SlideShare a Scribd company logo
1 of 57
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Cost-Volume-Profit
Analysis
Chapter
19
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
CVP analysis is used to answer questions
such as:
 How much must I sell to earn my desired income?
 How will income be affected
if I reduce selling prices to
increase sales volume?
 What will happen to
profitability if I expand
capacity?
CVP analysis is used to answer questions
such as:
 How much must I sell to earn my desired income?
 How will income be affected
if I reduce selling prices to
increase sales volume?
 What will happen to
profitability if I expand
capacity?
Questions Addressed by
Cost-Volume-Profit Analysis
Questions Addressed by
Cost-Volume-Profit Analysis
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Number of Local Calls
MonthlyBasic
TelephoneBill
Total fixed costs remain unchanged
when activity changes.
Your monthly basic
telephone bill probably
does not change when
you make more local calls.
Total Fixed CostTotal Fixed Cost
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Number of Local Calls
MonthlyBasicTelephone
BillperLocalCall
Fixed costs per unit decline
as activity increases.
Your average cost per
local call decreases as
more local calls are made.
Fixed Cost Per UnitFixed Cost Per Unit
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Minutes Talked
TotalLongDistance
TelephoneBill
Total variable costs change
when activity changes.
Your total long distance
telephone bill is based
on how many minutes
you talk.
Total Variable CostTotal Variable Cost
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Minutes Talked
PerMinute
TelephoneCharge
Variable costs per unit do not change
as activity increases.
The cost per long distance
minute talked is constant.
For example, 10
cents per minute.
Variable Cost Per UnitVariable Cost Per Unit
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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.
Cost Behavior SummaryCost Behavior Summary
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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
Mixed CostsMixed Costs
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Variable
Utility Charge
Activity (Kilowatt Hours)
TotalUtilityCost
Total mixed cost
Fixed Monthly
Utility Charge
Slope is
variable cost
per unit
of activity.
Mixed CostsMixed Costs
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Activity
Cost
Total cost remains
constant within a
narrow range of
activity.
Stair-Step CostsStair-Step Costs
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Activity
Cost
Total cost increases to a
new higher cost for the
next higher range of
activity.
Stair-Step CostsStair-Step Costs
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
TotalCost
Relevant Range
A straight line
closely (constant
unit variable cost)
approximates a
curvilinear variable
cost line within
the relevant range.
Volume of Output
Curvilinear
Cost Function
Curvilinear CostsCurvilinear Costs
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Let’s extend our
knowledge of
cost behavior to
CVP analysis.
Cost-Volume-Profit
(CVP) Analysis
Cost-Volume-Profit
(CVP) Analysis
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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.
Computing Break-Even PointComputing Break-Even Point
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Contribution margin is amount by which revenue
exceeds the variable costs of producing the revenue.
Contribution margin is amount by which revenue
exceeds the variable costs of producing the revenue.
Total Unit
Sales Revenue (2,000 units) 100,000$ 50$
Less: Variable costs 60,000 30
Contribution margin 40,000$ 20$
Less: Fixed costs 30,000
Operating income 10,000$
Computing Break-Even PointComputing Break-Even Point
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
How much contribution margin must this company
have to cover its fixed costs (break even)?
How much contribution margin must this company
have to cover its fixed costs (break even)?
Total Unit
Sales Revenue (2,000 units) 100,000$ 50$
Less: Variable costs 60,000 30
Contribution margin 40,000$ 20$
Less: Fixed costs 30,000
Operating income 10,000$
Computing Break-Even PointComputing Break-Even Point
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
How much contribution margin must this company
have to cover its fixed costs (break even)?
Answer: $30,000
How much contribution margin must this company
have to cover its fixed costs (break even)?
Answer: $30,000
Total Unit
Sales Revenue (2,000 units) 100,000$ 50$
Less: Variable costs 60,000 30
Contribution margin 40,000$ 20$
Less: Fixed costs 30,000
Operating income 10,000$
Computing Break-Even PointComputing Break-Even Point
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
How many units must this company sell to cover its
fixed costs (break even)?
How many units must this company sell to cover its
fixed costs (break even)?
Total Unit
Sales Revenue (2,000 units) 100,000$ 50$
Less: Variable costs 60,000 30
Contribution margin 40,000$ 20$
Less: Fixed costs 30,000
Operating income 10,000$
Computing Break-Even PointComputing Break-Even Point
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
How many units must this company sell to cover its
fixed costs (break even)?
Answer: $30,000 ÷ $20 per unit = 1,500 units
How many units must this company sell to cover its
fixed costs (break even)?
Answer: $30,000 ÷ $20 per unit = 1,500 units
Total Unit
Sales Revenue (2,000 units) 100,000$ 50$
Less: Variable costs 60,000 30
Contribution margin 40,000$ 20$
Less: Fixed costs 30,000
Operating income 10,000$
Computing Break-Even PointComputing Break-Even Point
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
We have just seen one of the basic CVP
relationships – the break-even computation.
Break-even point in units =
Fixed costs
Contribution margin per unit
Finding the Break-Even Point
Unit sales price less unit variable cost
($20 in previous example)
Formula for Computing
Break-Even Sales (in Units)
Formula for Computing
Break-Even Sales (in Units)
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The break-even formula may also be
expressed in sales dollars.
Break-even point in dollars =
Fixed costs
Contribution margin ratio
Unit sales price
Unit variable cost
Formula for Computing
Break-Even Sales (in Dollars)
Formula for Computing
Break-Even Sales (in Dollars)
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
ABC Co. sells product XYZ at $5.00 per unit. If
fixed costs are $200,000 and variable costs are
$3.00 per unit, how many units must be sold to
break even?
a. 100,000 units
b. 40,000 units
c. 200,000 units
d. 66,667 units
ABC Co. sells product XYZ at $5.00 per unit. If
fixed costs are $200,000 and variable costs are
$3.00 per unit, how many units must be sold to
break even?
a. 100,000 units
b. 40,000 units
c. 200,000 units
d. 66,667 units
Computing Break-Even Sales
Question 1
Computing Break-Even Sales
Question 1
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
ABC Co. sells product XYZ at $5.00 per unit. If
fixed costs are $200,000 and variable costs are
$3.00 per unit, how many units must be sold to
break even?
a. 100,000 units
b. 40,000 units
c. 200,000 units
d. 66,667 units
ABC Co. sells product XYZ at $5.00 per unit. If
fixed costs are $200,000 and variable costs are
$3.00 per unit, how many units must be sold to
break even?
a. 100,000 units
b. 40,000 units
c. 200,000 units
d. 66,667 units
Unit contribution = $5.00 - $3.00 = $2.00
Fixed costs
Unit contribution
=
$200,000
$2.00 per unit
= 100,000 units
Computing Break-Even Sales
Question 1
Computing Break-Even Sales
Question 1
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Use the contribution margin ratio formula to
determine the amount of sales revenue ABC must
have to break even. All information remains
unchanged: fixed costs are $200,000; unit sales
price is $5.00; and unit variable cost is $3.00.
a. $200,000
b. $300,000
c. $400,000
d. $500,000
Use the contribution margin ratio formula to
determine the amount of sales revenue ABC must
have to break even. All information remains
unchanged: fixed costs are $200,000; unit sales
price is $5.00; and unit variable cost is $3.00.
a. $200,000
b. $300,000
c. $400,000
d. $500,000
Computing Break-Even Sales
Question 2
Computing Break-Even Sales
Question 2
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Use the contribution margin ratio formula to
determine the amount of sales revenue ABC must
have to break even. All information remains
unchanged: fixed costs are $200,000; unit sales
price is $5.00; and unit variable cost is $3.00.
a. $200,000
b. $300,000
c. $400,000
d. $500,000
Use the contribution margin ratio formula to
determine the amount of sales revenue ABC must
have to break even. All information remains
unchanged: fixed costs are $200,000; unit sales
price is $5.00; and unit variable cost is $3.00.
a. $200,000
b. $300,000
c. $400,000
d. $500,000
Unit contribution = $5.00 - $3.00 = $2.00
Contribution margin ratio = $2.00 ÷ $5.00 = .40
Break-even revenue = $200,000 ÷ .4 = $500,000
Computing Break-Even Sales
Question 2
Computing Break-Even Sales
Question 2
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Volume in Units
CostsandRevenue
inDollars
Revenue
 Starting at the origin, draw the total revenue
line with a slope equal to the unit sales price.
Total fixed cost
 Total fixed cost
extends horizontally
from the vertical axis.
Preparing a CVP GraphPreparing a CVP Graph
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Total cost
Volume in Units
CostsandRevenue
inDollars
Total fixed cost
Break-even
Point
Profit
Loss
 Draw the total cost line with a slope
equal to the unit variable cost. Revenue
Preparing a CVP GraphPreparing a CVP Graph
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Break-even formulas may be adjusted to
show the sales volume needed to earn
any amount of operating income.
Break-even formulas may be adjusted to
show the sales volume needed to earn
any amount of operating income.
Unit sales =
Fixed costs + Target income
Contribution margin per unit
Dollar sales =
Fixed costs + Target income
Contribution margin ratio
Computing Sales Needed to
Achieve Target Operating Income
Computing Sales Needed to
Achieve Target Operating Income
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
ABC Co. sells product XYZ at $5.00 per unit. If
fixed costs are $200,000 and variable costs
are $3.00 per unit, how many units must be
sold to earn operating income of $40,000?
a. 100,000 units
b. 120,000 units
c. 80,000 units
d. 200,000 units
ABC Co. sells product XYZ at $5.00 per unit. If
fixed costs are $200,000 and variable costs
are $3.00 per unit, how many units must be
sold to earn operating income of $40,000?
a. 100,000 units
b. 120,000 units
c. 80,000 units
d. 200,000 units
Computing Sales Needed to
Achieve Target Operating Income
Computing Sales Needed to
Achieve Target Operating Income
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
ABC Co. sells product XYZ at $5.00 per unit. If
fixed costs are $200,000 and variable costs
are $3.00 per unit, how many units must be
sold to earn operating income of $40,000?
a. 100,000 units
b. 120,000 units
c. 80,000 units
d. 200,000 units
ABC Co. sells product XYZ at $5.00 per unit. If
fixed costs are $200,000 and variable costs
are $3.00 per unit, how many units must be
sold to earn operating income of $40,000?
a. 100,000 units
b. 120,000 units
c. 80,000 units
d. 200,000 units = 120,000 units
Unit contribution = $5.00 - $3.00 = $2.00
Fixed costs + Target income
Unit contribution
$200,000 + $40,000
$2.00 per unit
Computing Sales Needed to
Achieve Target Operating Income
Computing Sales Needed to
Achieve Target Operating Income
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Margin of safety is the amount by which sales may
decline before reaching break-even sales:
Margin of safety provides a quick means of
estimating operating income at any level of sales:
Margin of safety = Actual sales - Break-even sales
Operating Margin Contribution
Income of safety margin ratio= ×
What is our Margin of Safety?What is our Margin of Safety?
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Oxco’s contribution margin ratio is 40
percent. If sales are $100,000 and break-
even sales are $80,000, what is operating
income?
Operating Margin Contribution
Income of safety margin ratio= ×
Operating
Income = $20,000 × .40 = $8,000
What is our Margin of Safety?What is our Margin of Safety?
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Once break-even is reached, every additional dollar
of contribution margin becomes operating income:
Oxco expects sales to increase by $15,000. How
much will operating income increase?
Change in
operating income = $15,000 × .40 = $6,000
Change in Change in Contribution
operating income sales volume margin ratio= ×
What Change in Operating Income
Do We Anticipate?
What Change in Operating Income
Do We Anticipate?
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Business Applications of CVPBusiness Applications of CVP
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Total Per Unit Percent
Sales (500 bikes) 250,000$ 500$ 100%
Less: variable expenses 150,000 300 60%
Contribution margin 100,000$ 200$ 40%
Less: fixed expenses 80,000
Operating income 20,000$
Consider the following information
developed by the accountant at CyclCo, a
bicycle retailer:
Business Applications of CVPBusiness Applications of CVP
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Should CyclCo spend $12,000 on
advertising to increase sales by 10 percent?
Total Per Unit Percent
Sales (500 bikes) 250,000$ 500$ 100%
Less: variable expenses 150,000 300 60%
Contribution margin 100,000$ 200$ 40%
Less: fixed expenses 80,000
Operating income 20,000$
Business Applications of CVPBusiness Applications of CVP
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
500 550
Bikes Bikes
Sales 250,000$ 275,000$
Less: variable expenses 150,000 165,000
Contribution margin 100,000$ 110,000$
Less: fixed expenses 80,000 92,000
Operating income 20,000$ 18,000$
550 × $300
$80K + $12K
No, income is decreased.
550 × $500
Business Applications of CVPBusiness Applications of CVP
Should CyclCo spend $12,000 on
advertising to increase sales by 10 percent?
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
500
Bikes
Sales 250,000$
Less: variable expenses 150,000
Contribution margin 100,000$
Less: fixed expenses 80,000
Operating income 20,000$
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?
Business Applications of CVPBusiness Applications of CVP
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
500 625
Bikes Bikes
Sales 250,000$ 281,250$
Less: variable expenses 150,000 187,500
Contribution margin 100,000$ 93,750$
Less: fixed expenses 80,000 92,000
Operating income 20,000$ 1,750$
625 × $300
$80K + $12K
Income is decreased even more.
625 × $450
Now, in combination with the advertising,
CyclCo is considering a 10 percent price reduction that will
increase sales by 25 percent. What is the income effect?
1.25 × 500
Business Applications of CVPBusiness Applications of CVP
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
500
Bikes
Sales 250,000$
Less: variable expenses 150,000
Contribution margin 100,000$
Less: fixed expenses 80,000
Operating income 20,000$
Business Applications of CVPBusiness Applications of CVP
Now, in combination with advertising and a price cut, CyclCo
will replace $50,000 in sales salaries with a $25 per bike
commission, increasing sales by 50 percent above the
original 500 bikes. What is the effect on income?
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
500 750
Bikes Bikes
Sales 250,000$ 337,500$
Less: variable expenses 150,000 243,750
Contribution margin 100,000$ 93,750$
Less: fixed expenses 80,000 42,000
Operating income 20,000$ 51,750$
The combination of advertising, a price cut,
and change in compensation increases income.
750 × $325
$92K - $50K
750 × $450
Business Applications of CVPBusiness Applications of CVP
Now, in combination with advertising and a price cut, CyclCo
will replace $50,000 in sales salaries with a $25 per bike
commission, increasing sales by 50 percent above the
original 500 bikes. What is the effect on income?
1.5 × 500
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
 Different products with
different contribution margins.
 Determining semivariable
cost elements.
 Complying with the
assumptions of CVP analysis.
Additional Considerations in CVPAdditional Considerations in CVP
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Sales mix is the relative combination in which
a company’s different products are sold.
Different products have different selling
prices, costs, and contribution margins.
If CyclCo sells bikes and carts, how
will we deal with break-even analysis?
Sales mix is the relative combination in which
a company’s different products are sold.
Different products have different selling
prices, costs, and contribution margins.
If CyclCo sells bikes and carts, how
will we deal with break-even analysis?
CVP Analysis When a Company
Sells Many Products
CVP Analysis When a Company
Sells Many Products
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
CyclCo provides us with the following
information:
Bikes Carts Total
Sales 250,000$ 100% 300,000$ 100% 550,000$ 100%
Var. exp. 150,000 60% 135,000 45% 285,000 52%
Contrib. margin 100,000$ 40% 165,000$ 55% 265,000$ 48%
Fixed exp. 170,000
Net income 95,000$
CVP Analysis When a Company
Sells Many Products
CVP Analysis When a Company
Sells Many Products
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
The overall contribution margin ratio is:
$265,000
$550,000
= 48% (rounded)
Bikes Carts Total
Sales 250,000$ 100% 300,000$ 100% 550,000$ 100%
Var. exp. 150,000 60% 135,000 45% 285,000 52%
Contrib. margin 100,000$ 40% 165,000$ 55% 265,000$ 48%
Fixed exp. 170,000
Net income 95,000$
CVP Analysis When a Company
Sells Many Products
CVP Analysis When a Company
Sells Many Products
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Break-even in sales dollars is:
$170,000
.48
= $354,167 (rounded)
Bikes Carts Total
Sales 250,000$ 100% 300,000$ 100% 550,000$ 100%
Var. exp. 150,000 60% 135,000 45% 285,000 52%
Contrib. margin 100,000$ 40% 165,000$ 55% 265,000$ 48%
Fixed exp. 170,000
Operating income 95,000$
CVP Analysis When a Company
Sells Many Products
CVP Analysis When a Company
Sells Many Products
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
OwlCo recorded the following production activity
and maintenance costs for two months:
Using these two levels of activity, compute:
 the variable cost per unit.
 the total fixed cost.
 total cost formula.
Units Cost
High activity level 9,000 9,700$
Low activity level 5,000 6,100
Change 4,000 3,600$
The High-Low MethodThe High-Low Method
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Units Cost
High activity level 9,000 9,700$
Low activity level 5,000 6,100
Change 4,000 3,600$
 Unit variable cost = = = $0.90 per unit
∆ in cost
∆ in units
$3,600
4,000
The High-Low MethodThe High-Low Method
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Units Cost
High activity level 9,000 9,700$
Low activity level 5,000 6,100
Change 4,000 3,600$
 Unit variable cost = = = $0.90 per unit
 Fixed cost = Total cost – Total variable cost
∆ in cost
∆ in units
$3,600
4,000
The High-Low MethodThe High-Low Method
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Units Cost
High activity level 9,000 9,700$
Low activity level 5,000 6,100
Change 4,000 3,600$
 Unit variable cost = = = $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
∆ in cost
∆ in units
$3,600
4,000
The High-Low MethodThe High-Low Method
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Units Cost
High activity level 9,000 9,700$
Low activity level 5,000 6,100
Change 4,000 3,600$
 Unit variable cost = = = $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
∆ in cost
∆ in units
$3,600
4,000
The High-Low MethodThe High-Low Method
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
If sales commissions are $10,000 when 80,000 units
are sold and $14,000 when 120,000 units are sold,
what is the variable portion of sales commission per
unit sold?
a. $.08 per unit
b. $.10 per unit
c. $.12 per unit
d. $.125 per unit
If sales commissions are $10,000 when 80,000 units
are sold and $14,000 when 120,000 units are sold,
what is the variable portion of sales commission per
unit sold?
a. $.08 per unit
b. $.10 per unit
c. $.12 per unit
d. $.125 per unit
The High-Low Method
Question 1
The High-Low Method
Question 1
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
If sales commissions are $10,000 when 80,000 units
are sold and $14,000 when 120,000 units are sold,
what is the variable portion of sales commission per
unit sold?
a. $.08 per unit
b. $.10 per unit
c. $.12 per unit
d. $.125 per unit
If sales commissions are $10,000 when 80,000 units
are sold and $14,000 when 120,000 units are sold,
what is the variable portion of sales commission per
unit sold?
a. $.08 per unit
b. $.10 per unit
c. $.12 per unit
d. $.125 per unit $4,000 ÷ 40,000 units
= $.10 per unit
Units Cost
High level 120,000 14,000$
Low level 80,000 10,000
Change 40,000 4,000$
The High-Low Method
Question 1
The High-Low Method
Question 1
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
If sales commissions are $10,000 when 80,000 units
are sold and $14,000 when 120,000 units are sold,
what is the fixed portion of the sales commission?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
If sales commissions are $10,000 when 80,000 units
are sold and $14,000 when 120,000 units are sold,
what is the fixed portion of the sales commission?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
The High-Low Method
Question 2
The High-Low Method
Question 2
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
If sales commissions are $10,000 when 80,000 units
are sold and $14,000 when 120,000 units are sold,
what is the fixed portion of the sales commission?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
If sales commissions are $10,000 when 80,000 units
are sold and $14,000 when 120,000 units are sold,
what is the fixed portion of the sales commission?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $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 High-Low Method
Question 2
The High-Low Method
Question 2
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
 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).
Assumptions Underlying
CVP Analysis
Assumptions Underlying
CVP Analysis
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
End of Chapter 19End of Chapter 19

More Related Content

What's hot

Managerial Accounting Garrison Noreen Brewer Chapter 01Managerial Accounting ...
Managerial Accounting Garrison Noreen Brewer Chapter 01Managerial Accounting ...Managerial Accounting Garrison Noreen Brewer Chapter 01Managerial Accounting ...
Managerial Accounting Garrison Noreen Brewer Chapter 01Managerial Accounting ...Asif Hasan
 
ccounting by Meigs & Meigs
ccounting by Meigs & Meigs ccounting by Meigs & Meigs
ccounting by Meigs & Meigs Shakeel Ahmed
 
Managerial Accounting Garrison Noreen Brewer Chapter 02
Managerial Accounting Garrison Noreen Brewer Chapter 02Managerial Accounting Garrison Noreen Brewer Chapter 02
Managerial Accounting Garrison Noreen Brewer Chapter 02Asif Hasan
 
Managerial Accounting Garrison Noreen Brewer Chapter 10
Managerial Accounting Garrison Noreen Brewer Chapter 10Managerial Accounting Garrison Noreen Brewer Chapter 10
Managerial Accounting Garrison Noreen Brewer Chapter 10Asif Hasan
 
Managerial Accounting Garrison Noreen Brewer Chapter 03
Managerial Accounting Garrison Noreen Brewer Chapter 03Managerial Accounting Garrison Noreen Brewer Chapter 03
Managerial Accounting Garrison Noreen Brewer Chapter 03Asif Hasan
 
| Managerial Accounting | Chapter 7 | Systems Design: Activity-Based Costing ...
| Managerial Accounting | Chapter 7 | Systems Design: Activity-Based Costing ...| Managerial Accounting | Chapter 7 | Systems Design: Activity-Based Costing ...
| Managerial Accounting | Chapter 7 | Systems Design: Activity-Based Costing ...Ahmad Hassan
 
Managerial Accounting Garrison Noreen Brewer Chapter 05
Managerial Accounting Garrison Noreen Brewer Chapter 05Managerial Accounting Garrison Noreen Brewer Chapter 05
Managerial Accounting Garrison Noreen Brewer Chapter 05Asif Hasan
 
Managerial Accounting Garrison Noreen Brewer Chapter 04
Managerial Accounting Garrison Noreen Brewer Chapter 04Managerial Accounting Garrison Noreen Brewer Chapter 04
Managerial Accounting Garrison Noreen Brewer Chapter 04Asif Hasan
 

What's hot (17)

Gnb 11 12e
Gnb 11 12eGnb 11 12e
Gnb 11 12e
 
Gnb 06 12e
Gnb 06 12eGnb 06 12e
Gnb 06 12e
 
Gnb 02 12e
Gnb 02 12eGnb 02 12e
Gnb 02 12e
 
Gnb 07 12e
Gnb 07 12eGnb 07 12e
Gnb 07 12e
 
Gnb 05 12e
Gnb 05 12eGnb 05 12e
Gnb 05 12e
 
Gnb 10 12e
Gnb 10 12eGnb 10 12e
Gnb 10 12e
 
Managerial Accounting Garrison Noreen Brewer Chapter 01Managerial Accounting ...
Managerial Accounting Garrison Noreen Brewer Chapter 01Managerial Accounting ...Managerial Accounting Garrison Noreen Brewer Chapter 01Managerial Accounting ...
Managerial Accounting Garrison Noreen Brewer Chapter 01Managerial Accounting ...
 
ccounting by Meigs & Meigs
ccounting by Meigs & Meigs ccounting by Meigs & Meigs
ccounting by Meigs & Meigs
 
Chap001
Chap001Chap001
Chap001
 
Managerial Accounting Garrison Noreen Brewer Chapter 02
Managerial Accounting Garrison Noreen Brewer Chapter 02Managerial Accounting Garrison Noreen Brewer Chapter 02
Managerial Accounting Garrison Noreen Brewer Chapter 02
 
Managerial Accounting Garrison Noreen Brewer Chapter 10
Managerial Accounting Garrison Noreen Brewer Chapter 10Managerial Accounting Garrison Noreen Brewer Chapter 10
Managerial Accounting Garrison Noreen Brewer Chapter 10
 
Whbm08
Whbm08Whbm08
Whbm08
 
Whbm09
Whbm09Whbm09
Whbm09
 
Managerial Accounting Garrison Noreen Brewer Chapter 03
Managerial Accounting Garrison Noreen Brewer Chapter 03Managerial Accounting Garrison Noreen Brewer Chapter 03
Managerial Accounting Garrison Noreen Brewer Chapter 03
 
| Managerial Accounting | Chapter 7 | Systems Design: Activity-Based Costing ...
| Managerial Accounting | Chapter 7 | Systems Design: Activity-Based Costing ...| Managerial Accounting | Chapter 7 | Systems Design: Activity-Based Costing ...
| Managerial Accounting | Chapter 7 | Systems Design: Activity-Based Costing ...
 
Managerial Accounting Garrison Noreen Brewer Chapter 05
Managerial Accounting Garrison Noreen Brewer Chapter 05Managerial Accounting Garrison Noreen Brewer Chapter 05
Managerial Accounting Garrison Noreen Brewer Chapter 05
 
Managerial Accounting Garrison Noreen Brewer Chapter 04
Managerial Accounting Garrison Noreen Brewer Chapter 04Managerial Accounting Garrison Noreen Brewer Chapter 04
Managerial Accounting Garrison Noreen Brewer Chapter 04
 

Similar to Whbm19

Management consultancy-chapter-26-and-35
Management consultancy-chapter-26-and-35Management consultancy-chapter-26-and-35
Management consultancy-chapter-26-and-35Holy Cross College
 
chap07notes.pdf
chap07notes.pdfchap07notes.pdf
chap07notes.pdfEllamae79
 
appendixanotes.ppt
appendixanotes.pptappendixanotes.ppt
appendixanotes.pptEllamae79
 
EGT267 Programming for Engineering Applications Spring 2020 .docx
EGT267 Programming for Engineering Applications Spring 2020 .docxEGT267 Programming for Engineering Applications Spring 2020 .docx
EGT267 Programming for Engineering Applications Spring 2020 .docxgidmanmary
 
chap06notes.pdf
chap06notes.pdfchap06notes.pdf
chap06notes.pdfEllamae79
 
Managerial Accounting Garrison Noreen Brewer Chapter 07
Managerial Accounting Garrison Noreen Brewer Chapter 07Managerial Accounting Garrison Noreen Brewer Chapter 07
Managerial Accounting Garrison Noreen Brewer Chapter 07Asif Hasan
 
Hansen aise im ch11
Hansen aise im ch11Hansen aise im ch11
Hansen aise im ch11Daeng Aiman
 
Marginal costing -_final_module
Marginal costing -_final_moduleMarginal costing -_final_module
Marginal costing -_final_moduleShreejesh Mohan
 
Lecture 15 CVP analysis_ Breakeven point.pptx
Lecture 15 CVP analysis_ Breakeven point.pptxLecture 15 CVP analysis_ Breakeven point.pptx
Lecture 15 CVP analysis_ Breakeven point.pptxchetan771658
 
Chap022.ppt
Chap022.pptChap022.ppt
Chap022.pptredagad2
 

Similar to Whbm19 (20)

yrtyt
yrtytyrtyt
yrtyt
 
Ch-06 CVP.ppt.pdf
Ch-06 CVP.ppt.pdfCh-06 CVP.ppt.pdf
Ch-06 CVP.ppt.pdf
 
Management consultancy-chapter-26-and-35
Management consultancy-chapter-26-and-35Management consultancy-chapter-26-and-35
Management consultancy-chapter-26-and-35
 
chap07notes.pdf
chap07notes.pdfchap07notes.pdf
chap07notes.pdf
 
Whbm2
Whbm2Whbm2
Whbm2
 
B4 biaya profit_volume
B4 biaya profit_volumeB4 biaya profit_volume
B4 biaya profit_volume
 
B8 relevan cost
B8 relevan costB8 relevan cost
B8 relevan cost
 
appendixanotes.ppt
appendixanotes.pptappendixanotes.ppt
appendixanotes.ppt
 
EGT267 Programming for Engineering Applications Spring 2020 .docx
EGT267 Programming for Engineering Applications Spring 2020 .docxEGT267 Programming for Engineering Applications Spring 2020 .docx
EGT267 Programming for Engineering Applications Spring 2020 .docx
 
chap06notes.pdf
chap06notes.pdfchap06notes.pdf
chap06notes.pdf
 
Managerial Accounting Garrison Noreen Brewer Chapter 07
Managerial Accounting Garrison Noreen Brewer Chapter 07Managerial Accounting Garrison Noreen Brewer Chapter 07
Managerial Accounting Garrison Noreen Brewer Chapter 07
 
Break Even Analysis
Break Even AnalysisBreak Even Analysis
Break Even Analysis
 
CVP analysis
CVP analysis CVP analysis
CVP analysis
 
Hansen aise im ch11
Hansen aise im ch11Hansen aise im ch11
Hansen aise im ch11
 
yuty
yutyyuty
yuty
 
Sppt chap007
Sppt chap007Sppt chap007
Sppt chap007
 
Marginal costing -_final_module
Marginal costing -_final_moduleMarginal costing -_final_module
Marginal costing -_final_module
 
Lecture 15 CVP analysis_ Breakeven point.pptx
Lecture 15 CVP analysis_ Breakeven point.pptxLecture 15 CVP analysis_ Breakeven point.pptx
Lecture 15 CVP analysis_ Breakeven point.pptx
 
Chap022.ppt
Chap022.pptChap022.ppt
Chap022.ppt
 
B3 perilaku biaya
B3 perilaku biayaB3 perilaku biaya
B3 perilaku biaya
 

More from PMAS UIIT Rawalpindi (16)

Whbm18
Whbm18Whbm18
Whbm18
 
Whbm16
Whbm16Whbm16
Whbm16
 
Whbm14
Whbm14Whbm14
Whbm14
 
Whbm13
Whbm13Whbm13
Whbm13
 
Whbm12
Whbm12Whbm12
Whbm12
 
Whbm10
Whbm10Whbm10
Whbm10
 
Whbm09
Whbm09Whbm09
Whbm09
 
Whbm08
Whbm08Whbm08
Whbm08
 
Whbm07
Whbm07Whbm07
Whbm07
 
Whbm06
Whbm06Whbm06
Whbm06
 
Whbm05
Whbm05Whbm05
Whbm05
 
Whbm04
Whbm04Whbm04
Whbm04
 
Whbm04
Whbm04Whbm04
Whbm04
 
Whbm03
Whbm03Whbm03
Whbm03
 
Whbm02
Whbm02Whbm02
Whbm02
 
Whbm01
Whbm01Whbm01
Whbm01
 

Recently uploaded

18-04-UA_REPORT_MEDIALITERAСY_INDEX-DM_23-1-final-eng.pdf
18-04-UA_REPORT_MEDIALITERAСY_INDEX-DM_23-1-final-eng.pdf18-04-UA_REPORT_MEDIALITERAСY_INDEX-DM_23-1-final-eng.pdf
18-04-UA_REPORT_MEDIALITERAСY_INDEX-DM_23-1-final-eng.pdfssuser54595a
 
Historical philosophical, theoretical, and legal foundations of special and i...
Historical philosophical, theoretical, and legal foundations of special and i...Historical philosophical, theoretical, and legal foundations of special and i...
Historical philosophical, theoretical, and legal foundations of special and i...jaredbarbolino94
 
Introduction to AI in Higher Education_draft.pptx
Introduction to AI in Higher Education_draft.pptxIntroduction to AI in Higher Education_draft.pptx
Introduction to AI in Higher Education_draft.pptxpboyjonauth
 
Hierarchy of management that covers different levels of management
Hierarchy of management that covers different levels of managementHierarchy of management that covers different levels of management
Hierarchy of management that covers different levels of managementmkooblal
 
call girls in Kamla Market (DELHI) 🔝 >༒9953330565🔝 genuine Escort Service 🔝✔️✔️
call girls in Kamla Market (DELHI) 🔝 >༒9953330565🔝 genuine Escort Service 🔝✔️✔️call girls in Kamla Market (DELHI) 🔝 >༒9953330565🔝 genuine Escort Service 🔝✔️✔️
call girls in Kamla Market (DELHI) 🔝 >༒9953330565🔝 genuine Escort Service 🔝✔️✔️9953056974 Low Rate Call Girls In Saket, Delhi NCR
 
Proudly South Africa powerpoint Thorisha.pptx
Proudly South Africa powerpoint Thorisha.pptxProudly South Africa powerpoint Thorisha.pptx
Proudly South Africa powerpoint Thorisha.pptxthorishapillay1
 
Computed Fields and api Depends in the Odoo 17
Computed Fields and api Depends in the Odoo 17Computed Fields and api Depends in the Odoo 17
Computed Fields and api Depends in the Odoo 17Celine George
 
Roles & Responsibilities in Pharmacovigilance
Roles & Responsibilities in PharmacovigilanceRoles & Responsibilities in Pharmacovigilance
Roles & Responsibilities in PharmacovigilanceSamikshaHamane
 
Presiding Officer Training module 2024 lok sabha elections
Presiding Officer Training module 2024 lok sabha electionsPresiding Officer Training module 2024 lok sabha elections
Presiding Officer Training module 2024 lok sabha electionsanshu789521
 
CARE OF CHILD IN INCUBATOR..........pptx
CARE OF CHILD IN INCUBATOR..........pptxCARE OF CHILD IN INCUBATOR..........pptx
CARE OF CHILD IN INCUBATOR..........pptxGaneshChakor2
 
Pharmacognosy Flower 3. Compositae 2023.pdf
Pharmacognosy Flower 3. Compositae 2023.pdfPharmacognosy Flower 3. Compositae 2023.pdf
Pharmacognosy Flower 3. Compositae 2023.pdfMahmoud M. Sallam
 
Painted Grey Ware.pptx, PGW Culture of India
Painted Grey Ware.pptx, PGW Culture of IndiaPainted Grey Ware.pptx, PGW Culture of India
Painted Grey Ware.pptx, PGW Culture of IndiaVirag Sontakke
 
Alper Gobel In Media Res Media Component
Alper Gobel In Media Res Media ComponentAlper Gobel In Media Res Media Component
Alper Gobel In Media Res Media ComponentInMediaRes1
 
Software Engineering Methodologies (overview)
Software Engineering Methodologies (overview)Software Engineering Methodologies (overview)
Software Engineering Methodologies (overview)eniolaolutunde
 
Full Stack Web Development Course for Beginners
Full Stack Web Development Course  for BeginnersFull Stack Web Development Course  for Beginners
Full Stack Web Development Course for BeginnersSabitha Banu
 
Incoming and Outgoing Shipments in 1 STEP Using Odoo 17
Incoming and Outgoing Shipments in 1 STEP Using Odoo 17Incoming and Outgoing Shipments in 1 STEP Using Odoo 17
Incoming and Outgoing Shipments in 1 STEP Using Odoo 17Celine George
 
ECONOMIC CONTEXT - LONG FORM TV DRAMA - PPT
ECONOMIC CONTEXT - LONG FORM TV DRAMA - PPTECONOMIC CONTEXT - LONG FORM TV DRAMA - PPT
ECONOMIC CONTEXT - LONG FORM TV DRAMA - PPTiammrhaywood
 
“Oh GOSH! Reflecting on Hackteria's Collaborative Practices in a Global Do-It...
“Oh GOSH! Reflecting on Hackteria's Collaborative Practices in a Global Do-It...“Oh GOSH! Reflecting on Hackteria's Collaborative Practices in a Global Do-It...
“Oh GOSH! Reflecting on Hackteria's Collaborative Practices in a Global Do-It...Marc Dusseiller Dusjagr
 

Recently uploaded (20)

18-04-UA_REPORT_MEDIALITERAСY_INDEX-DM_23-1-final-eng.pdf
18-04-UA_REPORT_MEDIALITERAСY_INDEX-DM_23-1-final-eng.pdf18-04-UA_REPORT_MEDIALITERAСY_INDEX-DM_23-1-final-eng.pdf
18-04-UA_REPORT_MEDIALITERAСY_INDEX-DM_23-1-final-eng.pdf
 
Historical philosophical, theoretical, and legal foundations of special and i...
Historical philosophical, theoretical, and legal foundations of special and i...Historical philosophical, theoretical, and legal foundations of special and i...
Historical philosophical, theoretical, and legal foundations of special and i...
 
Introduction to AI in Higher Education_draft.pptx
Introduction to AI in Higher Education_draft.pptxIntroduction to AI in Higher Education_draft.pptx
Introduction to AI in Higher Education_draft.pptx
 
Hierarchy of management that covers different levels of management
Hierarchy of management that covers different levels of managementHierarchy of management that covers different levels of management
Hierarchy of management that covers different levels of management
 
call girls in Kamla Market (DELHI) 🔝 >༒9953330565🔝 genuine Escort Service 🔝✔️✔️
call girls in Kamla Market (DELHI) 🔝 >༒9953330565🔝 genuine Escort Service 🔝✔️✔️call girls in Kamla Market (DELHI) 🔝 >༒9953330565🔝 genuine Escort Service 🔝✔️✔️
call girls in Kamla Market (DELHI) 🔝 >༒9953330565🔝 genuine Escort Service 🔝✔️✔️
 
Proudly South Africa powerpoint Thorisha.pptx
Proudly South Africa powerpoint Thorisha.pptxProudly South Africa powerpoint Thorisha.pptx
Proudly South Africa powerpoint Thorisha.pptx
 
Model Call Girl in Bikash Puri Delhi reach out to us at 🔝9953056974🔝
Model Call Girl in Bikash Puri  Delhi reach out to us at 🔝9953056974🔝Model Call Girl in Bikash Puri  Delhi reach out to us at 🔝9953056974🔝
Model Call Girl in Bikash Puri Delhi reach out to us at 🔝9953056974🔝
 
Computed Fields and api Depends in the Odoo 17
Computed Fields and api Depends in the Odoo 17Computed Fields and api Depends in the Odoo 17
Computed Fields and api Depends in the Odoo 17
 
Roles & Responsibilities in Pharmacovigilance
Roles & Responsibilities in PharmacovigilanceRoles & Responsibilities in Pharmacovigilance
Roles & Responsibilities in Pharmacovigilance
 
Presiding Officer Training module 2024 lok sabha elections
Presiding Officer Training module 2024 lok sabha electionsPresiding Officer Training module 2024 lok sabha elections
Presiding Officer Training module 2024 lok sabha elections
 
CARE OF CHILD IN INCUBATOR..........pptx
CARE OF CHILD IN INCUBATOR..........pptxCARE OF CHILD IN INCUBATOR..........pptx
CARE OF CHILD IN INCUBATOR..........pptx
 
Pharmacognosy Flower 3. Compositae 2023.pdf
Pharmacognosy Flower 3. Compositae 2023.pdfPharmacognosy Flower 3. Compositae 2023.pdf
Pharmacognosy Flower 3. Compositae 2023.pdf
 
Model Call Girl in Tilak Nagar Delhi reach out to us at 🔝9953056974🔝
Model Call Girl in Tilak Nagar Delhi reach out to us at 🔝9953056974🔝Model Call Girl in Tilak Nagar Delhi reach out to us at 🔝9953056974🔝
Model Call Girl in Tilak Nagar Delhi reach out to us at 🔝9953056974🔝
 
Painted Grey Ware.pptx, PGW Culture of India
Painted Grey Ware.pptx, PGW Culture of IndiaPainted Grey Ware.pptx, PGW Culture of India
Painted Grey Ware.pptx, PGW Culture of India
 
Alper Gobel In Media Res Media Component
Alper Gobel In Media Res Media ComponentAlper Gobel In Media Res Media Component
Alper Gobel In Media Res Media Component
 
Software Engineering Methodologies (overview)
Software Engineering Methodologies (overview)Software Engineering Methodologies (overview)
Software Engineering Methodologies (overview)
 
Full Stack Web Development Course for Beginners
Full Stack Web Development Course  for BeginnersFull Stack Web Development Course  for Beginners
Full Stack Web Development Course for Beginners
 
Incoming and Outgoing Shipments in 1 STEP Using Odoo 17
Incoming and Outgoing Shipments in 1 STEP Using Odoo 17Incoming and Outgoing Shipments in 1 STEP Using Odoo 17
Incoming and Outgoing Shipments in 1 STEP Using Odoo 17
 
ECONOMIC CONTEXT - LONG FORM TV DRAMA - PPT
ECONOMIC CONTEXT - LONG FORM TV DRAMA - PPTECONOMIC CONTEXT - LONG FORM TV DRAMA - PPT
ECONOMIC CONTEXT - LONG FORM TV DRAMA - PPT
 
“Oh GOSH! Reflecting on Hackteria's Collaborative Practices in a Global Do-It...
“Oh GOSH! Reflecting on Hackteria's Collaborative Practices in a Global Do-It...“Oh GOSH! Reflecting on Hackteria's Collaborative Practices in a Global Do-It...
“Oh GOSH! Reflecting on Hackteria's Collaborative Practices in a Global Do-It...
 

Whbm19

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