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Learning Objectives

1. Cost Behavior 2. Cost-Volume-Profit Relationships 3. Mathematical Approach to Cost-Volume-Profit Analysis 4. Graphic Approach to Cost-Volume-Profit Analysis 5. Sales Mix Considerations 6. Special Cost-Volume-Profit Relationships 7. Assumptions of Cost-Volume-Profit Analysis. Power Notes.

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Learning Objectives

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  1. 1. Cost Behavior 2. Cost-Volume-Profit Relationships 3. Mathematical Approach to Cost-Volume-Profit Analysis 4. Graphic Approach to Cost-Volume-Profit Analysis 5. Sales Mix Considerations 6. Special Cost-Volume-Profit Relationships 7. Assumptions of Cost-Volume-Profit Analysis Power Notes ChapterM3 Cost Behavior and Cost-Volume-Profit Analysis Learning Objectives C3

  2. Power Notes ChapterM3 Cost Behavior and Cost-Volume-Profit Analysis Slide # Power Note Topics • 3 • 21 • 25 • 35 • 49 • 55 • Variable, Fixed, and Mixed Costs • Contribution Margin Income Statement • Break-Even Point, Planned Sales Level • Cost-Volume-Profit Charts • Sales Mix Considerations • Margin of Safety, Operating Leverage Note: To select a topic, type the slide # and press Enter.

  3. Variable Costs Total Variable Cost Graph Unit Variable Cost Graph $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $20 $15 $10 $5 Cost per Unit Total Costs 0 10 20 30 Units Produced (000) 0 10 20 30 Units Produced (000) Units Total Cost Produced Cost per Unit 5,000 $ 50,000 $10 10,000 100,000 10 15,000 150,000 10 20,000 200,000 10 25,000 250,000 10 30,000 300,000 10

  4. Variable Costs Total Variable Cost Graph Unit Variable Cost Graph $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $20 $15 $10 $5 Cost per Unit Total Costs 0 10 20 30 Units Produced (000) 0 10 20 30 Units Produced (000) Units Total Cost Produced Cost per Unit 5,000 $ 50,000 $10 10,000 100,000 10 15,000 150,000 10 20,000 200,000 10 25,000 250,000 10 30,000 300,000 10

  5. Variable Costs Total Variable Cost Graph Unit Variable Cost Graph $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $20 $15 $10 $5 Cost per Unit Total Costs 0 10 20 30 Units Produced (000) 0 10 20 30 Units Produced (000) Units Total Cost Produced Cost per Unit 5,000 $ 50,000 $10 10,000 100,000 10 15,000 150,000 10 20,000 200,000 10 25,000 250,000 10 30,000 300,000 10

  6. Fixed Costs Total Fixed Cost Graph Unit Fixed Cost Graph $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 $1.50 $1.25 $1.00 $.75 $.50 $.25 Total Costs Cost per Unit 0 0 100 200 300 100 200 300 Units Produced (000) Units Produced (000) Units Total Cost Produced Cost per Unit 50,000 $75,000 $1.500 100,000 75,000 .750 150,000 75,000 .500 200,000 75,000 .375 250,000 75,000 .300 300,000 75,000 .250

  7. Fixed Costs Total Fixed Cost Graph Unit Fixed Cost Graph $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 $1.50 $1.25 $1.00 $.75 $.50 $.25 Total Costs Cost per Unit 0 0 100 200 300 100 200 300 Units Produced (000) Units Produced (000) Units Total Cost Produced Cost per Unit 50,000 $75,000 $1.500 100,000 75,000 .750 150,000 75,000 .500 200,000 75,000 .375 250,000 75,000 .300 300,000 75,000 .250

  8. Fixed Costs Total Fixed Cost Graph Unit Fixed Cost Graph $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 $1.50 $1.25 $1.00 $.75 $.50 $.25 Total Costs Cost per Unit 0 0 100 200 300 100 200 300 Units Produced (000) Units Produced (000) Units Total Cost Produced Cost per Unit 50,000 $75,000 $1.500 100,000 75,000 .750 150,000 75,000 .500 200,000 75,000 .375 250,000 75,000 .300 300,000 75,000 .250

  9. Mixed Costs Total Mixed Cost Graph $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 Mixed costs are sometimes called semivariable or semifixed costs. Total Costs Mixed costs are usually separated into their fixed and variable components for management analysis. 0 10 20 30 40 Total Machine Hours (000)

  10. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total Units Cost Production Total Units Cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 Highest level Lowest level Difference

  11. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total Units Cost Production Total Units Cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 Highest level 2,100 $61,500 Lowest level Difference

  12. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total Units Cost Production Total Units Cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 Highest level 2,100 $61,500 Lowest level 750 41,250 Difference

  13. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total Units Cost Production Total Units Cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 Highest level 2,100 $61,500 Lowest level 750 41,250 Difference 1,350 $20,250 Difference in total cost Difference in production Variable cost per unit 1 =

  14. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total Units Cost Production Total Units Cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 Highest level 2,100 $61,500 Lowest level 750 41,250 Difference 1,350 $20,250 Difference in total cost Difference in production $20,250 1,350 units Variable cost per unit 1 = = = $15

  15. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total Units Cost Production Total Units Cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 Highest level 2,100 $61,500 Lowest level 750 41,250 Difference 1,350 $20,250 Difference in total cost Difference in production $20,250 1,350 units Variable cost per unit 1 = = = $15 Total cost Fixed cost Variable cost per unit Units of production 2 = – x

  16. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total Units Cost Production Total Units Cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 Highest level 2,100 $61,500 Lowest level 750 41,250 Difference 1,350 $20,250 Difference in total cost Difference in production $20,250 1,350 units Variable cost per unit 1 = = = $15 Total cost Fixed cost Variable cost per unit Units of production 2 = – x = – = Highest level: $61,500 ( $15 x 2,100 ) $30,000

  17. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total Units Cost Production Total Units Cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 Highest level 2,100 $61,500 Lowest level 750 41,250 Difference 1,350 $20,250 Difference in total cost Difference in production $20,250 1,350 units Variable cost per unit 1 = = = $15 Total cost Fixed cost Variable cost per unit Units of production 2 = – x = – = Highest level: $61,500 ( $15 x 2,100 ) $30,000 = – = Lowest level: $41,250 ( $15 x 750 ) $30,000

  18. Mixed Costs: High-Low Method Actual costs incurred Highest and lowest levels Production Total Units Cost Production Total Units Cost June 1,000 $45,550 July 1,500 52,000 August 2,100 61,500 September 1,800 57,500 October 750 41,250 Highest level 2,100 $61,500 Lowest level 750 41,250 Difference 1,350 $20,250 Difference in total cost Difference in production $20,250 1,350 units Variable cost per unit 1 = = = $15 Total cost Fixed cost Variable cost per unit Units of production 2 = – x = – = Highest level: $61,500 ( $15 x 2,100 ) $30,000 = – = Lowest level: $41,250 ( $15 x 750 ) $30,000

  19. Variable Costs Fixed Costs Total Variable Costs Total Fixed Costs Total Costs Total Costs Total Units Produced Total Units Produced Unit Fixed Costs Unit Variable Costs Per Unit Cost Per Unit Cost Total Units Produced Total Units Produced

  20. Variable Costs Fixed Costs Total Variable Costs Total Fixed Costs Used for planning. Remains the same regardless of activity level. Total Costs Total Costs $75,000 total Total Units Produced Total Units Produced Unit Fixed Costs Unit Variable Costs Per Unit Cost Per Unit Cost $10 per unit Total Units Produced Total Units Produced

  21. Contribution Margin Income Statement The contribution margin is available to cover the fixed costs and income from operations. Total Sales (50,000 units) $1,000,000 Variable costs 600,000 Contribution margin $400,000 Fixed costs 300,000 Income from operations $100,000 Variable costs Sales Fixed costs Income from operations

  22. Contribution Margin Income Statement Total Per Unit Percent Sales (50,000 units) $1,000,000 $20 100% Variable costs 600,000 12 60% Contribution margin $400,000 $ 8 40% Fixed costs 300,000 Income from operations $100,000 The statement can be extended to include per unit dollars and percentage numbers.

  23. Contribution Margin Income Statement Total Per Unit Percent Sales (50,000 units) $1,000,000 $20 100% Variable costs 600,000 12 60% Contribution margin $400,000 $ 8 40% Fixed costs 300,000 Income from operations $100,000 Income from operations Variable costs Fixed costs Sales = + + Variable costs Contribution margin Sales – =

  24. Contribution Margin Income Statement Total Per Unit Percent Sales (50,000 units) $1,000,000 $20 100% Variable costs 600,000 12 60% Contribution margin $400,000 $ 8 40% Fixed costs 300,000 Income from operations $100,000 Unit Contribution Margin Contribution Margin Ratio The contribution margin can be expressed three ways: 1. Total contribution margin in dollars. 2. Unit contribution margin (dollars per unit). 3. Contribution margin ratio (percentage).

  25. Calculating the Break-Even Point Total Per Unit Percent Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $300,000 $ 8 40% Fixed costs 300,000 Income from operations $ 0 At the break-even point, fixed costs and the contribution margin are equal.

  26. Calculating the Break-Even Point Total Per Unit Percent Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 300,000 $ 8 40% Fixed costs 300,000 Income from operations $ 0 / or Divide by either: $8 per unit or 40% Break-even sales Fixed costs Contribution margin = /

  27. Calculating the Break-Even Point Total Per Unit Percent Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 300,000 $ 8 40% Fixed costs 300,000 Income from operations $ 0  or Break-even sales Fixed costs Contribution Margin per unit = / What is the break-even sales in units?

  28. Calculating the Break-Even Point Total Per Unit Percent Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 300,000 $ 8 40% Fixed costs 300,000 Income from operations $ 0 / or Break-even sales Fixed costs Contribution margin = / Break-even sales = $300,000 / $8 = 37,500 units What is the break-even sales in dollars?

  29. Calculating the Break-Even Point Total Per Unit Percent Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 300,000 $ 8 40% Fixed costs 300,000 Income from operations $ 0 / or Break-even sales Fixed costs Contribution margin = / Break-even sales = $300,000 / $8 = 37,500 units Break-even sales = $300,000 / 40% = $750,000

  30. Calculating a Planned Sales Level Total Per Unit Percent Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 400,000 $ 8 40% Fixed costs 300,000 Income from operations $ 100,000 / or Contribution margin Planned sales Fixed Target costs profit + = / Fixed costs plus the target profit equals the required total contribution margin.

  31. Calculating a Planned Sales Level Total Per Unit Percent Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 400,000 $ 8 40% Fixed costs 300,000 Income from operations $ 100,000 / or Fixed Target costs profit Contribution margin Planned sales + = / $8 per unit or 40%

  32. Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 400,000 $ 8 40% Fixed costs 300,000 Income from operations $ 100,000 Calculating a Planned Sales Level Total Per Unit Percent / or Planned sales Fixed Target costs profit Contribution margin + = / What is the planned sales level in units?

  33. Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 400,000 $ 8 40% Fixed costs 300,000 Income from operations $ 100,000 Calculating a Planned Sales Level Total Per Unit Percent / or Planned sales Fixed Target costs profit Contribution margin + = / Planned sales = ($300,000 + $100,000) / $8 = 50,000 units What is the planned sales level in dollars?

  34. Calculating a Planned Sales Level Total Per Unit Percent Sales (50,000 units) $1,000,000 $20 100% Variable costs 600,000 12 60% Contribution margin $ 400,000 $ 8 40% Fixed costs 300,000 Income from operations $ 100,000 / or Planned sales Fixed Target costs profit Contribution margin + = / Planned sales = ($300,000 + $100,000) / $8 = 50,000 units Planned sales = ($300,000 + $100,000) / 40% = $1,000,000 $1,000,000

  35. Cost-Volume-Profit Chart $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Total Sales Sales and Costs ($000) 0 1 2 3 4 5 6 7 8 9 10 Units of Sales (000) Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $ 20 Total fixed costs $100,000

  36. Cost-Volume-Profit Chart $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Total Sales Sales and Costs ($000) Variable Costs 60% 0 1 2 3 4 5 6 7 8 9 10 Units of Sales (000) Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $ 20 Total fixed costs $100,000

  37. Cost-Volume-Profit Chart $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Total Sales Contribution Margin 40% Sales and Costs ($000) Variable Costs 60% 0 1 2 3 4 5 6 7 8 9 10 Units of Sales (000) 100% 60% 40% Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $ 20 Total fixed costs $100,000

  38. Cost-Volume-Profit Chart $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Total Sales Total Costs Fixed Costs Sales and Costs ($000) Variable Costs 0 1 2 3 4 5 6 7 8 9 10 Units of Sales (000) Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $ 20 Total fixed costs $100,000

  39. Cost-Volume-Profit Chart $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Total Sales Total Costs Sales and Costs ($000) 0 1 2 3 4 5 6 7 8 9 10 Units of Sales (000) Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $ 20 Total fixed costs $100,000

  40. Cost-Volume-Profit Chart $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Total Sales Operating Profit Area Total Costs Sales and Costs ($000) Operating Loss Area 0 1 2 3 4 5 6 7 8 9 10 Units of Sales (000) Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $ 20 Total fixed costs $100,000

  41. Cost-Volume-Profit Chart $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Total Sales Total Costs Sales and Costs ($000) Break-Even Point 0 1 2 3 4 5 6 7 8 9 10 Units of Sales (000) Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $ 20 Total fixed costs $100,000

  42. Cost-Volume-Profit Chart $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Total Sales Total Costs Sales and Costs ($000) Break-Even Point 0 1 2 3 4 5 6 7 8 9 10 Units of Sales (000) Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $20 Total fixed costs $100,000 $100,000 $20 = 5,000 units

  43. Cost-Volume-Profit Chart (Break-Even) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Total Sales Operating Profit Area Total Costs Sales and Costs ($000) Break-Even Point Operating Loss Area 0 1 2 3 4 5 6 7 8 9 10 Units of Sales (000) Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $ 20 Total fixed costs $100,000 $100,000 $20 = 5,000 units

  44. Revised Cost-Volume-Profit Chart $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Total Sales Operating Profit Area Total Costs Sales and Costs ($000) Revised Break-Even Point Operating Loss Area 0 1 2 3 4 5 6 7 8 9 10 Units of Sales (000) Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $ 20 Total fixed costs $80,000 $80,000 $20 = 4,000 units

  45. Profit-Volume Chart $100 $75 $50 $25 $ 0 $(25) $(50) $(75) $(100) Operating Profit (Loss) $000’s Relevant range is 10,000 units. 1 2 3 4 5 6 7 8 9 10 Units of Sales (000’s) Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000

  46. Profit-Volume Chart $100 $75 $50 $25 $ 0 $(25) $(50) $(75) $(100) Operating Profit (Loss) $000’s Maximum profit within the relevant range. 1 2 3 4 5 6 7 8 9 10 Units of Sales (000’s) Maximum loss is equal to the total fixed costs. Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000

  47. Profit-Volume Chart $100 $75 $50 $25 $ 0 $(25) $(50) $(75) $(100) Profit Line Operating Profit Operating Profit (Loss) $000’s Operating Loss 1 2 3 4 5 6 7 8 9 10 Units of Sales (000’s) Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000

  48. Profit-Volume Chart $100 $75 $50 $25 $ 0 $(25) $(50) $(75) $(100) Profit Line Operating Profit Operating Profit (Loss) $000’s Operating Loss Break-Even Point 1 2 3 4 5 6 7 8 9 10 Units of Sales (000’s) Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000

  49. Sales Mix Considerations Contribution margin Products A B Sales $ 90 $140 Variable costs 70 95 Contribution margin $ 20 $ 45 Sales mix 80% 20% What is the average contribution for each product?

  50. Sales Mix Considerations Contribution margin Products A B Sales $ 90 $140 Variable costs 70 95 Contribution margin $ 20 $ 45 Sales mix x 80% x 20% Product contribution $ 16 $ 9 What is the total product contribution?

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