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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)
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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
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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
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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)
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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)?
How much contribution margin must this companyhave to cover its fixed costs (break even)?
How much contribution margin must this companyhave to cover its fixed costs (break even)?
Answer: $30,000
How much contribution margin must this companyhave to cover its fixed costs (break even)?
Answer: $30,000
How many units must this company sell to cover itsfixed costs (break even)?
How many units must this company sell to cover itsfixed costs (break even)?
How many units must this company sell to cover itsfixed costs (break even)?
Answer: $30,000 $20 per unit = 1,500 units
How many units must this company sell to cover itsfixed costs (break even)?
Answer: $30,000 $20 per unit = 1,500 units
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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
($20 in previous example)
=
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The break-even formula may also beexpressed in sales dollars.
Unit sales price
Unit variable cost
How Many Dollars in SalesHow Many Dollars in Sales
Must We Generate?Must We Generate?
Break-evenpoint in dollars
Fixed costsContribution margin ratio
=
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C ti S l N d dC ti S l N d d
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Break-even formulas may be adjusted
to show the sales volume needed to
earn
any amount of operating income.
Break-even formulas may be adjusted
to show the sales volume needed to
earn
any amount ofoperating income.
Unit sales =Fixed costs + Target income
Contribution margin per unit
Dollarsales =Fixed costs + Target income
Contribution margin ratio
Computing Sales NeededComputing Sales Neededto Achieve Targetto Achieve Target
Operating IncomeOperating Income
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What is Our Margin ofWhat is Our Margin of
Safety?Safety?
Margin of safety is the amount by which salesmay decline before reaching break-even sales:
Margin of safety provides a quick means ofestimating operating income at any level of sales:
Margin of safety = Actual sales Break-even sales
Operating Margin ContributionIncome of safety margin ratio
=
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Matrix, Inc. recorded the following production activity andmaintenance costs for two months:
Using these two levels of activity, compute:
the variable cost per unit. the total fixed cost.
total cost formula.
Units Cost
High activity level 9,000 9,700$
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
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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
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