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© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Chapter 22
Cost-Volume-Profit Analysis
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Conceptual Learning Objectives
C1: Describe different types of cost behavior in relation to production and sales volume
C2: Identify assumptions in cost-volume profit analysis and explain their impact
C3: Describe several applications of cost-volume-profit analysis
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
A1: Compare the scatter diagram, high-low, and regression methods of estimating costs
A2: Compute contribution margin and describe what it reveals about a company’s cost structure
A3: Analyze changes in sales using the degree of operating leverage
Analytical Learning Objectives
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
P1: Determine cost estimates using three different methods
P2: Compute the break-even point for a single product company
P3: Graph costs and sales for a single product company
P4: Compute break-even point for a multiproduct company
Procedural Learning Objectives
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
CVP analysis is used to answer questions such as: What sales volume is needed to earn a
target income? What is the change in income if selling
prices decline and sales volume increases?
How much does income increase if we install a new machine to reduce labor costs?
What is the income effect if we change the sales mix of our products or services?
CVP analysis is used to answer questions such as: What sales volume is needed to earn a
target income? What is the change in income if selling
prices decline and sales volume increases?
How much does income increase if we install a new machine to reduce labor costs?
What is the income effect if we change the sales mix of our products or services?
Questions Addressed byCost-Volume-Profit Analysis
C2
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Number of Local Calls
Mo
nth
ly B
asic
T
elep
ho
ne
Bill
Total fixed costs remain unchangedwhen activity changes.
Your monthly basictelephone bill probablydoes not change when
you make more local calls.
Total Fixed CostC1
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Number of Local Calls
Mo
nth
ly B
asic
Tel
eph
on
e B
ill p
er L
oca
l Cal
l
Fixed costs per unit declineas activity increases.
Your average cost perlocal call decreases as
more local calls are made.1- Economic of scale2- Learning curve
Fixed Cost Per UnitC1
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Minutes Talked
To
tal L
on
g D
ista
nce
Tel
eph
on
e B
illTotal variable costs change
when activity changes.
Your total long distancetelephone bill is basedon how many minutes
you talk.
Total Variable CostC1
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Minutes Talked
Per
Min
ute
Tel
eph
on
e C
har
ge
Variable costs per unit do not changeas activity increases.
The cost per long distanceminute talked is constant.
For example, 7cents per minute.
Variable Cost Per UnitC1
© The McGraw-Hill Companies, Inc., 2007McGraw-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.
FixedRemains the same even
when activity level changes.Dereases as activity level
increases.
Cost Behavior SummaryC1
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Mixed costs contain a fixed portion that is incurred even when the
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 CostsC1
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Variable
Utility Charge
Activity (Kilowatt Hours)
To
tal
Uti
lity
Co
st
Total mixed cost
Fixed Monthly
Utility Charge
Mixed CostsC1
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Activity
Co
st
Total cost remainsconstant within anarrow range of
activity.
Step-Wise CostsC1
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Activity
Co
st
Total cost increases to a new higher cost for the
next higher range of activity.
Step-Wise CostsC1
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Costs that increase when activity increases, but in a nonlinear manner.
Activity
To
tal
Co
st
Curvilinear CostsC1
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
A scatter diagram of past cost behavior may be helpful in analyzing mixed costs.
Scatter DiagramP1
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Plot the data points on a graph (total cost vs. activity).
0 1 2 3 4
*
To
tal
Co
st i
n1,
000’
s o
f D
oll
ars
10
20
0
***
**
**
*
*
Activity, 1,000’s of Units Produced
P1
Scatter Diagram
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Draw a line through the plotted data points so that about equal numbers of points fall above and below the line.
Estimated fixed cost = 10,000
0 1 2 3 4
*
To
tal
Co
st i
n1,
000’
s o
f D
oll
ars
10
20
0
***
**
**
*
*
Activity, 1,000’s of Units Produced
P1
Scatter Diagram
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Vertical distance
is the change in cost.
Horizontal distance is the change in activity.
Unit Variable Cost = Slope = Δin costΔin units
0 1 2 3 4
*
To
tal
Co
st i
n1,
000’
s o
f D
oll
ars
10
20
0
***
**
**
*
*
Activity, 1,000’s of Units Produced
P1
Scatter Diagram
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
The following relationships between units produced and costs are observed:
Using these two levels of activity, compute: the variable cost per unit. the total fixed cost.
Units Cost
High activity level 67,500 29,000$ Low activity level 17,500 20,500 Change 50,000 8,500$
The High-Low MethodP1
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Unit variable cost = = = $0.17/ unitΔin costΔin units
$8,500$50,000
Units Cost
High activity level 67,500 29,000$ Low activity level 17,500 20,500 Change 50,000 8,500$
Exh. 22-6
P1
The High-Low Method
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Units Cost
High activity level 67,500 29,000$ Low activity level 17,500 20,500 Change 50,000 8,500$
Unit variable cost = = = $0.17/unit
Fixed cost = Total cost – Total variable
Δin costΔin units
$8,500$50,000
Exh. 22-6
P1
The High-Low Method
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Units Cost
High activity level 67,500 29,000$ Low activity level 17,500 20,500 Change 50,000 8,500$
Unit variable cost = = = $0.17 /unit
Fixed cost = Total cost – Total variable cost
Fixed cost = $29,000 – ($0.17 per unit × $67,500)
Fixed cost = $29,000 – $11,475 = $17,525
Δin costΔin units
$8,500$50,000
Exh. 22-6
P1
The High-Low Method
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
The objective of the cost analysis remains the
same: determination of total fixed cost and the
variable unit cost.
Least-squares regression is usually covered in advanced cost accounting courses. It is commonly used with spreadsheet programs or calculators.
Least-Squares RegressionP1
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Let’s extend our
knowledge of
cost behavior to
break-even analysis.
Break-Even AnalysisP2
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
The break-even point (expressed in units of product or dollars of sales) is the unique sales level at which a company earns neither a profit nor incurs a loss.
Computing Break-Even PointP2
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Contribution margin is amount by which revenue exceeds the variable costs of producing the revenue.
Contribution margin is amount by which revenue exceeds the variable costs of producing the revenue.
Total Unit
Sales Revenue (2,000 units) 200,000$ 100$
Less: Variable costs 140,000 70
Contribution margin 60,000$ 30$
Less: Fixed costs 24,000
Net income 36,000$
Computing Break-Even PointP2
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Total Unit
Sales Revenue (2,000 units) 200,000$ 100$
Less: Variable costs 140,000 70
Contribution margin 60,000$ 30$
Less: Fixed costs 24,000
Net income 36,000$
How much contribution margin must this company have to cover its fixed costs (break even)?
Answer: $24,000
P2
Computing Break-Even Point
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
How many units must this company sell to cover its fixed costs (break even)?
Total Unit
Sales Revenue (2,000 units) 200,000$ 100$
Less: Variable costs 140,000 70
Contribution margin 60,000$ 30$
Less: Fixed costs 24,000
Net income 36,000$
Answer: $24,000 ÷ $30 per unit = 800 units
P2
Computing Break-Even Point
© The McGraw-Hill Companies, Inc., 2007McGraw-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
Computing Break-Even Point
Unit sales price less unit variable cost($30 in previous example)
Exh. 22-8
P2
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
The break-even formula may also be expressed in sales dollars.
Break-even point in dollars = Fixed costs
Contribution margin ratio
Unit contribution margin Unit sales price
Exh. 22-9
P2
Computing Break-Even Point
© The McGraw-Hill Companies, Inc., 2007McGraw-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
P2
Computing Break-Even Point
© The McGraw-Hill Companies, Inc., 2007McGraw-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 costsUnit contribution =
$200,000$2.00 per unit
= 100,000 units
P2
Computing Break-Even Point
© The McGraw-Hill Companies, Inc., 2007McGraw-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
P2
Computing Break-Even Point
© The McGraw-Hill Companies, Inc., 2007McGraw-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
P2
Computing Break-Even Point
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Volume in Units
Co
sts
and
Rev
enu
ein
Do
llar
s Total fixed costsTotal costs
Draw the total cost line with a slopeequal to the unit variable cost.
Plot total fixed costs on the vertical axis.
Preparing a CVP ChartP3
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Sales
Volume in Units
Co
sts
and
Rev
enu
ein
Do
llar
s Starting at the origin, draw the sales line with a slope equal to the unit sales price.
Preparing a CVP Chart
Break-even Point
Total costsTotal fixed costs
P3
© The McGraw-Hill Companies, Inc., 2007McGraw-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.
Production = sales (no inventory changes).
Assumptions of CVP AnalysisC2
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Income (pretax) = Sales – Variable costs – Fixed costs
Income (pretax) = Sales – Variable costs – Fixed costs
Computing Income from Expected Sales Exh.
22-12
C3
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Rydell expects to sell 1,500 units at $100 each next month. Fixed costs are $24,000
per month and the unit variable cost is $70. What amount of income should
Rydell expect?
Income (pretax) = Sales – Variable costs – Fixed costs
= [1,500 units × $100] – [1,500 units × $70] – $24,000
= $21,000
Income (pretax) = Sales – Variable costs – Fixed costs
= [1,500 units × $100] – [1,500 units × $70] – $24,000
= $21,000
Computing Income from Expected Sales
Exh. 22-13
C3
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Break-even formulas may be adjusted to show the sales volume needed to earn any amount of income.
Break-even formulas may be adjusted to show the sales volume needed to earn any amount of income.
Unit sales = Fixed costs + Target incomeContribution margin per unit
Dollar sales = Fixed costs + Target income
Contribution margin ratio
Computing Sales for a Target Income
C3
© The McGraw-Hill Companies, Inc., 2007McGraw-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 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 income of $40,000?
a. 100,000 units
b. 120,000 units
c. 80,000 units
d. 200,000 units
C3 Computing Sales for a Target Income
© The McGraw-Hill Companies, Inc., 2007McGraw-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 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 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
C3 Computing Sales for a Target Income
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Target net income is income after income tax. But we can use target income before tax in our calculations.
Target net income is income after income tax. But we can use target income before tax in our calculations.
Dollar sales =
Fixed Target income costs before tax
Contribution margin ratio
+
Computing Sales (Dollars) for aTarget Net Income
Exh. 22-14
C3
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
To convert target net income to before-tax income, use the following formula:
Before-tax income = Target net income
1 - tax rate
C3 Computing Sales (Dollars) for aTarget Net Income
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Rydell has a monthly target net income of $18,000. The unit selling price is $100. Monthly fixed costs are $24,000, the
unit variable cost is $70, and the tax rate is 25 percent.
What is Rydell’s before-tax income andincome tax expense?
C3 Computing Sales (Dollars) for aTarget Net Income
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Before-tax income = Target net income
1 - tax rate
Before-tax income = = $24,000$18,000
1 - .25
Income tax = .25 × $24,000 = $6,000
Rydell has a monthly target net income of $18,000. The unit selling price is $100. Monthly fixed costs are $24,000, the
unit variable cost is $70, and the tax rate is 25 percent.
What is Rydell’s before-tax income andincome tax expense?
C3 Computing Sales (Dollars) for aTarget Net Income
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Rydell has a monthly target net income of $18,000. The unit selling price is $100. Monthly fixed costs are $24,000, the unit variable cost is $70, and the tax rate is 25 percent.
What monthly sales revenue will Rydellneed to earn the target net income?
C3 Computing Sales (Dollars) for aTarget Net Income
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Dollar sales =
Fixed Target net income costs before tax
Contribution margin ratio
+
Dollar sales = = $160,000
$24,000 + $24,00030%
Rydell has a monthly target net income of $18,000. The unit selling price is $100. Monthly fixed costs are $24,000, the unit variable cost is $70, and the tax rate is 25 percent.
What monthly sales revenue will Rydellneed to earn the target net income?
C3 Computing Sales (Dollars) for aTarget Net Income
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
The formula for computing dollar sales may be used to compute unit sales by substituting contribution per unit in the denominator.
The formula for computing dollar sales may be used to compute unit sales by substituting contribution per unit in the denominator.
Contribution margin per unitUnit sales =
Fixed Target net income taxes before taxes
+ +
Unit sales = = 1,600 units$24,000 + $24,000
$30 per unit
Formula for Computing Sales (Units) for a Target Net Income
Exh. 22-16
C3
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Margin of safety is the amount by which sales can drop before the company
incurs a loss.
Margin of safety may be expressed as a percentage of expected sales.
Computing the Margin of Safety Exh.
22-17
Margin of safety Expected sales - Break-even sales percentage Expected sales
=
C3
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Margin of safety Expected sales - Break-even sales percentage Expected sales
=
If Rydell’s sales are $100,000 and break-even sales are $80,000, what is the margin of safety in dollars and as a
percentage?
Exh. 22-17
C3 Computing the Margin of Safety
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
If Rydell’s sales are $100,000 and break-even sales are $80,000, what is the margin of safety in dollars and as a percentage?
Margin of safety = $100,000 - $80,000 = $20,000
Margin of safety Expected sales - Break-even sales percentage Expected sales=
Margin of safety $100,000 - $80,000 percentage $100,000
= = 20%
Exh. 22-17
C3 Computing the Margin of Safety
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
The basic CVP relationships may be used to analyze a number of situations such as changing sales price, changing variable cost, or changing fixed cost.
Consider the following example.
The basic CVP relationships may be used to analyze a number of situations such as changing sales price, changing variable cost, or changing fixed cost.
Consider the following example.
Sensitivity AnalysisC3
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Rydell Company is considering buying a new machine that would increase monthly fixed costs from $24,000 to $30,000, but decrease unit variable costs from $70 to $60. The $100 per unit selling price would remain unchanged.
What is the new break-even point in dollars?
Sensitivity Analysis ExampleC3
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Rydell Company is considering buying a new machine that would increase monthly fixed costs from $24,000 to $30,000, but decrease unit variable costs from $70 to $60. The $100 per unit selling price would remain unchanged.
Revised Break-evenpoint in dollars
Revised fixed costsRevised contribution margin ratio
Revised Break-evenpoint in dollars
$30,00040%
= $75,000=
=
Exh. 22-18
C3
Sensitivity Analysis Example
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
The CVP formulas may be modified for use when a company sells more than one product. The unit contribution margin is replaced with the
contribution margin for a composite unit. A composite unit is composed of specific
numbers of each product in proportion to the product sales mix.
Sales mix is the ratio of the volumes of the various products.
Computing MultiproductBreak-Even Point
P4
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
The resulting break-even formulafor composite unit sales is:
Break-even pointin composite units
Fixed costsContribution marginper composite unit
=
Consider the following example:
Continue
Exh. 22-19
P4 Computing MultiproductBreak-Even Point
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Hair-Today offers three cuts as shown below. Annual fixed costs are $96,000. Compute the break-even point in composite units and in number of units for each haircut at the given sales mix.
Haircuts Basic Ultra Budget
Selling Price 10.00$ 16.00$ 8.00$ Variable Cost 6.50 9.00 4.00 Unit Contribution 3.50$ 7.00$ 4.00$ Sales Mix Ratio 4 2 1
P4 Computing MultiproductBreak-Even Point
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Hair-Today offers three cuts as shown below. Annual fixed costs are $96,000. Compute the
break-even point in composite units and in number of units for each haircut at the given sales mix.
Haircuts Basic Ultra Budget
Selling Price 10.00$ 16.00$ 8.00$ Variable Cost 6.50 9.00 4.00 Unit Contribution 3.50$ 7.00$ 4.00$ Sales Mix Ratio 4 2 1
A 4:2:1 sales mix means that if there are 500 budget cuts, then there will be
1,000 ultra cuts, and 2,000 basic cuts.
P4 Computing MultiproductBreak-Even Point
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
HaircutsBasic Ultra Budget
Selling Price $10.00 $16.00 $8.00Variable Cost 6.50 9.00 4.00 Unit Contribution $3.50 $7.00 $4.00Sales Mix Ratio × 4 × 2 × 1
14.00$ 14.00$ 4.00$
Step 1: Compute contribution margin per composite unit.
P4 Computing MultiproductBreak-Even Point
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
HaircutsBasic Ultra Budget
Selling Price $10.00 $16.00 $8.00Variable Cost 6.50 9.00 4.00 Unit Contribution $3.50 $7.00 $4.00Sales Mix Ratio × 4 × 2 × 1Weighted Contribution 14.00$ + 14.00$ + 4.00$ = 32.00$
Contribution margin per composite unit
Step 1: Compute contribution margin per composite unit.
P4 Computing MultiproductBreak-Even Point
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Break-even pointin composite units
Fixed costsContribution marginper composite unit
=
Step 2: Compute break-even point in composite units.
Exh. 22-19
P4 Computing MultiproductBreak-Even Point
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Break-even pointin composite units
Fixed costsContribution marginper composite unit
=
Step 2: Compute break-even point in composite units.
Break-even pointin composite units
$96,000$32.00 per
composite unit
=
Break-even pointin composite units
= 3,000 composite units
Exh. 22-19
P4 Computing MultiproductBreak-Even Point
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Sales CompositeProduct Mix Cuts Haircuts
Basic 4 × 3,000 = 12,000Ultra 2 × 3,000 = 6,000
Budget 1 × 3,000 = 3,000
Step 3: Determine the number of each haircut that must be sold to break even.
P4 Computing MultiproductBreak-Even Point
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
HaircutsBasic Ultra Budget Combined
Selling Price 10.00$ 16.00$ 8.00$ Variable Cost 6.50 9.00 4.00 Unit Contribution 3.50$ 7.00$ 4.00$ Sales Volume × 12,000 × 6,000 × 3,000 Total Contribution 42,000$ 42,000$ 12,000$ 96,000$
Fixed Costs 96,000 Income $ 0
Step 4: Verify the results.
Multiproduct Break-EvenIncome Statement Exh.
22-20
P4
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
A measure of the extent to which fixed costs are being used in an organization.
A measure of the extent to which fixed costs are being used in an organization.
A measure of how a percentage change in sales will affect profits.
A measure of how a percentage change in sales will affect profits.
Contribution margin Net income
= Degree of operating leverage
Operating LeverageA3
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Rydell Company
Sales (1,200 units) 120,000$ Less: variable expenses 84,000 Contribution margin 36,000 Less: fixed expenses 24,000 Net income 12,000$
$36,000 $12,000
= 3.0
Contribution margin Net income
= Degree of operating leverage
If Rydell increases sales by 10percent, what will the percentage
increase in income be?
Operating LeverageA3
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
Percent increase in sales 10%
Degree of operating leverage × 3
Percent increase in income 30%
Operating LeverageRydell Company
Sales (1,200 units) 120,000$ Less: variable expenses 84,000 Contribution margin 36,000 Less: fixed expenses 24,000 Net income 12,000$
A3
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin
End of Chapter 22