HFT 3431HFT 3431
Chapter 7Chapter 7
Cost-Volume-Profit AnalysisCost-Volume-Profit Analysis
Cost Volume Profit AnalysisCost Volume Profit Analysis
What Is the Break-Even Point?What Is the Break-Even Point? What Is the Profit at Occupancy What Is the Profit at Occupancy
Percentages Above Break-Even?Percentages Above Break-Even? How Do Increases in Fixed Charges How Do Increases in Fixed Charges
Affect Break-Even?Affect Break-Even? How Many More Rooms Must Be Sold How Many More Rooms Must Be Sold
to Recover Cost Increases?to Recover Cost Increases?
Cost Volume Profit AnalysisCost Volume Profit Analysis
How Many Rooms Must Be Sold to How Many Rooms Must Be Sold to Reach a Certain Profit?Reach a Certain Profit?
What Is the Effect of Profits When What Is the Effect of Profits When Prices, Variable Costs, and Fixed Prices, Variable Costs, and Fixed Costs Change?Costs Change?
How Do Labor Rate Changes Affect How Do Labor Rate Changes Affect Profits?Profits?
Cost-Volume Profit Cost-Volume Profit AssumptionsAssumptions
Fixed Costs Remain Constant During Fixed Costs Remain Constant During the Period Being Analyzed.the Period Being Analyzed.
Variable Costs Fluctuate in a Linear Variable Costs Fluctuate in a Linear Fashion With Revenues.Fashion With Revenues.
Variable Costs Are Constant on a Per Variable Costs Are Constant on a Per Unit Basis.Unit Basis.
Cost-Volume Profit Cost-Volume Profit Assumptions Assumptions
Productivity Remains Constant.Productivity Remains Constant. Revenues Are Proportional to Revenues Are Proportional to
Variable Costs.Variable Costs. There Are No Volume Discounts.There Are No Volume Discounts.
Cost-Volume Profit Cost-Volume Profit Assumptions Assumptions
All Costs Can Be Broken Down Into All Costs Can Be Broken Down Into Their Fixed and Variable Their Fixed and Variable Components.Components.
Joint Costs Are Not Eliminated When Joint Costs Are Not Eliminated When One Department Is.One Department Is.
CVP Basic FormulaCVP Basic Formula
How Much Should Be Charged to How Much Should Be Charged to Break-Even?Break-Even?
10 Room Motel10 Room Motel Variable Costs Are $5 Per RoomVariable Costs Are $5 Per Room Fixed Costs Are $2,500Fixed Costs Are $2,500
CVP Basic FormulaCVP Basic Formula
250 Rooms Will Be Sold250 Rooms Will Be Sold
SP = VC Per Room + (Fixed Costs / SP = VC Per Room + (Fixed Costs / Number Rooms Sold)Number Rooms Sold)
SP = $5 +( $2,500 / 250)SP = $5 +( $2,500 / 250) SP = $15 Per RoomSP = $15 Per Room
Most Common Expression Most Common Expression of CVP Analysis Is a Graphof CVP Analysis Is a Graph
Fixed Costs
0
1000
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5000
6000
7000
0 100 200 300
Rooms Sold
$ Fixed Costs
Most Common Expression Most Common Expression of CVP Analysis Is a Graphof CVP Analysis Is a Graph
Variable Costs
0
1000
2000
3000
4000
5000
6000
7000
0 100 200 300
Rooms Sold
$ VariableCosts
Most Common Expression Most Common Expression of CVP Analysis Is a Graphof CVP Analysis Is a Graph
Total Costs
0
1000
2000
3000
4000
5000
6000
7000
0 100 200 300
Rooms Sold
$ Total Costs
Most Common Expression Most Common Expression of CVP Analysis Is a Graphof CVP Analysis Is a Graph
Revenue
0500
100015002000250030003500400045005000
0 100 200 300
Rooms Sold
$ Revenue
Most Common Expression Most Common Expression of CVP Analysis Is a Graphof CVP Analysis Is a Graph
Break - Even
0
1000
2000
3000
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5000
0 100 200 300
Rooms
$
Fixed Costs Variable Costs Total Costs Revenue
Profit
Breakeven
Loss but cover FC
Loss
CVP Basic FormulaCVP Basic Formula
How Much Should Be Charged to How Much Should Be Charged to Earn $2,000 in a 30 Day Period?Earn $2,000 in a 30 Day Period?
10 Room Motel10 Room Motel Variable Costs Are $5 Per RoomVariable Costs Are $5 Per Room Fixed Costs Are $2,500Fixed Costs Are $2,500
CVP Basic FormulaCVP Basic Formula
250 Rooms Will Be Sold250 Rooms Will Be Sold
SP = VC Per Room + (Profit + FC) / SP = VC Per Room + (Profit + FC) / Number Rooms SoldNumber Rooms Sold
SP = $5 +( $2,000 + $2,500) / 250SP = $5 +( $2,000 + $2,500) / 250 SP = $23 Per RoomSP = $23 Per Room
Most Common Expression Most Common Expression of CVP Analysis Is a Graphof CVP Analysis Is a Graph
With $2,000 Profit
0
1000
2000
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6000
7000
8000
0 100 200 300
Rooms Sold
$
Fixed + Profit
VariableCosts
Total Costs
Revenue
CVP Formula for Single CVP Formula for Single Product AnalysisProduct Analysis
I = Net IncomeI = Net Income S = Selling PriceS = Selling Price X = Units SoldX = Units Sold V = Variable Costs Per UnitV = Variable Costs Per Unit F = Total Fixed Costs (Plus Profit)F = Total Fixed Costs (Plus Profit)
CVP Formula for Single CVP Formula for Single Product AnalysisProduct Analysis
SX = Total RevenueSX = Total Revenue VX = Total Variable CostsVX = Total Variable Costs
Basic Formula for Break-Even Basic Formula for Break-Even (Income Equals 0)(Income Equals 0)
0 = SX - VX - F0 = SX - VX - F
Break-Even Formula Break-Even Formula VariationsVariations
Units Sold at Break-Even Units Sold at Break-Even X = F / (S - V)X = F / (S - V) Fixed Costs at Break-Even Fixed Costs at Break-Even F = SX - VXF = SX - VX Selling Price at Break-Even Selling Price at Break-Even S = (F / X) + VS = (F / X) + V
Break-Even Formula Break-Even Formula Variations Variations
Variable Cost Per Unit at Break-Even Variable Cost Per Unit at Break-Even V = S - (F / X)V = S - (F / X)
Most Hospitality Operations Sell Most Hospitality Operations Sell Multiple Products. Therefore, We Multiple Products. Therefore, We Need Additional Tools.Need Additional Tools.
Contribution MarginContribution Margin
Contribution Margin (CM) Is the Contribution Margin (CM) Is the Selling Price, or Sales, Minus the Selling Price, or Sales, Minus the Variable Cost(s).Variable Cost(s).
Contribution Margin Percentage Contribution Margin Percentage (Ratio) Is the CM Divided by the (Ratio) Is the CM Divided by the Selling Price (or Sales).Selling Price (or Sales).
Contribution MarginContribution Margin
To Get Break-Even in Units, Divide To Get Break-Even in Units, Divide the Fixed Costs by the Contribution the Fixed Costs by the Contribution Margin.Margin.
To Get Break-Even in Sales Dollars, To Get Break-Even in Sales Dollars, Divide the Fixed Costs by the Divide the Fixed Costs by the Contribution Margin Percentage.Contribution Margin Percentage.
Contribution MarginContribution Margin
Since Our Products Have Different Since Our Products Have Different CM, We Use CM Percent (Weighted) a CM, We Use CM Percent (Weighted) a Lot.Lot.
Weighted Contribution Weighted Contribution Margin PercentMargin Percent
The Contribution Margin Percent, or The Contribution Margin Percent, or Contribution Margin Ratio (CMR) Contribution Margin Ratio (CMR) Says That the Amount Available to Says That the Amount Available to Cover Fixed Costs Is the CMR Times Cover Fixed Costs Is the CMR Times the Sales Dollars.the Sales Dollars.
Weighted Contribution Weighted Contribution Margin PercentMargin Percent
The Weighted CMR Is Computed As The Weighted CMR Is Computed As Follows:Follows:
(Total Revenue - Total Variable (Total Revenue - Total Variable Costs) / Total RevenueCosts) / Total Revenue
Weighted Contribution Weighted Contribution Margin PercentMargin Percent
Another Way of Looking at it is to Another Way of Looking at it is to Take the Sales Mix Percentage for Take the Sales Mix Percentage for Each Area (Which in Total Must Add Each Area (Which in Total Must Add up to 100%) and Multiply That up to 100%) and Multiply That Percentage by the CMR for the Percentage by the CMR for the Particular Area. Then Add All Particular Area. Then Add All Results to Get the Weighted CMR.Results to Get the Weighted CMR.
Weighted Contribution Weighted Contribution Margin PercentMargin Percent
Divide the Weighted CMR Into the Divide the Weighted CMR Into the Fixed Costs (and Profit if Applicable) Fixed Costs (and Profit if Applicable) and the Result is the Required Sales and the Result is the Required Sales Level.Level.
Margin of SafetyMargin of Safety
Excess of Budgeted or Actual Sales Excess of Budgeted or Actual Sales Over Sales at Break-EvenOver Sales at Break-Even
Expressed in Units or DollarsExpressed in Units or Dollars
Sensitivity AnalysisSensitivity Analysis
Study of the Sensitivity of Dependent Study of the Sensitivity of Dependent Variables to Changes in Independent Variables to Changes in Independent VariablesVariables
Looks at the Incremental Number of Looks at the Incremental Number of Units Required to Sold to Cover Units Required to Sold to Cover Additional CostsAdditional Costs
Operating LeverageOperating Leverage
Extent to Which Expenses Are Fixed Extent to Which Expenses Are Fixed Rather Than VariableRather Than Variable
Highly Levered When Fixed Costs to Highly Levered When Fixed Costs to Variable Costs Is HighVariable Costs Is High
Highly Levered Means a Small Highly Levered Means a Small Increase in Sales Yields a Large Increase in Sales Yields a Large Profit (Above Break-Even)Profit (Above Break-Even)
AssignmentAssignment
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