•Cost-Volume-Profit Analysis

•Break

•Profit Planning with Constraints

BA 215BA 215Agenda for Lecture 5Agenda for Lecture 5

Cost-Volume-Profit AnalysisCost-Volume-Profit Analysis

• Contribution Margin

• The Basic Profit Equation

• Break-even Analysis

• Solving for targeted profits

Contribution Margin

• Contribution Margin

total sales revenue - total variable costs

• Unit Contribution Margin

unit sales price - unit variable costs

The Basic Profit Equation

profit = sales - costs

The Basic Profit Equation

profit = sales - costs

profit = sales - variable costs - fixed costs

The Basic Profit Equation

profit = sales - costs

profit = sales - variable costs - fixed costs

profit + fixed costs = sales - variable costs

The Basic Profit Equation

profit = sales - costs

profit = sales - variable costs - fixed costs

profit + fixed costs = sales - variable costs

profit + fixed costs = # of units x

(unit selling price - unit variable cost)

The Basic Profit Equation

profit = sales - costs

profit = sales - variable costs - fixed costs

profit + fixed costs = sales - variable costs

profit + fixed costs = # of units x

(unit selling price - unit variable cost)

P + FC = Q x (SP - VC)

Break-Even Analysis

Set profit = 0, plug in total fixed costs, unit selling price and unit variable cost, and solve for # of units. This is break-even analysis.

P + FC = Q x (SP - VC)

FC = Q x (SP - VC)

Target Dollar Profits

Plug in for profits, total fixed costs, unit selling price and unit variable cost, and solve for # of units (Q). This calculates unit sales to achieve a targeted profit.

P + FC = Q x (SP - VC)

Target Selling Prices

Plug in for profits, total fixed costs, unit variable cost, and sales volume, and solve for targeted selling price. This calculates the unit sales price to achieve a targeted profit.

P + FC = Q x (SP - VC)

•Cost-Volume-Profit Analysis

•Break

•Profit Planning with Constraints

BA 215BA 215Agenda for Lecture 5Agenda for Lecture 5

•Cost-Volume-Profit Analysis

•Break

•Profit Planning with Constraints

BA 215BA 215Agenda for Lecture 5Agenda for Lecture 5

Maximizing Profits when there are Constrained Resources

• The solution is to maximize the contribution margin per unit of the constraint.

Due to a kitchen fire, the Albuquerque Baking Company has only one working oven for the next several weeks. The company makes pies and cookies. The oven can hold four pies or two dozen cookies. The pies require 60 minutes to bake. The cookies require 12 minutes to bake. Since the pies and cookies bake at different temperatures, they cannot be baked at the same time. Pies sell for $9 each. A dozen cookies sell for $5. The ingredients to make each pie cost $3. The ingredients to make a dozen cookies cost $2.

Question: Should the Albuquerque Baking Company use its one functional oven to make cookies, pies, or some combination?

Joe can stock his cooler with beer, soda or juice, and sell everything in it at the beach on a hot Saturday in June. The beer costs $1 per bottle, and he can sell beer for $2 per bottle. The soda costs $0.25 per can, and he can sell soda for $1.50 per can. The juice costs $1.25 per carton, and he can sell each carton for $1.75. The cooler has a capacity of 12 cubic feet. Each cubic foot can hold 16 juice cartons, six soda cans, or eight bottles of beer.

Question: What should Joe do in order to maximize his profits?