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1、Learning Objective 1Explain how changes in activity affect contribution margin and net operating income.第1页/共78页Basics of Cost-Volume-Profit AnalysisContribution Margin(CM)is the amount remaining from sales revenue after variable expenses have been deducted.第2页/共78页Basics of Cost-Volume-Profit Analy
2、sisCM is used first to cover fixed expenses.Any remaining CM contributes to net operating income.第3页/共78页The Contribution Approach Sales,variable expenses,and contribution margin can also be expressed on a per unit basis.If Racing sells an additional bicycle,$200 additional CM will be generated to c
3、over fixed expenses and profit.第4页/共78页The Contribution ApproachEach month,Racing must generate at least$80,000 in total CM to break even.第5页/共78页The Contribution ApproachIf Racing sells 400 units400 units in a month,it will be operating at the break-even point.第6页/共78页The Contribution ApproachIf Ra
4、cing sells one more bike(401 bikes401 bikes),net operating income will increase by$200.第7页/共78页The Contribution ApproachWe do not need to prepare an income statement to estimate profits at a particular sales volume.Simply multiply the number of units sold above break-even by the contribution margin
5、per unit.If Racing sells If Racing sells 430 bikes,430 bikes,its net income will be its net income will be$6,000.$6,000.第8页/共78页Learning Objective 2Prepare and interpret a cost-volume-profit(CVP)graph.第9页/共78页CVP Relationships in Graphic FormThe relationship among revenue,cost,profit and volume can
6、be expressed graphically by preparing a CVP graph.Racing developed contribution margin income statements at 300,400,and 500 units sold.We will use this information to prepare the CVP graph.第10页/共78页CVP GraphUnitsDollarsIn a CVP graph,In a CVP graph,unit volumeunit volume is is usually represented on
7、 the usually represented on the horizontal(X)axishorizontal(X)axis and and dollarsdollars on on the the vertical(Y)axisvertical(Y)axis.第11页/共78页CVP GraphUnitsDollarsFixed Expenses第12页/共78页CVP GraphDollarsUnitsFixed ExpensesTotal Expenses第13页/共78页CVP GraphFixed ExpensesDollarsTotal ExpensesTotal Sale
8、sUnits第14页/共78页CVP GraphDollarsUnitsBreak-even pointBreak-even point(400 units or$200,000 in sales)(400 units or$200,000 in sales)Profit AreaLoss Area第15页/共78页Learning Objective 3Use the contribution margin ratio(CM ratio)to compute changes in contribution margin and net operating income resulting f
9、rom changes in sales volume.第16页/共78页Contribution Margin RatioThe contribution margin ratio is:For Racing Bicycle Company the ratio is:Total CMTotal salesCM Ratio =Each$1.00 increase in sales results in a total contribution margin increase of 40.=40%$80,000$200,000第17页/共78页Contribution Margin RatioO
10、r,in terms of units,the contribution margin ratio is:For Racing Bicycle Company the ratio is:$200$500=40%Unit CMUnit selling priceCM Ratio =第18页/共78页Contribution Margin RatioA$50,000 increase in sales revenue A$50,000 increase in sales revenue results in a$20,000 increase in CM.results in a$20,000 i
11、ncrease in CM.($50,000 40%=$20,000)($50,000 40%=$20,000)第19页/共78页Quick Check Coffee Klatch is an espresso stand in a downtown office building.The average selling price of a cup of coffee is$1.49 and the average variable expense per cup is$0.36.The average fixed expense per month is$1,300.2,100 cups
12、are sold each month on average.What is the CM Ratio for Coffee Klatch?a.1.319b.0.758c.0.242d.4.139第20页/共78页 Coffee Klatch is an espresso stand in a downtown office building.The average selling price of a cup of coffee is$1.49 and the average variable expense per cup is$0.36.The average fixed expense
13、 per month is$1,300.2,100 cups are sold each month on average.What is the CM Ratio for Coffee Klatch?a.1.319b.0.758c.0.242d.4.139Quick Check Unit contribution marginUnit selling priceCM Ratio=($1.49-$0.36)$1.49=$1.13$1.49=0.758第21页/共78页Learning Objective 4Show the effects on contribution margin of c
14、hanges in variable costs,fixed costs,selling price,and volume.第22页/共78页Changes in Fixed Costs and Sales VolumeWhat is the profit impact if Racing can increase unit sales from 500 to 540 by increasing the monthly advertising budget by$10,000?第23页/共78页Changes in Fixed Costs and Sales Volume$80,000+$10
15、,000 advertising=$90,000$80,000+$10,000 advertising=$90,000Sales Sales increasedincreased by$20,000,but net operating by$20,000,but net operating income income decreaseddecreased by$2,000 by$2,000.第24页/共78页Changes in Fixed Costs and Sales VolumeThe Shortcut Solution第25页/共78页Change in Variable Costs
16、and Sales VolumeWhat is the profit impact if Racing can use higher quality raw materials,thus increasing variable costs per unit by$10,to generate an increase in unit sales from 500 to 580?第26页/共78页Change in Variable Costs and Sales Volume580 units 580 units$310 variable cost/unit=$179,800$310 varia
17、ble cost/unit=$179,800Sales Sales increaseincrease by$40,000,and net operating income by$40,000,and net operating income increasesincreases by$10,200 by$10,200.第27页/共78页Change in Fixed Cost,Sales Price and VolumeWhat is the profit impact if Racing(1)cuts its selling price$20 per unit,(2)increases it
18、s advertising budget by$15,000 per month,and(3)increases sales from 500 to 650 units per month?第28页/共78页Sales Sales increaseincrease by$62,000,fixed costs increase by by$62,000,fixed costs increase by$15,000,and net operating income$15,000,and net operating income increasesincreases by$2,000 by$2,00
19、0.Change in Fixed Cost,Sales Price and Volume第29页/共78页Change in Variable Cost,Fixed Cost and Sales VolumeWhat is the profit impact if Racing(1)pays a$15 sales commission per bike sold instead of paying salespersons flat salaries that currently total$6,000 per month,and(2)increases unit sales from 50
20、0 to 575 bikes?第30页/共78页Change in Variable Cost,Fixed Cost and Sales VolumeSales Sales increaseincrease by$37,500,variable costs by$37,500,variable costs increaseincrease by by$31,125,but fixed expenses$31,125,but fixed expenses decreasedecrease by$6,000 by$6,000.第31页/共78页Change in Regular Sales Pri
21、ceIf Racing has an opportunity to sell 150 bikes to a wholesaler without disturbing sales to other customers or fixed expenses,what price would it quote to the wholesaler if it wants to increase monthly profits by$3,000?第32页/共78页Change in Regular Sales Price第33页/共78页Learning Objective 5Compute the b
22、reak-even point in unit sales and sales dollars.第34页/共78页Break-Even AnalysisBreak-even analysis can be approached in two ways:1.Equation method2.Contribution margin method第35页/共78页Equation MethodProfits =(Sales Variable expenses)Fixed expensesSales =Variable expenses+Fixed expenses+ProfitsORAt the b
23、reak-even point profits equal zero第36页/共78页Break-Even AnalysisHere is the information from Racing Bicycle Company:第37页/共78页Equation Method We calculate the break-even point as follows:Sales=Variable expenses+Fixed expenses+Profits$500Q=$300Q+$80,000+$0Where:Q=Number of bikes sold$500=Unit selling pr
24、ice$300=Unit variable expense$80,000=Total fixed expense第38页/共78页Equation Method$500Q=$300Q+$80,000+$0$200Q=$80,000 Q=$80,000$200 per bike Q=400 bikes We calculate the break-even point as follows:Sales=Variable expenses+Fixed expenses+Profits第39页/共78页Equation Method The equation can be modified to c
25、alculate the break-even point in sales dollars.Sales=Variable expenses+Fixed expenses+Profits X =0.60X +$80,000 +$0 Where:X=Total sales dollars 0.60=Variable expenses as a%of sales$80,000=Total fixed expenses第40页/共78页Equation Method X=0.60X +$80,000 +$0 0.40X=$80,000 X=$80,000 0.40 X=$200,000Sales=V
26、ariable expenses+Fixed expenses+Profits The equation can be modified to calculate the break-even point in sales dollars.第41页/共78页Contribution Margin MethodThe contribution margin method has two key equations.Fixed expensesCM per unit =Break-even pointin units soldFixed expenses CM ratio=Break-even p
27、oint intotal sales dollars第42页/共78页Contribution Margin MethodLets use the contribution margin method to calculate the break-even point in total sales dollars at Racing.Fixed expenses CM ratio=Break-even point intotal sales dollars$80,000$80,00040%40%=$200,000 break-even sales=$200,000 break-even sal
28、es第43页/共78页Quick Check Coffee Klatch is an espresso stand in a downtown office building.The average selling price of a cup of coffee is$1.49 and the average variable expense per cup is$0.36.The average fixed expense per month is$1,300.2,100 cups are sold each month on average.What is the break-even
29、sales in units?a.872 cupsb.3,611 cupsc.1,200 cupsd.1,150 cups第44页/共78页 Coffee Klatch is an espresso stand in a downtown office building.The average selling price of a cup of coffee is$1.49 and the average variable expense per cup is$0.36.The average fixed expense per month is$1,300.2,100 cups are so
30、ld each month on average.What is the break-even sales in units?a.872 cupsb.3,611 cupsc.1,200 cupsd.1,150 cupsQuick Check Fixed expensesCM per UnitBreak-even=$1,300$1.49/cup-$0.36/cup=$1,300$1.13/cup=1,150 cups=第45页/共78页Quick Check Coffee Klatch is an espresso stand in a downtown office building.The
31、average selling price of a cup of coffee is$1.49 and the average variable expense per cup is$0.36.The average fixed expense per month is$1,300.2,100 cups are sold each month on average.What is the break-even sales in dollars?a.$1,300b.$1,715c.$1,788d.$3,129第46页/共78页 Coffee Klatch is an espresso stan
32、d in a downtown office building.The average selling price of a cup of coffee is$1.49 and the average variable expense per cup is$0.36.The average fixed expense per month is$1,300.2,100 cups are sold each month on average.What is the break-even sales in dollars?a.$1,300b.$1,715c.$1,788d.$3,129Quick C
33、heck Fixed expensesCM RatioBreak-evensales$1,3000.758=$1,715=第47页/共78页Learning Objective 6Determine the level of sales needed to achieve a desired target profit.第48页/共78页Target Profit Analysis The equation and contribution margin methods can be used to determine the sales volume needed to achieve a
34、target profit.Suppose Racing Bicycle Company wants to know how many bikes must be sold to earn a profit of$100,000.第49页/共78页The CVP Equation MethodSales=Variable expenses+Fixed expenses+Profits$500Q =$300Q +$80,000 +$100,000$200Q =$180,000 Q =900 bikes第50页/共78页The Contribution Margin Approach The co
35、ntribution 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 CM per unit=Unit sales to attainthe target profit$80,000 +$100,000$200/bike=900 bikes第51页/共78页Quick Check Coffee Klatch is an espresso stand in a downtown
36、office building.The average selling price of a cup of coffee is$1.49 and the average variable expense per cup is$0.36.The average fixed expense per month is$1,300.How many cups of coffee would have to be sold to attain target profits of$2,500 per month?a.3,363 cupsb.2,212 cupsc.1,150 cupsd.4,200 cup
37、s第52页/共78页 Coffee Klatch is an espresso stand in a downtown office building.The average selling price of a cup of coffee is$1.49 and the average variable expense per cup is$0.36.The average fixed expense per month is$1,300.How many cups of coffee would have to be sold to attain target profits of$2,5
38、00 per month?a.3,363 cupsb.2,212 cupsc.1,150 cupsd.4,200 cupsQuick Check Fixed expenses+Target profitUnit CMUnit salesto attaintarget profit=3,363 cups=$3,800$1.13$1,300+$2,500$1.49-$0.36=第53页/共78页Learning Objective 7Compute the margin of safety and explain its significance.第54页/共78页The Margin of Sa
39、fetyThe 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 salesLets look at Racing Bicycle Company and determine the margin of safety.第55页/共78页The Margin of SafetyIf we assume that Racing Bicycle Company has actual
40、 sales of$250,000,given that we have already determined the break-even sales to be$200,000,the margin of safety is$50,000 as shown.第56页/共78页The Margin of SafetyThe margin of safety can be expressed as 20%of sales.($50,000$250,000)第57页/共78页The Margin of SafetyThe margin of safety can be expressed in
41、terms of the number of units sold.The margin of safety at Racing is$50,000,and each bike sells for$500.Margin ofSafety in units=100 bikes$50,000$500第58页/共78页Quick Check Coffee Klatch is an espresso stand in a downtown office building.The average selling price of a cup of coffee is$1.49 and the avera
42、ge variable expense per cup is$0.36.The average fixed expense per month is$1,300.2,100 cups are sold each month on average.What is the margin of safety?a.3,250 cupsb.950 cupsc.1,150 cupsd.2,100 cups第59页/共78页 Coffee Klatch is an espresso stand in a downtown office building.The average selling price o
43、f a cup of coffee is$1.49 and the average variable expense per cup is$0.36.The average fixed expense per month is$1,300.2,100 cups are sold each month on average.What is the margin of safety?a.3,250 cupsb.950 cupsc.1,150 cupsd.2,100 cupsQuick Check Margin of safety=Total sales Break-even sales=950 c
44、ups=2,100 cups 1,150 cupsor950 cups2,100 cupsMargin of safety percentage=45%第60页/共78页Cost Structure and Profit StabilityCost structure refers to the relative proportion of fixed and variable costs in an organization.Managers often have some latitude in determining their organizations cost structure.
45、第61页/共78页Cost Structure and Profit StabilityThere are advantages and disadvantages to high fixed cost(or low variable cost)and low fixed cost(or high variable cost)structures.An advantage of a high fixedcost structure is that incomewill be higher in good yearscompared to companieswith lower proporti
46、on offixed costs.A disadvantage of a high fixedcost structure is that incomewill be lower in bad yearscompared to companieswith lower proportion offixed costs.第62页/共78页Learning Objective 8Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predic
47、t changes in net operating income.第63页/共78页Operating Leverage A measure of how sensitive net operating income is to percentage changes in sales.Contribution margin Net operating incomeDegree ofoperating leverage=第64页/共78页Operating Leverage$100,000$20,000=5At Racing,the degree of operating leverage i
48、s 5.第65页/共78页Operating LeverageWith an operating leverage of 5,if Racing increases its sales by 10%,net operating income would increase by 50%.Heres the verification!第66页/共78页Operating Leverage10%increase in sales from$250,000 to$275,000.results in a 50%increase inincome from$20,000 to$30,000.第67页/共
49、78页Quick Check Coffee Klatch is an espresso stand in a downtown office building.The average selling price of a cup of coffee is$1.49 and the average variable expense per cup is$0.36.The average fixed expense per month is$1,300.2,100 cups are sold each month on average.What is the operating leverage?
50、a.2.21b.0.45c.0.34d.2.92第68页/共78页 Coffee Klatch is an espresso stand in a downtown office building.The average selling price of a cup of coffee is$1.49 and the average variable expense per cup is$0.36.The average fixed expense per month is$1,300.2,100 cups are sold each month on average.What is the