The document discusses cost-volume-profit (CVP) analysis, which examines how sales volume, price, costs, and profitability interact. CVP analysis uses models to help managers make decisions about marketing, production, investment, and financing. The one-product CVP model calculates net income as the difference between total revenue and total costs. It can be used to determine the break-even point and target profits. For companies with multiple products, the CVP model is modified to account for different sales volumes and costs across products. Operating leverage measures how sensitive operating income is to changes in sales volume.
Bab 12 membahas pengambilan keputusan taktis yang terdiri atas pemilihan alternatif dengan hasil langsung atau terbatas. Keputusan harus mencapai tujuan jangka panjang dan meningkatkan daya saing. Proses pengambilan keputusan meliputi 6 langkah yaitu mendefinisikan masalah, mengidentifikasi alternatif, mengidentifikasi biaya dan manfaat, menghitung total biaya dan manfaat, menilai faktor kualitatif, dan
This document discusses cost-volume-profit (CVP) analysis and how it can be used to analyze the relationship between costs, sales, and profits. It defines the breakeven point as the level of sales where total revenue equals total costs. The document provides examples of using CVP analysis to calculate breakeven points, target profits, and how costs and selling prices can impact profits. It also demonstrates how CVP analysis can be used to compare alternative business strategies and identify indifference points.
The document discusses cost-volume-profit (CVP) analysis, which involves making assumptions about how costs and revenues change with production volume. The key assumptions are that costs can be separated into fixed and variable components, and that revenues and costs change linearly with volume. CVP analysis is used to determine the break-even point and output needed to achieve a target profit level. It can also incorporate the effects of income taxes and multiple products or cost drivers.
This chapter describes methods for allocating joint costs between joint products. Joint products are two or more products produced from the same raw materials, like petrol and diesel from crude oil. By-products have lower value. Methods for allocating joint costs include sale value at split-off point, reverse cost method, net realizable value method, physical unit method, and contribution margin method. The net realizable value method is often most suitable.
This document discusses various concepts related to decision making, including:
1. It outlines a five-step process for decision making: gathering information, making predictions, choosing an alternative, implementing the decision, and evaluating performance.
2. It differentiates between relevant and irrelevant costs and revenues for decision making, noting that only differences in expected future costs and revenues between alternatives should be considered.
3. Both quantitative (e.g. financial) and qualitative factors must be considered in decision making. Qualitative factors cannot be measured numerically.
4. It provides an example of accepting a one-time special order, calculating that the incremental revenues exceed the incremental costs so the order should be accepted.
Standard costs are predetermined costs that are used for planning, control, and performance evaluation. Actual costs are compared to standard costs to calculate variances. This document provides an example of calculating variances for material, labor, overhead and other expenses based on standard and actual data for a company. It determines cost, revenue, and profit variances and reconciles the actual profit to the standard profit through a variance analysis. The variances are then analyzed to identify reasons for differences in order to take corrective actions and improve operations.
This document discusses activity-based costing and its advantages over traditional costing methods. It covers key concepts such as tracing overhead costs to activities and products using cost drivers, calculating activity and product unit costs, and addressing issues like product cost distortions that can occur when products consume overhead activities in different proportions. The document provides examples of calculating predetermined overhead rates and variances, and assigning costs using multiple cost drivers and activity rates. It explains how activity-based costing can provide more accurate product costing than traditional methods.
Bab 12 membahas pengambilan keputusan taktis yang terdiri atas pemilihan alternatif dengan hasil langsung atau terbatas. Keputusan harus mencapai tujuan jangka panjang dan meningkatkan daya saing. Proses pengambilan keputusan meliputi 6 langkah yaitu mendefinisikan masalah, mengidentifikasi alternatif, mengidentifikasi biaya dan manfaat, menghitung total biaya dan manfaat, menilai faktor kualitatif, dan
This document discusses cost-volume-profit (CVP) analysis and how it can be used to analyze the relationship between costs, sales, and profits. It defines the breakeven point as the level of sales where total revenue equals total costs. The document provides examples of using CVP analysis to calculate breakeven points, target profits, and how costs and selling prices can impact profits. It also demonstrates how CVP analysis can be used to compare alternative business strategies and identify indifference points.
The document discusses cost-volume-profit (CVP) analysis, which involves making assumptions about how costs and revenues change with production volume. The key assumptions are that costs can be separated into fixed and variable components, and that revenues and costs change linearly with volume. CVP analysis is used to determine the break-even point and output needed to achieve a target profit level. It can also incorporate the effects of income taxes and multiple products or cost drivers.
This chapter describes methods for allocating joint costs between joint products. Joint products are two or more products produced from the same raw materials, like petrol and diesel from crude oil. By-products have lower value. Methods for allocating joint costs include sale value at split-off point, reverse cost method, net realizable value method, physical unit method, and contribution margin method. The net realizable value method is often most suitable.
This document discusses various concepts related to decision making, including:
1. It outlines a five-step process for decision making: gathering information, making predictions, choosing an alternative, implementing the decision, and evaluating performance.
2. It differentiates between relevant and irrelevant costs and revenues for decision making, noting that only differences in expected future costs and revenues between alternatives should be considered.
3. Both quantitative (e.g. financial) and qualitative factors must be considered in decision making. Qualitative factors cannot be measured numerically.
4. It provides an example of accepting a one-time special order, calculating that the incremental revenues exceed the incremental costs so the order should be accepted.
Standard costs are predetermined costs that are used for planning, control, and performance evaluation. Actual costs are compared to standard costs to calculate variances. This document provides an example of calculating variances for material, labor, overhead and other expenses based on standard and actual data for a company. It determines cost, revenue, and profit variances and reconciles the actual profit to the standard profit through a variance analysis. The variances are then analyzed to identify reasons for differences in order to take corrective actions and improve operations.
This document discusses activity-based costing and its advantages over traditional costing methods. It covers key concepts such as tracing overhead costs to activities and products using cost drivers, calculating activity and product unit costs, and addressing issues like product cost distortions that can occur when products consume overhead activities in different proportions. The document provides examples of calculating predetermined overhead rates and variances, and assigning costs using multiple cost drivers and activity rates. It explains how activity-based costing can provide more accurate product costing than traditional methods.
This document provides examples and explanations of cost-volume-profit (CVP) analysis concepts. It includes definitions of key CVP terms like break-even point, contribution margin, variable cost ratio, and sales mix. Examples are provided to demonstrate how to calculate break-even units and sales using CVP formulas. The effects of changes in variables like fixed costs, variable costs, selling price, and sales mix on break-even points are also illustrated.
This document discusses cost behavior and different types of costs. It defines variable costs as changing proportionally with activity level and fixed costs as remaining constant despite changes in activity. Total and per-unit cost behaviors are examined for variable and fixed costs. Examples are provided to illustrate concepts. Methods for analyzing mixed costs are presented, including high-low, scattergraph, and least squares regression. The contribution format income statement is introduced as a way to organize costs by behavior.
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The document defines various types of variances that can occur in cost accounting, including material, labor, and overhead variances. It provides formulas to calculate variance amounts and examples showing how to compute variances based on standard and actual costs. Variances are classified into price, usage/efficiency, and mix categories and can be favorable or unfavorable depending on whether actual costs are lower or higher than standards.
1. PT Takashima memproduksi mainan anak-anak melalui dua departemen yaitu perakitan dan penyelesaian. Terjadi produk cacat akibat proses produksi yang rumit.
2. Diberikan data produksi dan biaya bulan Agustus untuk kedua departemen.
3. Laporan menghitung biaya produksi untuk masing-masing departemen berdasarkan unit ekuivalen dan menjelaskan pertanggungjawaban biaya.
Dokumen tersebut membahas mengenai analisis biaya-volume-laba (cost-volume-profit/CVP) sebagai alat perencanaan manajerial untuk memprediksi perubahan biaya dan membantu pengambilan keputusan."
The profit/volume (P/V) ratio expresses the relationship between contribution and sales. It is calculated as contribution divided by sales or sales minus variable costs divided by sales. The P/V ratio is important for analyzing the profitability of a business, as a higher ratio means more profit and a lower ratio means less profit. The ratio can be increased by raising prices, lowering variable costs, or selling more profitable products. The P/V ratio is also useful for calculating the break-even point, profit at a given sales volume, sales needed for a target profit, and sales required to maintain profits with a price reduction.
Activity based costing (ABC) is a management accounting approach that allocates direct and indirect costs to products and services based on the activities and resources required to produce them. It provides more accurate cost and profit information than traditional methods by tracing costs to activities and then to cost objects using activity drivers. The key steps in ABC are identifying activities and resources, assigning resource costs to activities, and assigning activity costs to cost objects using activity consumption drivers. This allows management to understand cost and profitability at a more granular level and improve decision making.
This document discusses the different motives for holding cash in a business, including the transaction motive, precautionary motive, and speculative motive. The transaction motive refers to needing cash for day-to-day operations like purchases, expenses, taxes, and dividends. The precautionary motive means holding cash in reserve for contingencies like floods, strikes, slow collections, or increases in costs. The speculative motive refers to holding cash for investing in profitable opportunities as they arise, such as anticipated price declines or interest rate changes.
Cost-volume-profit (CVP) analysis examines how changes in volume, costs, and prices affect profits. It is used for managerial decisions like pricing, order acceptance, product promotion, and feasibility analysis. CVP analysis uses techniques like contribution margin analysis and break-even analysis under assumptions like linear revenues and expenses. Questions address profit levels at different volumes, the volume where costs equal revenues, and the effects of cost/price changes on profits.
The document summarizes key concepts in break-even analysis (CVP analysis). It defines break-even point as the level of sales where total revenue equals total costs, meaning no profit or loss. It provides formulas to calculate break-even volume, contribution ratio, break-even revenue, margin of safety, and number of units to achieve a target profit. Example problems demonstrate using these formulas and how to interpret break-even and profit-volume charts. The document also discusses applying CVP analysis to multiple products.
Target costing Prepared By Melwin MathewMelwin Mathew
Target costing is a cost management tool used to reduce the overall cost of a product over its lifecycle. It was developed by Toyota in 1965 in response to rising costs and fewer opportunities for cost reductions late in development. The target costing process involves determining a target price based on market research, then working backwards to establish a target cost per unit by determining required profit levels. The goal is to motivate cross-functional teams to innovatively design products that meet cost targets and ensure planned profit levels.
This document defines and explains break even analysis. It lists the group members and contents. Break even analysis determines the level of output needed for total revenue to equal total costs. It discusses calculating break even points using fixed and variable costs. The purpose is to provide a rough earnings indicator. Limitations include not accounting for demand changes. Calculators are available to assist with break even calculations.
Break Even Point is the point at which total revenue equals total costs. It is calculated as Total Fixed Costs divided by the difference between Selling Price and Average Variable Cost per unit. BEP analysis determines the sales volume needed to cover fixed and variable costs. Sales above the BEP generate profits, while sales below the BEP result in losses. BEP is used in business decision making, pricing, sales projections, and other areas. It works best under assumptions of linear costs and revenues and constant prices, but has limitations as it ignores market factors and is static.
Standard costing involves setting predetermined expected costs for cost components like direct materials, direct labor, and factory overhead. Variances are calculated as the difference between actual and standard costs. This includes direct material, direct labor, and factory overhead variances. The direct material variance has a price and usage component. The factory overhead variance separates variable from fixed costs, with the controllable variance measuring variable cost efficiency and volume variance measuring fixed cost utilization.
Model EOQ digunakan untuk menentukan jumlah pemesanan optimal yang meminimalkan total biaya persediaan tahunan. Dokumen menjelaskan komponen biaya yang dipertimbangkan dalam model EOQ serta contoh penerapannya untuk menghitung jumlah pemesanan, frekuensi pemesanan, dan reorder point untuk suatu perusahaan.
This document defines key cost concepts and classifications. It explains that cost is the monetary measure of resources used for production or services. Expenses are expired costs that helped generate revenue, while losses are expired costs with no benefit. Cost centers and cost units are defined as sections or units for which costs can be measured and used for control. Costs are classified in various ways such as direct/indirect, fixed/variable, and product/period costs to aid management decision making. Special costs like sunk, differential and marginal costs are also discussed.
Marginal costing is an alternative to absorption costing. Under marginal costing, only variable costs are charged as cost of sales and contribution is calculated. Fixed costs are treated as period costs. Contribution is the difference between sales revenue and variable costs, and it goes towards recovering fixed costs and generating profit. The key principles of marginal costing are that fixed costs do not change with volume, so increasing or decreasing sales only impacts profits by the amount of the variable cost per unit. Inventory is valued at marginal/variable cost under marginal costing.
This document provides an overview of the food processing industry in India. It discusses that India is the second largest producer of food globally and has potential to become the largest. The total food production in India is expected to double in the next ten years. It also outlines the size and growth of various sub-sectors in the industry such as fruits and vegetables, dairy, meat and poultry, packaged/convenience foods, etc. The document highlights that the food processing industry is a major driver of India's economic growth and development.
Inventory is an important aspect in Distribution Management. Inventory Control & Management highlight important issues of inventory and coverage profile. ABC and VED classification are explained. JIT and KANBAN, Japanese techniques used for inventory management are some of the concepts that are discussed in the presentation.
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This document provides examples and explanations of cost-volume-profit (CVP) analysis concepts. It includes definitions of key CVP terms like break-even point, contribution margin, variable cost ratio, and sales mix. Examples are provided to demonstrate how to calculate break-even units and sales using CVP formulas. The effects of changes in variables like fixed costs, variable costs, selling price, and sales mix on break-even points are also illustrated.
This document discusses cost behavior and different types of costs. It defines variable costs as changing proportionally with activity level and fixed costs as remaining constant despite changes in activity. Total and per-unit cost behaviors are examined for variable and fixed costs. Examples are provided to illustrate concepts. Methods for analyzing mixed costs are presented, including high-low, scattergraph, and least squares regression. The contribution format income statement is introduced as a way to organize costs by behavior.
come and join AFTERSCHOOOL and change the world of millions of people. Raise your voice for truth, honesty, values and work to change the world - use fair means to become an entrepreneur
The document defines various types of variances that can occur in cost accounting, including material, labor, and overhead variances. It provides formulas to calculate variance amounts and examples showing how to compute variances based on standard and actual costs. Variances are classified into price, usage/efficiency, and mix categories and can be favorable or unfavorable depending on whether actual costs are lower or higher than standards.
1. PT Takashima memproduksi mainan anak-anak melalui dua departemen yaitu perakitan dan penyelesaian. Terjadi produk cacat akibat proses produksi yang rumit.
2. Diberikan data produksi dan biaya bulan Agustus untuk kedua departemen.
3. Laporan menghitung biaya produksi untuk masing-masing departemen berdasarkan unit ekuivalen dan menjelaskan pertanggungjawaban biaya.
Dokumen tersebut membahas mengenai analisis biaya-volume-laba (cost-volume-profit/CVP) sebagai alat perencanaan manajerial untuk memprediksi perubahan biaya dan membantu pengambilan keputusan."
The profit/volume (P/V) ratio expresses the relationship between contribution and sales. It is calculated as contribution divided by sales or sales minus variable costs divided by sales. The P/V ratio is important for analyzing the profitability of a business, as a higher ratio means more profit and a lower ratio means less profit. The ratio can be increased by raising prices, lowering variable costs, or selling more profitable products. The P/V ratio is also useful for calculating the break-even point, profit at a given sales volume, sales needed for a target profit, and sales required to maintain profits with a price reduction.
Activity based costing (ABC) is a management accounting approach that allocates direct and indirect costs to products and services based on the activities and resources required to produce them. It provides more accurate cost and profit information than traditional methods by tracing costs to activities and then to cost objects using activity drivers. The key steps in ABC are identifying activities and resources, assigning resource costs to activities, and assigning activity costs to cost objects using activity consumption drivers. This allows management to understand cost and profitability at a more granular level and improve decision making.
This document discusses the different motives for holding cash in a business, including the transaction motive, precautionary motive, and speculative motive. The transaction motive refers to needing cash for day-to-day operations like purchases, expenses, taxes, and dividends. The precautionary motive means holding cash in reserve for contingencies like floods, strikes, slow collections, or increases in costs. The speculative motive refers to holding cash for investing in profitable opportunities as they arise, such as anticipated price declines or interest rate changes.
Cost-volume-profit (CVP) analysis examines how changes in volume, costs, and prices affect profits. It is used for managerial decisions like pricing, order acceptance, product promotion, and feasibility analysis. CVP analysis uses techniques like contribution margin analysis and break-even analysis under assumptions like linear revenues and expenses. Questions address profit levels at different volumes, the volume where costs equal revenues, and the effects of cost/price changes on profits.
The document summarizes key concepts in break-even analysis (CVP analysis). It defines break-even point as the level of sales where total revenue equals total costs, meaning no profit or loss. It provides formulas to calculate break-even volume, contribution ratio, break-even revenue, margin of safety, and number of units to achieve a target profit. Example problems demonstrate using these formulas and how to interpret break-even and profit-volume charts. The document also discusses applying CVP analysis to multiple products.
Target costing Prepared By Melwin MathewMelwin Mathew
Target costing is a cost management tool used to reduce the overall cost of a product over its lifecycle. It was developed by Toyota in 1965 in response to rising costs and fewer opportunities for cost reductions late in development. The target costing process involves determining a target price based on market research, then working backwards to establish a target cost per unit by determining required profit levels. The goal is to motivate cross-functional teams to innovatively design products that meet cost targets and ensure planned profit levels.
This document defines and explains break even analysis. It lists the group members and contents. Break even analysis determines the level of output needed for total revenue to equal total costs. It discusses calculating break even points using fixed and variable costs. The purpose is to provide a rough earnings indicator. Limitations include not accounting for demand changes. Calculators are available to assist with break even calculations.
Break Even Point is the point at which total revenue equals total costs. It is calculated as Total Fixed Costs divided by the difference between Selling Price and Average Variable Cost per unit. BEP analysis determines the sales volume needed to cover fixed and variable costs. Sales above the BEP generate profits, while sales below the BEP result in losses. BEP is used in business decision making, pricing, sales projections, and other areas. It works best under assumptions of linear costs and revenues and constant prices, but has limitations as it ignores market factors and is static.
Standard costing involves setting predetermined expected costs for cost components like direct materials, direct labor, and factory overhead. Variances are calculated as the difference between actual and standard costs. This includes direct material, direct labor, and factory overhead variances. The direct material variance has a price and usage component. The factory overhead variance separates variable from fixed costs, with the controllable variance measuring variable cost efficiency and volume variance measuring fixed cost utilization.
Model EOQ digunakan untuk menentukan jumlah pemesanan optimal yang meminimalkan total biaya persediaan tahunan. Dokumen menjelaskan komponen biaya yang dipertimbangkan dalam model EOQ serta contoh penerapannya untuk menghitung jumlah pemesanan, frekuensi pemesanan, dan reorder point untuk suatu perusahaan.
This document defines key cost concepts and classifications. It explains that cost is the monetary measure of resources used for production or services. Expenses are expired costs that helped generate revenue, while losses are expired costs with no benefit. Cost centers and cost units are defined as sections or units for which costs can be measured and used for control. Costs are classified in various ways such as direct/indirect, fixed/variable, and product/period costs to aid management decision making. Special costs like sunk, differential and marginal costs are also discussed.
Marginal costing is an alternative to absorption costing. Under marginal costing, only variable costs are charged as cost of sales and contribution is calculated. Fixed costs are treated as period costs. Contribution is the difference between sales revenue and variable costs, and it goes towards recovering fixed costs and generating profit. The key principles of marginal costing are that fixed costs do not change with volume, so increasing or decreasing sales only impacts profits by the amount of the variable cost per unit. Inventory is valued at marginal/variable cost under marginal costing.
This document provides an overview of the food processing industry in India. It discusses that India is the second largest producer of food globally and has potential to become the largest. The total food production in India is expected to double in the next ten years. It also outlines the size and growth of various sub-sectors in the industry such as fruits and vegetables, dairy, meat and poultry, packaged/convenience foods, etc. The document highlights that the food processing industry is a major driver of India's economic growth and development.
Inventory is an important aspect in Distribution Management. Inventory Control & Management highlight important issues of inventory and coverage profile. ABC and VED classification are explained. JIT and KANBAN, Japanese techniques used for inventory management are some of the concepts that are discussed in the presentation.
For more such innovative content on management studies, join WeSchool PGDM-DLP Program: http://bit.ly/DistMang
Join us on Facebook: http://www.facebook.com/welearnindia
Follow us on Twitter: https://twitter.com/WeLearnIndia
Read our latest blog at: http://welearnindia.wordpress.com
Subscribe to our Slideshare Channel: http://www.slideshare.net/welingkarDLP
Presentation on CVP Analysis, Break Even Point & Applications of Marginal Cos...Leena Kakkar
CVP analysis helps managers understand the relationship between cost, volume, and profit by examining how price, volume, variable costs, fixed costs, and product mix interact. It is used to determine what products to make/sell, pricing policies, marketing strategies, and facility investments. The break-even point is where total costs and revenues are equal, and no profit or loss has occurred. Marginal costing is used to set optimal prices, evaluate price reductions, choose product mixes, calculate safety margins, and set different prices for different customers.
The document discusses cost-volume-profit (CVP) analysis, which examines how changes in volume, costs, prices, and sales mix affect profits. It outlines assumptions of CVP, describes techniques like break-even analysis, and provides examples of using CVP to determine sales volume needed to achieve a profit target or how profits would change with cost/price increases. The document also includes a case study on a tea company analyzing how much variable costs must decrease to maintain profits as sales drop 40% due to eliminating a middleman.
Inventory control involves regulating inventory levels according to predetermined norms to reduce costs. It aims to balance ordering, holding, and stockout costs. The ABC analysis technique categorizes inventory into A, B, and C items based on annual consumption value to focus control efforts where they are needed most. VED classification groups items as vital, essential, or desirable based on the criticality of inventory to operations. FSN analysis looks at item movement patterns to identify fast, slow, or non-moving inventory.
The document discusses inventory control, which involves maintaining desired inventory levels to balance economic and production needs. It describes different types of inventory like raw materials, work in progress, and finished goods. Effective inventory control requires planning inventory levels, ordering, receiving, storing, and recording inventory. Key aspects of inventory control include determining maximum and minimum inventory levels, reorder points, and economic order quantities.
This document provides an overview of cost-volume-profit (CVP) analysis, which examines how a firm's sales volume, selling price, cost structure, and profitability interact. It presents the basic one-product CVP model using equations and contribution margin concepts. Key assumptions of the CVP model are discussed. The document also covers break-even analysis, target profit analysis, margin of safety, changes in variables, multi-product CVP models, operating leverage, and an example problem analyzing CVP relationships for a company.
This document discusses key concepts in cost-volume-profit analysis using the example of a bicycle company. It explains the contribution format income statement and how it is used to determine the contribution margin, break-even point, margin of safety, and degree of operating leverage. The contribution margin is the amount of sales revenue left after deducting variable expenses and is used to cover fixed expenses and determine profits. The document provides examples of how profits are affected by changes in sales volume, variable costs, fixed costs, and selling price. It emphasizes the importance of understanding cost behavior and how operating leverage impacts the sensitivity of profits to changes in sales.
This document discusses cost-volume-profit analysis and break-even analysis. It defines key terms like contribution margin, variable costs, fixed costs, and sales mix. It provides examples of using the equation method and contribution margin method to calculate break-even points. It also discusses how to calculate target profit, margin of safety, operating leverage, and deals with break-even analysis for situations with multiple products or a sales mix.
This document discusses cost-volume-profit (CVP) analysis and how it can be used to analyze the relationship between costs, sales, and profits. It provides formulas to calculate the breakeven point in units and sales dollars. An example is worked through for a company called Bill's Briefcases. The document also discusses how CVP analysis can be used to compare alternative cost structures, determine target costs or prices, and calculate the degree of operating leverage and margin of safety.
The document discusses calculating break-even points, operating leverage, and margin of safety for companies selling multiple products. It provides an example of a company, Cascade, which sells two products. It calculates the break-even point for Cascade by treating its products as a single "enterprise product". It also defines operating leverage as the ratio of contribution margin to income from operations and calculates it for two hypothetical companies. Finally, it defines margin of safety as the possible decrease in sales before an operating loss occurs.
Marginal costing is a technique that uses the concept of marginal cost, which is the change in total cost from producing one additional unit. It involves separating total costs into fixed and variable costs. Contribution margin is the difference between selling price and variable cost per unit, and shows the amount available to cover fixed costs and generate profit. Cost-volume-profit (CVP) analysis examines how costs, revenue, and profit change with production volume. It can be used to determine the break-even point and plan production levels required to achieve profit targets. Managers use CVP to make decisions about pricing, production, investment, and financing.
The contribution margin format is used as an internal planning and decision making tool, including cost-volume-profit analysis, budgeting, and make-or-buy decisions. It emphasizes variable cost behavior and how contribution margin covers fixed costs and provides income. For Racing Bicycle Company, the contribution margin is $200 per unit and $80,000 are fixed costs. The break-even point is 400 units or $200,000 in sales. Operating leverage is a measure of how sensitive net income is to sales changes; for Racing it is 5.
1. Calculate contribution margin per customer as average revenue ($8) minus average variable cost ($3), which is $5.
2. Calculate break-even point in customers as fixed costs ($450,000) divided by contribution margin per customer ($5), which is 90,000 customers.
3. Calculate taxable income as contribution margin ($5 per customer) times number of customers minus fixed costs ($450,000).
4. Calculate income taxes as 30% of taxable income.
5. Calculate net income as taxable income minus income taxes.
This document discusses cost-volume-profit (CVP) analysis and break-even point calculations. It contains examples using a bicycle company called Racing Bicycle Company. It explains contribution margin, how to calculate break-even points using the equation method and contribution margin method, and how to determine the sales volume needed to achieve a target profit level. Graphs and calculations are provided to illustrate CVP relationships and the effects of changes in variables such as sales price, costs, sales volume, and fixed expenses.
This document discusses cost-volume-profit (CVP) analysis and break-even point calculations. It contains examples using a bicycle company called Racing Bicycle Company. It explains contribution margin, how to calculate break-even points using the equation method and contribution margin method, and how to determine the sales volume needed to achieve a target profit level. Graphs and calculations are provided to illustrate CVP relationships and the effects of changes in variables such as sales price, fixed costs, and volume.
This document discusses cost-volume-profit (CVP) analysis, which estimates how changes in costs and sales volume affect profits. CVP analysis can determine the break-even point, or volume needed to cover total costs. It examines the relationship between a company's costs, sales volume, and profits. The document defines CVP analysis elements like price, volume, variable and fixed costs. It also discusses concepts like contribution margin, break-even analysis, and how CVP can be used to reach profit targets or analyze products.
This document discusses cost-volume-profit (CVP) analysis and break-even points. It contains several examples and explanations of how to calculate break-even points using both the contribution margin approach and equation approach. It also discusses how to calculate break-even points for companies with multiple products using weighted average contribution margins. Additionally, it explains how to graph CVP relationships using cost-volume-profit and profit-volume graphs and how managers can use these graphs. Key assumptions of CVP analysis and how CVP relationships are reflected in traditional vs contribution format income statements are also summarized.
This document appears to be a presentation for a marketing class on brand management. It includes:
1. An agenda that covers brand management and metrics mastery on topics like break-even analysis and return on marketing investment.
2. Examples of brand associations for companies like Honda, Coach, and Apple.
3. Definitions and discussions of what a brand is, how brand reputation is created, and types of brand loyalty.
4. Topics on brand extensions, keys to successful extensions, and examples of extensions.
5. Discussions of brand name logos, trademarks, and changing brand logos.
6. Worksheets and examples for calculating break-even points and return
This document discusses cost-volume-profit (CVP) analysis and the concept of contribution margin (CM). It defines CM as sales revenue minus variable costs and explains that CM is used to cover fixed costs and contribute to profit. The document also discusses assumptions of CVP analysis and applications such as break-even analysis, calculating profit at different sales levels, and measuring operating leverage.
This document discusses concepts related to cost-volume-profit analysis and break-even analysis. It defines marginal costing, contribution margin, profit-volume ratio, break-even point, and margin of safety. It also includes examples showing how to calculate these metrics using cost and revenue data. The document is intended to help managers understand how costs, sales volume, and price affect profitability.
This document discusses operating and financial leverage. It defines operating leverage as the use of fixed operating costs, which can increase sensitivity to sales changes. Financial leverage refers to the use of fixed financing costs. The document explains how to calculate break-even points, degrees of operating and financial leverage, and use EBIT-EPS analysis to evaluate financing alternatives.
This document discusses operating and financial leverage. It defines operating leverage as the use of fixed operating costs, which can increase sensitivity to sales changes. Financial leverage refers to the use of fixed financing costs. The document explains how to calculate break-even points, degree of operating leverage, and degree of financial leverage. It also shows how financing choices like debt, equity or preferred stock affect earnings per share through an EBIT-EPS analysis.
1) The document discusses cost-volume-profit (CVP) analysis, which is used to determine the break-even point where revenues and expenses are equal.
2) It provides examples of how to calculate the break-even point using the equation approach, contribution margin approach, and contribution margin ratio for a surfboard company.
3) Graphs are used to illustrate the relationships between costs, sales, and profits at different production volumes.
Muhammad Furqan gives a lecture on cost-volume-profit (CVP) analysis. He discusses key CVP concepts like contribution margin, break-even point, and CVP graph. He provides examples using a hypothetical company, Racing Bicycle Company, to demonstrate how to calculate contribution margin, contribution margin ratio, and break-even point using both the equation method and contribution margin method.
2. COST-VOLUME-PROFIT (CVP)COST-VOLUME-PROFIT (CVP)
ANALYSISANALYSIS
CVP analysis examines the interaction of a firm’s sales volume,
selling price, cost structure, and profitability. It is a powerful
tool in making managerial decisions including marketing,
production, investment, and financing decisions.
How many units of its products must a firm sell to break
even?
How many units of its products must a firm sell to earn a
certain amount of profit?
Should a firm invest in highly automated machinery and
reduce its labor force?
Should a firm advertise more to improve its sales?
3. One Product Cost-Volume-Profit ModelOne Product Cost-Volume-Profit Model
Net Income (NI) = Total Revenue – Total Cost
Total Revenue = Selling Price Per Unit (P) * Number of
Units Sold (X)
Total Cost = Total Variable Cost + Total Fixed Cost (F)
Total Variable Cost = Variable Cost Per Unit (V) *
Number of Units Sold (X)
NI = P X – V X – F
NI = X (P – V) – F
4. One Product Cost-Volume-Profit ModelOne Product Cost-Volume-Profit Model
Net Income (NI) = Total Revenue – Total Cost
Total Revenue = Selling Price Per Unit (P) * Number of
Units Sold (X)
Total Cost = Total Variable Cost + Total Fixed Cost (F)
Total Variable Cost = Variable Cost Per Unit (V) *
Number of Units Sold (X)
NI = P X – V X – F
NI = X (P – V) – F
This is an Income Statement
Sales Revenue (P X)
- Variable Costs (V X)
Contribution Margin
- Fixed Costs (F)
Net Income (NI)
5. CVP Model – AssumptionsCVP Model – Assumptions
Key assumptions of CVP model
Selling price is constant
Costs are linear and can be divided into
variable and fixed elements.
In multi-product companies, sales mix is
constant
In manufacturing companies, inventories
do not change.
6. Contribution Margin RatioContribution Margin Ratio
Or, in terms of units, the contribution margin ratio is:
For Racing Bicycle Company the ratio is:
$4
$16
= 25%
Unit CM
Unit selling price
CM Ratio =
7. Changes in Fixed Costs and Sales VolumeChanges in Fixed Costs and Sales Volume
What is the profit impact if Chocolate
Co. can increase unit sales from
12000 to 13000 by increasing the
monthly advertising budget by 5,000?
(1000 x 4 CM) - $5,000 = -$1,000
8. Change in Variable Costs and SalesChange in Variable Costs and Sales
VolumeVolume
What is the profit impact if Chocolate Co.
can use higher quality raw materials, thus,
increasing variable costs per unit by $2, to
generate an increase in unit sales from
12000 to 28000?
28000 x $2 CM/unit = $56000 – $40,000 =
$16000 vs. $8000, increase of $8000
9. Change in Fixed Cost, Sales Price andChange in Fixed Cost, Sales Price and
VolumeVolume
What is the profit impact if Chocolate Co.
(1) cuts its selling price $2 per unit, (2)
increases its advertising budget by $4,000
per month, and (3) increases unit sales
from 12000 to 40,000 units per month?
40,000 x $2 CM/unit = $80,000 - $40,000 -
$4,000 = $36,000 , increase of $28000
10. Break-Even AnalysisBreak-Even Analysis
Break-even analysis can be approached inBreak-even analysis can be approached in
two ways:two ways:
1.1. Equation methodEquation method
2.2. Contribution margin methodContribution margin method
11. Equation MethodEquation Method
Profits = (Sales – Variable expenses) – Fixed expenses
Sales = Variable expenses + Fixed expenses + Profits
OR
At the break-even pointAt the break-even point
profits equal zeroprofits equal zero
12. Equation MethodEquation Method
$16Q = $12Q + $40,000 + $0
Where:
Q = Number of chocolates sold
$16 = Unit selling price
$12 = Unit variable expense
$40,000 = Total fixed expense
We calculate the break-even point as follows:
Sales = Variable expenses + Fixed expenses + ProfitsSales = Variable expenses + Fixed expenses + Profits
13. Equation MethodEquation Method
We calculate the break-even point as follows:
$500Q = $300Q + $80,000 + $0
$200Q = $80,000
Q = $80,000 ÷ $200 per bike
Q = 400 bikes400 bikes
Sales = Variable expenses + Fixed expenses + ProfitsSales = Variable expenses + Fixed expenses + Profits
14. Equation MethodEquation Method
The equation can be modified to calculate the break-
even point in sales dollars.
Sales = Variable expenses + Fixed expenses + ProfitsSales = Variable expenses + Fixed expenses + Profits
X = 0.75X + $40,000 +X = 0.75X + $40,000 + $0$0
Where:
X = Total sales dollars
0.75 = Variable expenses as a % of sales
$40,000 = Total fixed expenses
15. Equation MethodEquation Method
X = 0.75X + $40,000 + $0
0.25X = $40,000
X = $40,000 ÷ 0.25
X = $160,000$160,000
Sales = Variable expenses + Fixed expenses + ProfitsSales = Variable expenses + Fixed expenses + Profits
The equation can be modified to calculate the
break-even point in sales dollars.
16. Contribution Margin MethodContribution Margin Method
The contribution margin method has two
key equations.
Fixed expenses
Unit contribution margin
=
Break-even point
in units sold
Fixed expenses
CM ratio
=
Break-even point in
total sales dollars
17. Contribution Margin MethodContribution Margin Method
Let’s use the contribution margin method to calculate
the break-even point in total sales dollars at Racing.
Fixed expenses
CM ratio
=
Break-even point in
total sales dollars
$40,000$40,000
25%25%
= $160,000 break-even sales= $160,000 break-even sales
18. Target Profit AnalysisTarget Profit Analysis
The equation and contribution margin methods can
be used to determine the sales volume needed to
achieve a target profit.
Suppose Chocolate Co. wants to know how
many bikes must be sold to earn a profit of
$50,000.
20. The Contribution Margin ApproachThe Contribution Margin Approach
The contribution margin method can be used to
determine that 900 bikes must be sold to earn the target
profit of $100,000.
Fixed expenses + Target profit
Unit contribution margin
=
Unit sales to attain
the target profit
$40,000 + $50,000
$4/chocolate
= 22500
chocolates
21. The Margin of SafetyThe Margin of Safety
The margin of safety is the excess of budgeted
(or actual) sales over the break-even volume
of sales.
Margin of safety = Total sales - Break-even salesMargin of safety = Total sales - Break-even sales
Let’s look at Chocolate Co. and determine
the margin of safety.
22. Multi-Product CVP ModelMulti-Product CVP Model
Suppose a firm makes two products (printers and copiers). To allow for two
products, the CVP model can be modified as follows:
NI = (P1 – V1) X1 + (P2 - V2) X2 – F
NI = Profit
P1 = Price per unit of product 1 (printers)
P2 = Price per unit of product 2 (copiers)
V1 = Variable cost per unit of product 1 (printers)
V2 = Variable cost per unit of product 2 (copiers)
X1 = Quantity sold and produced of product 1 (printers)
X2 = Quantity sold and produced of product 2 (copiers)
Sales Mix or Product Mix – the relative proportion of each type of product sold by
a company (i.e. and )
23. Multi-Product CVP Model - ExampleMulti-Product CVP Model - Example
Example: Suppose FC = $200,000; P1 = $5; V1
= $2; P2 = $10; V2 = $6. Find all the
breakeven points.
NI = (P1 – V1)X1 + (P2 – V2)X2 – FC
0 = (5 - 2)X1 + (10 - 6)X2 – 200,000
0 = 3X1 + 4X2 – 200,000
We get 1 equation and 2 unknowns
24. Multi-Product CVP Model - ExampleMulti-Product CVP Model - Example
Any point on the line is a possible combination of X1 and
X2
We need more information to solve the BE point
X1
X2
200,000 / 3 =
66,667
200,000 / 4 =
50,000
25. Multi-Product CVP Model - ExampleMulti-Product CVP Model - Example
Suppose the firm produces and sells the same
number of the two products. Find the
breakeven point.
Let X = X1 = X2
So 0=3X +4X - $200,000
0 = 7 X – $200,000
X = $200,000 / 7 ≈ 28,572 units
26. Multi-Product CVP ModelMulti-Product CVP Model
If the sales mix is constant, CVP problems with multiple products can be solved using the
following equations:
(P1 – V1) X1 = total contribution margin of product 1
(P2 – V2) X2 = total contribution margin of product 2
• Amount of sales revenue required to achieve a target profit:
(NI + F) / Overall CMR = Sales
• Breakeven sales volume:
BE Sales = F / Overall CMR
Note that if the sales mix changes, the overall contribution margin changes; a new overall contribution margin ratio has
to be calculated to solve a CVP problem.
Overall Contribution Margin Ratio =
=
NI = (Overall CM ratio) (Total Sales) – F
27. Problem: Trop Co. produces 3 kinds of fruit juice, whose costs, prices, and expected
sales levels are provided below:
Apple Orange Cranberry
Sales price per unit $1.50 $2.00 $2.50
Variable cost per
unit
$0.50 $0.50 $0.50
Expected sales
units
20,000 units $20,000 units 10,000 units
Trop Co. has a total fixed cost of $84,000.
Given the current sales mix, what is the overall contribution margin ratio?
TCM / Sales = [20,000 (1.5 – 0.5) + 20,000 (2 – 0.5) + 10,000 (2.5 – 0.5)] /
[20,000 * 1.5 + 20,000 * 2 + 10,000 * 2.5] = 70,000 / 95,000 = 0.73684
If Trop’s sales mix remains constant, what is the breakeven sales volume?
BE Sales = 84,000 / 0.73684 = $ 114,000
BE Sales = 2/5 X * 1.5 + 2/5 X * 2 + 1/5 X * 2.5 = 114,000
X = 60,000 units in total
Multi-Product CVP Model - Example
28. Operating LeverageOperating Leverage
Operating Leverage – a measure of how sensitive operating income is to
percentage changes in sales.
With high operating leverage, even a small percentage increase (decrease) in sales
can cause a large percentage increase (decrease) in operating income.
Degree of Operating Leverage (DOL) =
Percentage increase in profits = DOL * Percentage increase in Sales
Example: The following data pertains to Extreme Bike Co.
Sales $500,000
Variable costs $300,000
Contribution Margin $200,000
Fixed Costs $160,000
Operating Income $40,000
29. Operating Leverage - ExampleOperating Leverage - Example
Calculate Extreme’s degree of operating
leverage
DOL = $200,000 / $40,000 = 5
Calculate Extreme’s operating income, if
Extreme achieves a 20% increase in its sales
20% * 5 = 100% increase in NI
$40,000 * 100% = $40,000
New NI = $40,000 + $40,000 = $80,000
30. Operating Leverage - ExampleOperating Leverage - Example
Sales $600,000
VC 360,000
CM 240,000
FC 160,000
NI $ 80,000
31. Operating Leverage - ExampleOperating Leverage - Example
Calculate Extreme’s operating income, if
Extreme experiences a drop of 30% in its
sales
-30% * 5 = -150%
$40,000 * -150% = -$60,000
New NI = $40,000 – $60,000 = -$20,000
32. Operating Leverage - ExampleOperating Leverage - Example
Sales $350,000
VC 210,000
CM 140,000
FC 160,000
NI $ (20,000)
33. Review Problem: CVP RelationshipsReview Problem: CVP Relationships
Voltar Company manufactures and sells a specialized cordless telephone for high
electromagnetic radiation environments. The company's contribution format income
statement for the most recent year is given below:
Required:
Compute the company's CM ratio and variable expense ratio.
Compute the company's break-even point in both units and sales dollars. Use the equation
method.
Assume that sales increase by $400,000 next year. If cost behavior patterns remain unchanged,
by how much will the company's net operating income increase? Use the CM ratio to
compute your answer.
Refer to the original data. Assume that next year management wants the company to earn a
profit of at least $90,000. How many units will have to be sold to meet this target profit?
Refer to the original data. Compute the company's margin of safety in both dollar and
percentage form.
34. Review Problem: CVP RelationshipsReview Problem: CVP Relationships
Voltar Company manufactures and sells a specialized cordless telephone for high
electromagnetic radiation environments. The company's contribution format income
statement for the most recent year is given below:
Required:
Compute the company's CM ratio and variable expense ratio.
CMR = 25%; VC ratio = 75%
Compute the company's break-even point in both units and sales dollars. Use the equation
method.
60 Q = 45Q + 240,000 - > 15 Q = 240,000 -> Q = 16,000 units
16,000 * 60 = $960,000
35. Assume that sales increase by $400,000 next year. If cost behavior
patterns remain unchanged, by how much will the company's net
operating income increase? Use the CM ratio to compute your
answer.
Increase in sales $400,000
CMR 25%
Increase in NOI $100,000
Refer to the original data. Assume that next year management wants
the company to earn a profit of at least $90,000. How many units
will have to be sold to meet this target profit?
(240,000 + 90,000)/15 = 22,000 units
Refer to the original data. Compute the company's margin of safety in
both dollar and percentage form.
Margin of safety = 1,200,000 – 960,000 = $240,000 or 20%
36. Review Problem: CVP RelationshipsReview Problem: CVP Relationships
Voltar Company manufactures and sells a specialized cordless telephone for high
electromagnetic radiation environments. The company's contribution format
income statement for the most recent year is given below:
Required:
Compute the company's degree of operating leverage at the present level of sales.
DOL = 300,000 / 60,000 = 5
37. Assume that through a more intense effort by the sales staff, the
company's sales increase by 8% next year. By what percentage would
you expect net operating income to increase? Use the degree of
operating leverage to obtain your answer.
5 * 8% = 40%
Verify your answer to (b) by preparing a new contribution format income
statement showing an 8% increase in sales.
39. Review Problem: CVP RelationshipsReview Problem: CVP Relationships
Voltar Company manufactures and sells a specialized cordless telephone for high
electromagnetic radiation environments. The company's contribution format
income statement for the most recent year is given below:
In an effort to increase sales and profits, management is considering the use of a higher-quality
speaker. The higher-quality speaker would increase variable costs by $3 per unit, but
management could eliminate one quality inspector who is paid a salary of $30,000 per year.
The sales manager estimates that the higher-quality speaker would increase annual sales by
at least 20%.
Assuming that changes are made as described above, prepare a projected contribution
format income statement for next year. Show data on a total, per unit, and percentage
basis.
40. Compute the company's new break-even point in both units and dollars
of sales. Use the contribution margin method.
BE units = FC/ CM per unit = 210,000/ 12 = 17,500 units
17,500 * 60 = $1,050,000
Would you recommend that the changes be made?
Margin of safety = 1,440,000 – 1,050,000 = $390,000. Yes.
Editor's Notes
We may also calculate the contribution margin ratio using per unit amounts, by dividing the contribution margin per unit by the selling price per unit.
Let’s assume that the management of Racing Bicycle believes it can increase unit sales from 500 to 540, if it spends $10,000 on advertising. Would you recommend that the advertising campaign be undertaken? See if you can solve this problem before going to the next screen.
Management at Racing Bicycle believes that using higher quality raw materials will result in an increase in sales from 500 to 580. The higher quality raw materials will lead to a $10 increase in variable costs per unit. Would you recommend the use of the higher quality raw materials?
Here is a more complex situation because we will experience a change in selling price, advertising expense, and unit sales. Would you support this plan?
We can accomplish break-even analysis in one of two ways. We can use the equation method or the contribution margin method. We get the same results regardless of the method selected. You may prefer one method over the other. It’s a personal choice, but be aware that there are problems associated with either method. Some are easier to solve using the equation method, while others can be quickly solved using the contribution margin method.
The equation method is based on the contribution approach income statement. The equation can be stated in one of two ways:
Profits equal Sales less Variable expenses, less Fixed Expenses, or
Sales equal Variable expenses plus Fixed expenses plus ProfitsRemember that at the break-even point, profits are equal to zero.
The break-even point in units is determined by creating the equation as shown, where Q is the number of bikes sold, $500 is the unit selling price, $300 is the unit variable expense, and $80,000 is the total fixed expense.We need to solve for Q.
Solving this equation shows that the break-even point in units is 400 bikes. We want to be careful with the algebra when we group terms.
The equation can be modified, as shown, to calculate the break-even point in sales dollars. In this equation, X is total sales dollars, 0.60 (or 60%) is the variable expense as a percentage of sales, and $80,000 is the total fixed expense.We need to solve for X.
Solving this equation shows that the break-even point is sales dollars is $200,000. Once again, be careful when you combine the X values in the equation.
The contribution margin method has two key equations:Break-even point in units sold equals Fixed expenses divided by CM per unit, and
Break-even point in sales dollars equals Fixed expenses divided by CM ratio.
Part ILet’s use the contribution margin method to calculate break-even in total sales dollars.
Part IIThe break-even sales revenue is $200,000.
We can use either method to determine the revenue or units needed to achieve a target level of profits.Suppose Racing Bicycle wants to earn net income of $100,000. How many bikes must the company sell to achieve this profit level?
Instead of setting profit to zero, like we do in a break-even analysis, we set the profit level to $100,000. Solving for Q, we see that the company will have to sell 900 bikes to achieve the desired profit level.
A quicker way to solve this problem is to add the desired profits to the fixed cost and divide the total by the contribution margin per unit. Notice we get the same result of 900 bikes.
The margin of safety helps management assess how far above or below the break-even point the company is currently operating at. To calculate the margin of safety, we take total current sales and subtract break-even sales.Let’s calculate the margin of safety for Racing Bicycle.