,000 30,000 $ 10,000 Unit $ 50 30 $ 20 How much contribution margin must this company How much contribution margin must this company have to cover its fixed costs (break even)? have to cover its fixed costs (break even)? Answer: $30,000 Answer: $30,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 18. Computing Break-Even Point Computing Break-Even Point Sales Revenue (2,000 units) Less: Variable costs Contribution margin Less: Fixed costs Operating income Total $ 100,000 60,000 $ 40,000 30,000 $ 10,000 Unit $ 50 30 $ 20 How many units must this company sell to cover its How many units must this company sell to cover its fixed costs (break even)? fixed costs (break even)? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 19. Computing Break-Even Point Computing Break-Even Point Sales Revenue (2,000 units) Less: Variable costs Contribution margin Less: Fixed costs Operating income Total $ 100,000 60,000 $ 40,000 30,000 $ 10,000 Unit $ 50 30 $ 20 How many units must this company sell to cover its How many units must this company sell to cover its fixed costs (break even)? fixed costs (break even)? Answer: $30,000 ÷ $20 per unit = 1,500 units Answer: $30,000 ÷ $20 per unit = 1,500 units McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 20. Formula for Computing Formula for Computing Finding the Break-Even Point Break-Even Sales (in Units) Break-Even Sales (in Units) We have just seen one of the basic CVP relationships – the break-even computation. Fixed costs Break-even point in units = Contribution margin per unit Unit sales price less unit variable cost ($20 in previous example) McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 21. Formula for Computing Formula for Computing Break-Even Sales (in Dollars) Break-Even Sales (in Dollars) The break-even formula may also be expressed in sales dollars. Fixed costs Break-even point in dollars = Contribution margin ratio Unit sales price Unit variable cost McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 22. Computing Break-Even Sales Computing Break-Even Sales Question 1 Question 1 ABC Co. sells product XYZ at $5.00 per unit. If ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be sold to $3.00 per unit, how many units must be sold to break even? break even? a. a. b. b. c. c. d. d. 100,000 units 100,000 units 40,000 units 40,000 units 200,000 units 200,000 units 66,667 units 66,667 units McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 23. Computing Break-Even Sales Computing Break-Even Sales Question 1 Question 1 ABC Co. sells product XYZ at $5.00 per unit. If ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be sold to $3.00 per unit, how many units must be sold to break even? break even? a. a. b. b. c. c. d. d. 100,000 units 100,000 units 40,000 units contribution = $5.00 - $3.00 = $2.00 Unit 40,000 units 200,000 unitsFixed costs $200,000 200,000 units = $2.00 per unit Unit contribution 66,667 units 66,667 units = 100,000 units McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 24. Computing Break-Even Sales Computing Break-Even Sales Question 2 Question 2 Use the contribution margin ratio formula to Use the contribution margin ratio formula to determine the amount of sales revenue ABC must determine the amount of sales revenue ABC must have to break even. All information remains have to break even. All information remains unchanged: fixed costs are $200,000; unit sales unchanged: fixed costs are $200,000; unit sales price is $5.00; and unit variable cost is $3.00. price is $5.00; and unit variable cost is $3.00. a. a. b. b. c. c. d. d. $200,000 $200,000 $300,000 $300,000 $400,000 $400,000 $500,000 $500,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 25. Computing Break-Even Sales Computing Break-Even Sales Question 2 Question 2 Use the contribution margin ratio formula to Use the contribution margin ratio formula to determine the amount of sales revenue ABC must determine the amount of sales revenue ABC must have to break even. All information remains have to break even. All information remains unchanged: fixed costs are $200,000; unit sales unchanged: fixed costs are $200,000; unit sales price is $5.00; and unit variable cost is $3.00. price is $5.00; and unit variable cost is $3.00. Unit contribution = $5.00 - $3.00 = $2.00 a. a. b. b. c. c. d. d. $200,000 $200,000 Contribution margin ratio = $2.00 ÷ $5.00 = .40 $300,000 $300,000 Break-even revenue = $200,000 ÷ .4 = $500,000 $400,000 $400,000 $500,000 $500,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 26. Preparing a CVP Graph Preparing a CVP Graph  Starting at the origin, draw the total revenue Costs and Revenue in Dollars line with a slope equal to the unit sales price. Revenue  Total fixed cost extends horizontally from the vertical axis. Total fixed cost Volume in Units McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 27. Preparing a CVP Graph Preparing a CVP Graph  Draw the total cost line with a slope Revenue Costs and Revenue in Dollars equal to the unit variable cost. Break-even Point Profit Total cost Loss Total fixed cost Volume in Units McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 28. Computing Sales Needed to Computing Sales Needed to Achieve Target Operating Income Achieve Target Operating Income Break-even formulas may be adjusted to Break-even formulas may be adjusted to show the sales volume needed to earn show the sales volume needed to earn any amount of operating income. any amount of operating income. Unit sales = Fixed costs + Target income Contribution margin per unit Fixed costs + Target income Dollar sales = Contribution margin ratio McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 29. Computing Sales Needed to Computing Sales Needed to Achieve Target Operating Income Achieve Target Operating Income ABC Co. sells product XYZ at $5.00 per unit. If ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be are $3.00 per unit, how many units must be sold to earn operating income of $40,000? sold to earn operating income of $40,000? a. a. b. b. c. c. d. d. 100,000 units 100,000 units 120,000 units 120,000 units 80,000 units 80,000 units 200,000 units 200,000 units McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 30. Computing Sales Needed to Computing Sales Needed to Achieve Target Operating Income Achieve Target Operating Income ABC Co. sells product XYZ at $5.00 per unit. If ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be are $3.00 per unit, how many units must be sold to earn operating income of $40,000? sold to earn operating income of $40,000? a. a. b. b. c. c. d. d. Unit 100,000 units contribution = $5.00 - $3.00 = $2.00 100,000 units Fixed costs + Target income 120,000 units 120,000 units Unit contribution 80,000 units 80,000 units $200,000 + $40,000 = 120,000 units 200,000 units $2.00 per unit 200,000 units McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 31. What is our Margin of Safety? What is our Margin of Safety? Margin of safety is the amount by which sales may decline before reaching break-even sales: Margin of safety = Actual sales - Break-even sales Margin of safety provides a quick means of estimating operating income at any level of sales: Operating Income McGraw-Hill/Irwin = Margin of safety × Contribution margin ratio © The McGraw-Hill Companies, Inc., 2002
  • 32. What is our Margin of Safety? What is our Margin of Safety? Oxco’s contribution margin ratio is 40 percent. If sales are $100,000 and breakeven sales are $80,000, what is operating income? Operating Income = Operating Income = $20,000 × .40 = $8,000 McGraw-Hill/Irwin Margin of safety × Contribution margin ratio © The McGraw-Hill Companies, Inc., 2002
  • 33. What Change in Operating Income What Change in Operating Income Do We Anticipate? Do We Anticipate? Once break-even is reached, every additional dollar of contribution margin becomes operating income: Change in operating income = Change in sales volume × Contribution margin ratio Oxco expects sales to increase by $15,000. How much will operating income increase? Change in operating income McGraw-Hill/Irwin = $15,000 × .40 = $6,000 © The McGraw-Hill Companies, Inc., 2002
  • 34. Business Applications of CVP Business Applications of CVP McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 35. Business Applications of CVP Business Applications of CVP Consider the following information developed by the accountant at CyclCo, a bicycle retailer: Total Sales (500 bikes) $ 250,000 Less: variable expenses 150,000 Contribution margin $ 100,000 Less: fixed expenses 80,000 Operating income $ 20,000 McGraw-Hill/Irwin Per Unit $ 500 300 $ 200 Percent 100% 60% 40% © The McGraw-Hill Companies, Inc., 2002
  • 36. Business Applications of CVP Business Applications of CVP Should CyclCo spend $12,000 on advertising to increase sales by 10 percent? Total Sales (500 bikes) $ 250,000 Less: variable expenses 150,000 Contribution margin $ 100,000 Less: fixed expenses 80,000 Operating income $ 20,000 McGraw-Hill/Irwin Per Unit $ 500 300 $ 200 Percent 100% 60% 40% © The McGraw-Hill Companies, Inc., 2002
  • 37. Business Applications of CVP Business Applications of CVP Should CyclCo spend $12,000 on advertising to increase sales by 10 percent? 500 Bikes Sales $ 250,000 Less: variable expenses 150,000 Contribution margin $ 100,000 Less: fixed expenses 80,000 Operating income $ 20,000 550 × $500 550 × $300 $80K + $12K 550 Bikes $ 275,000 165,000 $ 110,000 92,000 $ 18,000 No, income is decreased. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 38. Business Applications of CVP Business Applications of CVP Now, in combination with the advertising, CyclCo is considering a 10 percent price reduction that will increase sales by 25 percent. What is the income effect? 500 Bikes Sales $ 250,000 Less: variable expenses 150,000 Contribution margin $ 100,000 Less: fixed expenses 80,000 Operating income $ 20,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 39. Business Applications of CVP Business Applications of CVP Now, in combination with the advertising, CyclCo is considering a 10 percent price reduction that will increase sales by 25 percent. What is the income effect? 500 Bikes Sales $ 250,000 Less: variable expenses 150,000 Contribution margin $ 100,000 Less: fixed expenses 80,000 Operating income $ 20,000 1.25 × 500 625 × $450 625 × $300 $80K + $12K 625 Bikes $ 281,250 187,500 $ 93,750 92,000 $ 1,750 Income is decreased even more. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 40. Business Applications of CVP Businesswith advertising and aof CVPCyclCo Applications price cut, Now, in combination will replace $50,000 in sales salaries with a $25 per bike commission, increasing sales by 50 percent above the original 500 bikes. What is the effect on income? 500 Bikes Sales $ 250,000 Less: variable expenses 150,000 Contribution margin $ 100,000 Less: fixed expenses 80,000 Operating income $ 20,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 41. Business Applications of CVP Businesswith advertising and aof CVPCyclCo Applications price cut, Now, in combination will replace $50,000 in sales salaries with a $25 per bike commission, increasing sales by 50 percent above the original 500 bikes. What is the effect on income? 500 Bikes Sales $ 250,000 Less: variable expenses 150,000 Contribution margin $ 100,000 Less: fixed expenses 80,000 Operating income $ 20,000 1.5 × 500 750 × $450 750 × $325 $92K - $50K 750 Bikes $ 337,500 243,750 $ 93,750 42,000 $ 51,750 The combination of advertising, a price cut, and change in compensation increases income. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 42. Additional Considerations in CVP Additional Considerations in CVP  Different products with different contribution margins.  Determining semivariable cost elements.  Complying with the assumptions of CVP analysis. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 43. CVP Analysis When a Company CVP Analysis When a Company Sells Many Products Sells Many Products Sales mix is the relative combination in which Sales mix is the relative combination in which a company’s different products are sold. a company’s different products are sold. Different products have different selling Different products have different selling prices, costs, and contribution margins. prices, costs, and contribution margins. If CyclCo sells bikes and carts, how If CyclCo sells bikes and carts, how will we deal with break-even analysis? will we deal with break-even analysis? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 44. CVP Analysis When a Company CVP Analysis When a Company Sells Many Products Sells Many Products CyclCo provides us with the following information: Sales $ Var. exp. Contrib. margin $ Fixed exp. Net income McGraw-Hill/Irwin Bikes 250,000 100% 150,000 60% 100,000 40% Carts $ 300,000 100% 135,000 45% $ 165,000 55% Total $ 550,000 100% 285,000 52% $ 265,000 48% 170,000 $ 95,000 © The McGraw-Hill Companies, Inc., 2002
  • 45. CVP Analysis When a Company CVP Analysis When a Company Sells Many Products Sells Many Products The overall contribution margin ratio is: Sales $ Var. exp. Contrib. margin $ Fixed exp. Net income Bikes 250,000 100% 150,000 60% 100,000 40% $265,000 $550,000 McGraw-Hill/Irwin Carts $ 300,000 100% 135,000 45% $ 165,000 55% Total $ 550,000 100% 285,000 52% $ 265,000 48% 170,000 $ 95,000 = 48% (rounded) © The McGraw-Hill Companies, Inc., 2002
  • 46. CVP Analysis When a Company CVP Analysis When a Company Sells Many Products Sells Many Products Break-even in sales dollars is: Sales $ Var. exp. Contrib. margin $ Fixed exp. Operating income Bikes 250,000 100% 150,000 60% 100,000 40% $170,000 .48 McGraw-Hill/Irwin Carts $ 300,000 100% 135,000 45% $ 165,000 55% Total $ 550,000 100% 285,000 52% $ 265,000 48% 170,000 $ 95,000 = $354,167 (rounded) © The McGraw-Hill Companies, Inc., 2002
  • 47. The High-Low Method The High-Low Method OwlCo recorded the following production activity and maintenance costs for two months: High activity level Low activity level Change Units 9,000 5,000 4,000 Cost $ 9,700 6,100 $ 3,600 Using these two levels of activity, compute:  the variable cost per unit.  the total fixed cost.  total cost formula. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 48. The High-Low Method The High-Low Method High activity level Low activity level Change Units 9,000 5,000 4,000 Cost $ 9,700 6,100 $ 3,600 $3,600 ∆ in cost  Unit variable cost = ∆ in units = 4,000 = $0.90 per unit McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 49. The High-Low Method The High-Low Method High activity level Low activity level Change Units 9,000 5,000 4,000 Cost $ 9,700 6,100 $ 3,600 $3,600 ∆ in cost  Unit variable cost = ∆ in units = 4,000 = $0.90 per unit  Fixed cost = Total cost – Total variable cost McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 50. The High-Low Method The High-Low Method High activity level Low activity level Change Units 9,000 5,000 4,000 Cost $ 9,700 6,100 $ 3,600 $3,600 ∆ in cost  Unit variable cost = ∆ in units = 4,000 = $0.90 per unit  Fixed cost = Total cost – Total variable cost Fixed cost = $9,700 – ($0.90 per unit × 9,000 units) Fixed cost = $9,700 – $8,100 = $1,600 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 51. The High-Low Method The High-Low Method High activity level Low activity level Change Units 9,000 5,000 4,000 Cost $ 9,700 6,100 $ 3,600 $3,600 ∆ in cost  Unit variable cost = ∆ in units = 4,000 = $0.90 per unit  Fixed cost = Total cost – Total variable cost Fixed cost = $9,700 – ($0.90 per unit × 9,000 units) Fixed cost = $9,700 – $8,100 = $1,600  Total cost = $1,600 + $.90 per unit McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 52. The High-Low Method The High-Low Method Question 1 Question 1 If sales commissions are $10,000 when 80,000 units If sales commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, are sold and $14,000 when 120,000 units are sold, what is the variable portion of sales commission per what is the variable portion of sales commission per unit sold? unit sold? a. a. b. b. c. c. d. d. McGraw-Hill/Irwin $.08 per unit $.08 per unit $.10 per unit $.10 per unit $.12 per unit $.12 per unit $.125 per unit $.125 per unit © The McGraw-Hill Companies, Inc., 2002
  • 53. The High-Low Method The High-Low Method Question 1 Question 1 If sales commissions are $10,000 when 80,000 units If sales commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, are sold and $14,000 when 120,000 units are sold, what is the variable portion of sales commission per what is the variable portion of sales commission per unit sold? unit sold? a. a. b. b. c. c. d. d. McGraw-Hill/Irwin $.08 per unit $.08 per unit $.10 per unit $.10 per unit $.12 per unit $.12 per unit $.125 per unit $.125 per unit High level Low level Change Units 120,000 80,000 40,000 Cost $ 14,000 10,000 $ 4,000 $4,000 ÷ 40,000 units = $.10 per unit © The McGraw-Hill Companies, Inc., 2002
  • 54. The High-Low Method The High-Low Method Question 2 Question 2 If sales commissions are $10,000 when 80,000 units If sales commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, are sold and $14,000 when 120,000 units are sold, what is the fixed portion of the sales commission? what is the fixed portion of the sales commission? a. a. b. b. c. c. d. d. McGraw-Hill/Irwin $ 2,000 $ 2,000 $ 4,000 $ 4,000 $10,000 $10,000 $12,000 $12,000 © The McGraw-Hill Companies, Inc., 2002
  • 55. The High-Low Method The High-Low Method Question 2 Question 2 If sales commissions are $10,000 when 80,000 units If sales commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, are sold and $14,000 when 120,000 units are sold, what is the fixed portion of the sales commission? what is the fixed portion of the sales commission? a. a. b. b. c. c. d. d. McGraw-Hill/Irwin $ 2,000 $ 2,000 $ 4,000 $ 4,000 $10,000 $10,000 $12,000 $12,000 Total cost = Total fixed cost + Total variable cost $14,000 = Total fixed cost + ($.10 × 120,000 units) Total fixed cost = $14,000 - $12,000 Total fixed cost = $2,000 © The McGraw-Hill Companies, Inc., 2002
  • 56. Assumptions Underlying Assumptions Underlying CVP Analysis CVP Analysis  A limited range of activity, called the relevant range, where CVP relationships are linear.  Unit selling price remains constant.  Unit variable costs remain constant.  Total fixed costs remain constant.  Sales mix remains constant.  Production = sales (no inventory changes). McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 57. End of Chapter 19 End of Chapter 19 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002