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- 1. Universidad Cuauhtémoc Campus Aguascalientes Cost Behavior & Cost-Volume-Profit Analysis Análisis de Costos Maestría en Administración
- 2. Cost Behavior
- 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. 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. Unit Variable Cost Graph $20 $15 $10 $5 0 CostperUnit 10 20 30 Units Produced (000) Variable Cost
- 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. 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. 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. 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. 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. 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. The high-low method is a simple way to separate mixed costs into their fixed and variable components. Mixed Costs
- 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. What is the break-even point? Revenues Costs= Break-even
- 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. 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. 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. 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. 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. 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. Summary of Effects of Changes on Break-Even Point
- 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. 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. $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. Graphic Approach to Cost-Volume-Profit Analysis
- 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. 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. 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. 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. 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. $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. 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. 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. Sales Mix Considerations
- 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. 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. Sales Mix Considerations Products A BProduct contribution margin $16 $ 9 $25 Break-even sales units $200,000 $25 Fixed costs, $200,000
- 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. 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. 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. Margin of Safety
- 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. Universidad Cuauhtémoc Campus Aguascalientes Questions? Análisis de Costos Maestría en Administración

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