Financial&managerial accounting_15e williamshakabettner chap 20

8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 20

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Copyright 2010 by The McGraw-Hill Companies, Inc. All rightsMcGraw-Hill/Irwin

Cost-Volume-ProfitCost-Volume-Profit

AnalysisAnalysisChapter 20


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Total fixed costs

remain constant asactivity increases.

Number of Local Calls

Month

lyBas

ic

Teleph

oneBill

Cost per calldeclines as

activity increases.

Number of Local Calls

MonthlyBas

icTel e

phone

Billpe r

LocalCall

Fixed Costs (and FixedFixed Costs (and Fixed

Expenses)Expenses)

20-2


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Variable Costs (and VariableVariable Costs (and Variable

Expenses)Expenses)

Total variablecosts increase asactivity increases.

Minutes Talked

Costp

erMinute

Minutes Talked

Cost per Minuteis constant as

activity increases.

TotalL o

ngDistan

ce

Teleph

oneB

ill

20-3


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Summary of Variable and Fixed Cost Behavior

Variable Costs Fixed costs

Per Unit Remains the same evenwhen activity level changes.

Dereases as activity levelincreases.

TotalChanges as activity level

changes.

Remains the same over wide

ranges of activity.

Cost Behavior SummaryCost Behavior Summary

20-4


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Variable

Utility Charge

Activity (Kilowatt Hours)

Total

Utilit y

Cost

Total

mixe

dcos

t

Fixed Monthly

Utility Charge

Slope isvariable cost

per unitof activity.

Slope isvariable cost

per unitof activity.

Semivariable Costs (MixedSemivariable Costs (Mixed

Costs)Costs)

20-5


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Volume in Units

Costs

a

nd

Revenu

e

in

Dollars

Break-evenPoint

Profit

Loss

Draw thetotal cost linewith a slopeequal to theunit variable

cost.

CVP Relationships : ACVP Relationships : A

Graphical AnalysisGraphical Analysis Starting at the origin, draw

the total revenue line with a slopeequal to the unit sales price.

Total fixedcost extendshorizontally

from the

vertical axis.20-6


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Activity

Co

st

Total cost remains

constant within a

narrow rangeof

activity.

Total cost increases to anew higher cost for the next

higher range of activity.

Semivariable CostsSemivariable Costs

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Total

Cost

Relevant Range

A straight line

closely (constant

unit variable cost)

approximates a

curvilinear variablecost line within

the relevant range.

A straight line

closely (constant

unit variable cost)

approximates a

curvilinear variablecost line within

the relevant range.

Volume of Output

Curvilinear

Cost Function

Curvilinear CostsCurvilinear Costs

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Contribution margin is amount by which revenueexceeds the variable costs of producing the revenue.

Contribution margin is amount by which revenueexceeds 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-EvenComputing Break-Even

PointPoint

How much contribution margin must this companyhave to cover its fixed costs (break even)?



Answer: $30,000


Answer: $30,000

How many units must this company sell to cover itsfixed costs (break even)?



Answer: $30,000 $20 per unit = 1,500 units


Answer: $30,000 $20 per unit = 1,500 units

20-10


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We have just seen one of the basic CVPrelationships the break-evencomputation.

Break-evenpoint in units

Fixed costs

Contribution margin per unit

How Many Units Must WeHow Many Units Must We

Sell?Sell?

Unit sales price less unit variable cost

($20 in previous example)

Unit sales price less unit variable cost

($20 in previous example)

=

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The break-even formula may also beexpressed in sales dollars.

Unit sales price

Unit variable cost

How Many Dollars in SalesHow Many Dollars in Sales

Must We Generate?Must We Generate?

Break-evenpoint in dollars

Fixed costsContribution margin ratio

=

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C ti S l N d dC ti S l N d d


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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 ofoperating income.

Unit sales =Fixed costs + Target income

Contribution margin per unit

Dollarsales =Fixed costs + Target income

Contribution margin ratio

Computing Sales NeededComputing Sales Neededto Achieve Targetto Achieve Target

Operating IncomeOperating Income

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What is Our Margin ofWhat is Our Margin of

Safety?Safety?

Margin of safety is the amount by which salesmay decline before reaching break-even sales:

Margin of safety provides a quick means ofestimating operating income at any level of sales:

Margin of safety = Actual sales Break-even sales

Operating Margin ContributionIncome of safety margin ratio

=

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D t i i S i i blD t i i S i i bl


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Matrix, Inc. recorded the following production activity andmaintenance 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$

Determining SemivariableDetermining SemivariableCost Elements : The High-Cost Elements : The High-

Low MethodLow Method

20-15

D t i i S i i blD t i i S i i bl


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Units Cost

High activity level 9,000 9,700$

Low activity level 5,000 6,100

Change 4,000 3,600$

Unit variable cost = $3,600 4,000 units = $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

Determining SemivariableDetermining SemivariableCost Elements : The High-Cost Elements : The High-

Low MethodLow Method

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End of Chapter 20End of Chapter 20

20 17

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