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Universidad Cuauhtémoc
Campus Aguascalientes
Cost Behavior &
Cost-Volume-Profit
Analysis
Análisis de Costos
Maestría en Ad...
Cost Behavior
Jason Inc. produces stereo sound systems
under the brand name of J-Sound. The parts
for the stereo are purchased from an o...
Total Variable Cost Graph
TotalCosts
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
10 20 300
Units Produced
(in tho...
Unit Variable Cost Graph
$20
$15
$10
$5
0
CostperUnit
10 20 30
Units Produced
(000)
Variable Cost
TotalCosts
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
10 20 300
$20
$15
$10
$5
0
CostperUnit
10 20 30
Number of
...
The production
supervisor for Minton
Inc.’s Los Angeles plant
is Lupita Marmolejo.
She is paid $75,000 per
year. The plant...
Number of
Bottles
Produced
Total Salary
for Jane
Sovissi
50,000 bottles $75,000 $1.500
100,000 75,000 0.750
150,000 75,000...
Fixed Costs
Total Fixed Cost GraphTotalCosts
$150,000
$125,000
$100,000
$75,000
$50,000
$25,000
100 200 3000
Unit Fixed Co...
Simpson Inc. manufactures
sails using rented equipment.
The rental charges are
$15,000 per year, plus $1 for
each machine ...
Mixed Costs
Total Mixed Cost Graph
TotalCosts
0
Total Machine Hours (000)
$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
...
The high-low method is a simple way
to separate mixed costs into their
fixed and variable components.
Mixed Costs
Actual costs incurred
ProductionTotal
(Units) Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,80...
Actual costs incurred
ProductionTotal
(Units) Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,80...
Actual costs incurred
ProductionTotal
(Units) Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,80...
Actual costs incurred
ProductionTotal
(Units) Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,80...
2,100 – 750
Actual costs incurred
ProductionTotal
(Units) Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
Se...
Actual costs incurred
ProductionTotal
(Units) Cost
Variable cost per unit = $15
What is the total
fixed cost (using the
hi...
Actual costs incurred
ProductionTotal
(Units) Cost
Variable cost per unit = $15
The fixed cost is
the same at the
lowest l...
Variable Costs
Total Fixed Costs
Total Units Produced
TotalCosts
Total Units Produced
PerUnitCost
Total Variable Costs
Tot...
Contribution Margin Income Statement
Sales (50,000 units) $1,000,000
Variable costs 600,000
Contribution margin $ 400,000
...
Contribution Margin Income Statement
Sales Variable
costs
Fixed
costs
Income
from
operations
= + +
Sales
Variable
costs
Co...
Contribution Margin Ratio
100%
60%
40%
30%
10%
Contribution margin ratio =
Sales – Variable costs
Sales
Contribution margi...
100%
60%
40%
30%
10%
The contribution margin can be expressed three ways:
1. Total contribution margin in dollars.
3. Cont...
What is the
break-even
point?
Revenues Costs=
Break-even
Calculating the Break-Even Point
At the break-even point, fixed
costs and the contribution
margin are equal.
Sales (? unit...
Sales ($25 x ? units) $ ?
Variable costs ($15 x ? units) ?
Contribution margin $ 90,000
Fixed costs 90,000
Income from ope...
Sales ($250 x ? units) $ ?
Variable costs ($145 x ? units) ?
Contribution margin $ ?
Fixed costs 840,000
Income from opera...
Sales ($25 x ? units) $ ?
Variable costs ($15 x ? units) ?
Contribution margin $ ?
Fixed costs 840,000
Income from operati...
Sales $ ?
Variable costs ?
Contribution margin $ ?
Fixed costs $600,000
Income from operations $ 0
Break-even sales (units...
Sales $ ?
Variable costs ?
Contribution margin $ ?
Fixed costs $600,000
Income from operations $ 0
Break-even sales (units...
Summary of Effects of Changes on
Break-Even Point
Target Profit
Fixed costs are estimated at $200,000, and the
desired profit is $100,000. The unit selling
price is $75 and...
Sales (? units) $ ?
Variable costs ?
Contribution margin $ ?
Fixed costs 200,000
Income from operations $ 0
Sales (units) ...
$75
45
$30
Sales (10,000 units x $75) $750,000
Variable costs (10,000 x $45) 450,000
Contribution margin $300,000
Fixed co...
Graphic Approach to
Cost-Volume-Profit
Analysis
Cost-Volume-Profit Chart
SalesandCosts($000)
0
Units of Sales (000)
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Unit...
Cost-Volume-Profit Chart
SalesandCosts($000)
0
Units of Sales (000)
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Unit...
Cost-Volume-Profit Chart
SalesandCosts($000)
0
Units of Sales (000)
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Unit...
Cost-Volume-Profit Chart
SalesandCosts($000)
0
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
1 2 3 4 5 6 7 8 9 10
Brea...
Cost-Volume-Profit Chart
SalesandCosts($000)
0
Units of Sales (000)
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Unit...
$100
$75
$50
$25
$ 0
$(25)
$(50)
$(75)
$(100)
Sales (10,000 units x $50) $500,000
Variable costs (10,000 units x $30) 300,...
Units of Sales (000’s)
1 2 3 4 5 6 7 8 9 10
Maximum loss is
equal to the total
fixed costs.
Profit Line
Operating
loss
Ope...
OperatingProfit
(Loss)$000’s
Units of Sales (000’s)
1 2 3 4 5 6 7 8 9 10
Operating
loss
Operating
profit
Break-Even Point
...
Sales Mix
Considerations
Cascade Company sold 8,000 units of Product A
and 2,000 units of Product B during the past year.
Cascade Company’s fixed c...
Sales $ 90 $140
Variable costs 70 95
Contribution margin $ 20 $ 45
Sales mix 80% 20%
Sales Mix Considerations
Products
A B...
Sales Mix Considerations
Products
A BProduct contribution
margin $16 $ 9
$25
Break-even sales units
$200,000
$25
Fixed cos...
Sales Mix Considerations
Products
A BProduct contribution
margin $16 $ 9
$25
Break-even sales units
$200,000
$25
Fixed cos...
Sales Mix Considerations
Products
A BProduct contribution
margin $16 $ 9
$25
A: 8,000 units x Sales Mix (80%) = 6,400
B: 8...
PROOF
Product A Product B Total
Sales:
6,400 units x $90 $576,000 $576,000
1,600 units x $140 $224,000 224,000
Total sales...
Margin
of Safety
Margin of Safety =
Sales – Sales at break-even point
Sales
The margin of safety indicates the
possible decrease in sales t...
Universidad Cuauhtémoc
Campus Aguascalientes
Questions?
Análisis de Costos
Maestría en Administración
6. Cost Volume-Profit Analysis
6. Cost Volume-Profit Analysis
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Transcript of "6. Cost Volume-Profit Analysis"

  1. 1. Universidad Cuauhtémoc Campus Aguascalientes Cost Behavior & Cost-Volume-Profit Analysis Análisis de Costos Maestría en Administración
  2. 2. Cost Behavior
  3. 3. Jason Inc. produces stereo sound systems under the brand name of J-Sound. The parts for the stereo are purchased from an outside supplier for $10 per unit (a variable cost). Variable Cost
  4. 4. Total Variable Cost Graph TotalCosts $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 10 20 300 Units Produced (in thousands) Variable Cost
  5. 5. Unit Variable Cost Graph $20 $15 $10 $5 0 CostperUnit 10 20 30 Units Produced (000) Variable Cost
  6. 6. TotalCosts $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 10 20 300 $20 $15 $10 $5 0 CostperUnit 10 20 30 Number of Units Produced Units Produced (000) Units Produced (000) Direct Materials Cost per Unit Total Direct Materials Cost 5,000 units $10 $ 50,000 10,000 10 l00,000 15,000 10 150,000 20,000 10 200,000 25,000 10 250,000 30,000 10 300,000 Variable Cost
  7. 7. The production supervisor for Minton Inc.’s Los Angeles plant is Lupita Marmolejo. She is paid $75,000 per year. The plant produces from 50,000 to 300,000 bottles of perfume. La Fleur Fixed Costs
  8. 8. Number of Bottles Produced Total Salary for Jane Sovissi 50,000 bottles $75,000 $1.500 100,000 75,000 0.750 150,000 75,000 0.500 200,000 75,000 0.375 250,000 75,000 0.300 300,000 75,000 0.250 Salary per Bottle Produced Fixed Costs
  9. 9. Fixed Costs Total Fixed Cost GraphTotalCosts $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 100 200 3000 Unit Fixed Cost Graph Bottles Produced (000) Number of Bottles Produced CostperUnit $1.50 $1.25 $1.00 $.75 $.50 $.25 100 200 3000 Units Produced (000) Total Salary for Jane Sovissi 50,000 bottles $75,000 $1.500 100,000 75,000 0.750 15,000 75,000 0.500 20,000 75,000 0.375 25,000 75,000 0.300 30,000 75,000 0.250 Salary per Bottle Produced
  10. 10. Simpson Inc. manufactures sails using rented equipment. The rental charges are $15,000 per year, plus $1 for each machine hour used over 10,000 hours.
  11. 11. Mixed Costs Total Mixed Cost Graph TotalCosts 0 Total Machine Hours (000) $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 10 20 30 40 Mixed costs are usually separated into their fixed and variable components for management analysis. Mixed costs are sometimes called semivariable or semifixed costs.
  12. 12. The high-low method is a simple way to separate mixed costs into their fixed and variable components. Mixed Costs
  13. 13. Actual costs incurred ProductionTotal (Units) Cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 High-Low Method Variable cost per unit = Highest level of activity ($) minus lowest level of activity ($) Highest level of activity (n) minus lowest level of activity (n) What month has the highest level of activity in terms of cost?
  14. 14. Actual costs incurred ProductionTotal (Units) Cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 Variable cost per unit = $61,500 minus lowest level of activity ($) What month has the highest level of activity in terms of cost? Highest level of activity (n) minus lowest level of activity (n) High-Low Method
  15. 15. Actual costs incurred ProductionTotal (Units) Cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 Variable cost per unit = $61,500 minus lowest level of activity ($) For the highest level of cost, what is the level of production? Highest level of activity (n) minus lowest level of activity (n) 2,100 minus lowest level of activity (n) High-Low Method
  16. 16. Actual costs incurred ProductionTotal (Units) Cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 Variable cost per unit = $61,500 minus lowest level of activity ($) What month has the lowest level of activity in terms of cost? $61,500 – $41,250 2,100 minus lowest level of activity (n) 2,100 – 750 High-Low Method
  17. 17. 2,100 – 750 Actual costs incurred ProductionTotal (Units) Cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 What is the variable cost per unit? $57,500 – $41,250 High-Low Method $20,250 1,350 Variable cost per unit = $15
  18. 18. Actual costs incurred ProductionTotal (Units) Cost Variable cost per unit = $15 What is the total fixed cost (using the highest level)? Total cost = (Variable cost per unit x Units of production) + Fixed cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 $61,500 = ($15 x 2,100) + Fixed cost $61,500 = ($15 x 2,100) + $30,000 High-Low Method
  19. 19. Actual costs incurred ProductionTotal (Units) Cost Variable cost per unit = $15 The fixed cost is the same at the lowest level. Total cost = (Variable cost per unit x Units of production) + Fixed cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 $41,250 = ($15 x 750) + Fixed cost $41,250 = ($15 x 750) + $30,000 High-Low Method
  20. 20. Variable Costs Total Fixed Costs Total Units Produced TotalCosts Total Units Produced PerUnitCost Total Variable Costs Total Units Produced Unit Variable Costs Total Units Produced TotalCosts PerUnitCost Fixed Costs Review Unit Fixed CostsTotal costs remain the same regardless of activity. Unit Costs increase and decreases with activity level. Total costs increase and decreases proportionately with activity level. Unit costs remain the same per unit regardless of activity.
  21. 21. Contribution Margin Income Statement Sales (50,000 units) $1,000,000 Variable costs 600,000 Contribution margin $ 400,000 Fixed costs 300,000 Income from operations $ 100,000 The contribution margin is available to cover the fixed costs and income from operations. FIXED COSTS Contribution margin Income from Operations
  22. 22. Contribution Margin Income Statement Sales Variable costs Fixed costs Income from operations = + + Sales Variable costs Contribution margin – = Sales (50,000 units) $1,000,000 Variable costs 600,000 Contribution margin $ 400,000 Fixed costs 300,000 Income from operations $ 100,000
  23. 23. Contribution Margin Ratio 100% 60% 40% 30% 10% Contribution margin ratio = Sales – Variable costs Sales Contribution margin ratio = $1,000,000 – $600,000 $1,000,000 Contribution margin ratio = 40% Sales (50,000 units) $1,000,000 Variable costs 600,000 Contribution margin $ 400,000 Fixed costs 300,000 Income from operations $ 100,000
  24. 24. 100% 60% 40% 30% 10% The contribution margin can be expressed three ways: 1. Total contribution margin in dollars. 3. Contribution margin ratio (percentage). 3. Unit contribution margin (dollars per unit). $20 12 $ 8 Sales (50,000 units) $1,000,000 Variable costs 600,000 Contribution margin $ 400,000 Fixed costs 300,000 Income from operations $ 100,000 Contribution Margin Ratio
  25. 25. What is the break-even point? Revenues Costs= Break-even
  26. 26. Calculating the Break-Even Point At the break-even point, fixed costs and the contribution margin are equal. Sales (? units) $ ? Variable costs ? Contribution margin $ 90,000 Fixed costs 90,000 Income from operations $ 0 $25 15 $10
  27. 27. Sales ($25 x ? units) $ ? Variable costs ($15 x ? units) ? Contribution margin $ 90,000 Fixed costs 90,000 Income from operations $ 0 $25 15 $10 Break-even sales (units) = Unit contribution margin Fixed costs$90,000 $10 9,000 units Sales ($25 x 9,000) $225,000 Variable costs ($15 x 9,000) 135,000 Contribution margin $ 90,000 Fixed costs 90,000 Income from operations $ 0 PROOF! Calculating the Break-Even Point In Units
  28. 28. Sales ($250 x ? units) $ ? Variable costs ($145 x ? units) ? Contribution margin $ ? Fixed costs 840,000 Income from operations $ 0 $250 145 $105 Break-even sales (units) = Unit contribution margin Fixed costs$840,000 $105 8,000 units Calculating the Break-Even Point In Units The unit selling price is $250 and unit variable cost is $145. Fixed costs are $840,000.
  29. 29. Sales ($25 x ? units) $ ? Variable costs ($15 x ? units) ? Contribution margin $ ? Fixed costs 840,000 Income from operations $ 0 $250 145 $105 Break-even sales (units) = Unit contribution margin Fixed costs$840,000 $100 8,400 units $250 150 $100 Next, assume variable costs is increased by $5. Calculating the Break-Even Point In Units The unit selling price is $250 and unit variable cost is $145. Fixed costs are $840,000.
  30. 30. Sales $ ? Variable costs ? Contribution margin $ ? Fixed costs $600,000 Income from operations $ 0 Break-even sales (units) = Unit contribution margin Fixed costs$600,000 $20 30,000 units $50 30 $20 Calculating the Break-Even Point In Units A firm currently sells their product at $50 per unit and it has a related unit variable cost of $30. The fixed costs are $600,000.
  31. 31. Sales $ ? Variable costs ? Contribution margin $ ? Fixed costs $600,000 Income from operations $ 0 Break-even sales (units) = Unit contribution margin Fixed costs$600,000 $30 20,000 units $50 30 $20 $60 30 $30 Calculating the Break-Even Point In Units Management increases the selling price from $50 to $60.
  32. 32. Summary of Effects of Changes on Break-Even Point
  33. 33. Target Profit Fixed costs are estimated at $200,000, and the desired profit is $100,000. The unit selling price is $75 and the unit variable cost is $45. The firm wishes to make a $100,000 profit. Sales (? units) $ ? Variable costs ? Contribution margin $ ? Fixed costs 200,000 Income from operations $ 0 $75 45 $30 In Units
  34. 34. Sales (? units) $ ? Variable costs ? Contribution margin $ ? Fixed costs 200,000 Income from operations $ 0 Sales (units) = Unit contribution margin Fixed costs + target profit$200,000 + $100,000 $30 10,000 units Target Profit In Units $75 45 $30 Target profit is used here to refer to “Income from operations.”
  35. 35. $75 45 $30 Sales (10,000 units x $75) $750,000 Variable costs (10,000 x $45) 450,000 Contribution margin $300,000 Fixed costs 200,000 Income from operations $100,000 Proof that sales of 10,000 units will provide a profit of $100,000. Target Profit
  36. 36. Graphic Approach to Cost-Volume-Profit Analysis
  37. 37. Cost-Volume-Profit Chart SalesandCosts($000) 0 Units of Sales (000) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $ 20 Total fixed costs $100,000 60% Total Sales Variable Costs 1 2 3 4 5 6 7 8 9 10
  38. 38. Cost-Volume-Profit Chart SalesandCosts($000) 0 Units of Sales (000) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $ 20 Total fixed costs $100,000 60% 40% Contribution Margin 100% 60% 40% 1 2 3 4 5 6 7 8 9 10
  39. 39. Cost-Volume-Profit Chart SalesandCosts($000) 0 Units of Sales (000) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $ 20 Total fixed costs $100,000 Fixed Costs 100% 60% 40% Total Costs 1 2 3 4 5 6 7 8 9 10
  40. 40. Cost-Volume-Profit Chart SalesandCosts($000) 0 $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 1 2 3 4 5 6 7 8 9 10 Break-Even Point Units of Sales (000) Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $ 20 Total fixed costs $100,000 100% 60% 40% $100,000 $20 = 5,000 units
  41. 41. Cost-Volume-Profit Chart SalesandCosts($000) 0 Units of Sales (000) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $ 20 Total fixed costs $100,000 100% 60% 40% Operating Profit Area Operating Loss Area
  42. 42. $100 $75 $50 $25 $ 0 $(25) $(50) $(75) $(100) Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000 Units of Sales (000’s) 1 2 3 4 5 6 7 8 9 10 Relevant range is 10,000 units OperatingProfit (Loss)$000’s
  43. 43. Units of Sales (000’s) 1 2 3 4 5 6 7 8 9 10 Maximum loss is equal to the total fixed costs. Profit Line Operating loss Operating profit $100 $75 $50 $25 $ 0 $(25) $(50) $(75) $(100) Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000 Maximum profit within the relevant range. OperatingProfit (Loss)$000’s
  44. 44. OperatingProfit (Loss)$000’s Units of Sales (000’s) 1 2 3 4 5 6 7 8 9 10 Operating loss Operating profit Break-Even Point Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000 $100 $75 $50 $25 $ 0 $(25) $(50) $(75) $(100)
  45. 45. Sales Mix Considerations
  46. 46. Cascade Company sold 8,000 units of Product A and 2,000 units of Product B during the past year. Cascade Company’s fixed costs are $200,000. Other relevant data are as follows: Sales $ 90 $140 Variable costs 70 95 Contribution margin $ 20 $ 45 Sales mix 80% 20% Products A B
  47. 47. Sales $ 90 $140 Variable costs 70 95 Contribution margin $ 20 $ 45 Sales mix 80% 20% Sales Mix Considerations Products A B Product contribution margin $16 $ 9 $25 Fixed costs, $200,000
  48. 48. Sales Mix Considerations Products A BProduct contribution margin $16 $ 9 $25 Break-even sales units $200,000 $25 Fixed costs, $200,000
  49. 49. Sales Mix Considerations Products A BProduct contribution margin $16 $ 9 $25 Break-even sales units $200,000 $25 Fixed costs, $200,000 = 8,000 units
  50. 50. Sales Mix Considerations Products A BProduct contribution margin $16 $ 9 $25 A: 8,000 units x Sales Mix (80%) = 6,400 B: 8,000 units x Sales Mix (20%) = 1,600
  51. 51. PROOF Product A Product B Total Sales: 6,400 units x $90 $576,000 $576,000 1,600 units x $140 $224,000 224,000 Total sales $576,000 $224,000 $800,000 Variable costs: 6,400 x $70 $448,000 $448,000 1,600 x $95 $152,000 152,000 Total variable costs $448,000 $152,000 $600,000 Contribution margin $128,000 $ 72,000 $200,000 Fixed costs 200,000 Income from operations $ 0Break-even point
  52. 52. Margin of Safety
  53. 53. Margin of Safety = Sales – Sales at break-even point Sales The margin of safety indicates the possible decrease in sales that may occur before an operating loss results. Margin of Safety = $250,000 – $200,000 $250,000 Margin of Safety = 20%
  54. 54. Universidad Cuauhtémoc Campus Aguascalientes Questions? Análisis de Costos Maestría en Administración
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