CostCost

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COST: Must include multi-

product CVP

Let ’s Take Not es ... BREAKEVEN (C-V-P)

What is the GOAL of any business? How does a business accomplish this GOAL? C- V- P analysis seeks the most profitable combination of …

Love itself is love’ chief nourishment. -- Sextus Propertius (c. 50—16 B.C.), Poet

To make money …

Sell products for more than the sum ofvariable and fixed costs

SellingPrice

per Unit

SalesVolume

×VariableCosts

FixedCosts

+,

Variable Costs = VCU × Volume

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VCU × units

Let ’s Take Not es ... BREAKEVEN (C-V-P)

How do costs behave … I n Total How do costs behave … Per Unit

Cos

t

Activity

Fixed Cost

Rent

Depr. Cos

t

Activity

Variable Cost

Per Gallon

Per Pint

Cos

t

Activity

Variable Cost

Per Gallon

Per PintCos

t

Activity

Fixed Cost

RentDepr.

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Let ’s Take Not es ... BREAKEVEN (C-V-P)

The Relevance of the Relevant Range

DESIGNATED DOODLE ZONE

There will always be a conflict between “good” and “good enough”. -- Henry Martyn Leland (1843—1932), Engineer

Cos

t

Activity

Step-Fixed Cost

A B

Cost behavior patterns arevalid within a relevant rangeof activity.

Over time, cost behaviorpatterns may change.

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Let ’s Take Not es ... BREAKEVEN (C-V-P)

What kind of Cost is this?

Chance favours only those who know how to court her. -- Charles Nicholle (1866—1936), Physician and Scientist

Cos

t

Activity

Semifixed (Total) Cost

A B

Fixed Cost

Variable Cost

Total Cost

At 38 units of sales,The total cost is $21,750And the fixed cost is $17,000.What is variable cost per unit?

Y = a + b(X)

$21750 = $17000 +b(38) b = $4750/38 b = $125

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Question:

Answer:

Let ’s Take Not es ... BREAKEVEN (C-V-P) Variable Costing information is necessary for breakeven calculations! Variable Costing I ncome Statement: VC Ratio = CM Ratio =

Do the common thing in an uncommon way. -- Booker T. Washington (1856—1943), Educator

Rev- VCCM- FCNI

100%

60%

40%

VC go away with no production

FC occur regardless of production

VC

Rev.=

VCU

SPUSales = Revenue !!

CM

Rev.=

CMU

SPU

IN TOTAL PER UNIT

= %

= %

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Let ’s Take Not es ... BREAKEVEN (C-V-P)

C- V- P I ntuition:

TR = TC

TR = FC + VC + NISPU(x) = FC + VCU(x) + NI [or NIU(x)]

BE occurs when NI = $0Are equivalentwhen NI = $0

Algebra: SPU(x) - VCU(x) = FC + NIx (SPU - VCU) = FC + NIx = FC + NI SP - VCU

BE(units) = FC + NI CM per unit

BE($) = FC + NI CM Ratio

desired NI

“Walla”, BE(units)“Voilà”

CM Ratio =

per unit in total

CMSPU-VCU

RevSPU

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Let ’s Take Not es ... BREAKEVEN (C-V-P)

Let us think about this a little more! What is the eff ect on Breakeven of …

1. A change in _________________________ ?

2. A change in _________________________ ?

3. A change in _________________________ ?

DESIGNATED DOODLE ZONE

Every creative act of ours in relation to other people—an act of love, of help, of peacemaking—not merely has a future, but is eternal. -- Nikolay Berdyayev (1874—19), Philosopher

Fixed Cost

Variable Cost per Unit

Selling Price per Unit

Increased FC increases BE

Increased VCU increases BE

Increased SPU decreases BE

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Let ’s Take Not es ... BREAKEVEN (C-V-P)

Margin of Safety, and more! Margin of Safety = A Handf ul of Handy For mul as: MS($) = Actual Revenue – Breakeven Revenue MS Ratio = (Actual Revenue – Breakeven Revenue) ________ is GOOD! Actual Revenue Operating Leverage = Contribution Margin / Profit MS Ratio = 1 / Operating Leverage

DESIGNATED DOODLE ZONE

You have your way. I have my way. As for the right way, the correct way, and the only way, it does not exist. -- Friedrich Nietzche (1844—1900), Philosopher

how much can the firm mess around (or mess up) before profit goes away?

BIG

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Let ’s Take Not es ... BREAKEVEN (C-V-P)

The Eff ect of Taxes …

When including desired profit in a “breakeven” calculation, is this desired profit before/after tax??

A Handy of Formula: NIBT = NIAT .

(1 – Tax Rate)

DESIGNATED DOODLE ZONE

When we have done our best, we may await the result without anxiety. -- John Bullock (1834—1913), Financier and naturalist

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Let ’s Take Not es ... BREAKEVEN (C-V-P)

Multi- Product Breakeven

My mother read me bedtime stories until I was six years old. It was a sneak attack on her part. As soon as I really got to like the stories, she said, “Here’s the book, now you read.” -- Octavia Butler (1947—2006), Novelist

When [my mother] was dying, talking to me, she said: “Always try to be kind and nice to people. And if you do that, somebody will always speak up for you.” And I’ve found that to be a fact. They really do. -- B. B. King, Musician

NOTE TO “SELF”! [Cost Acccounting Students Only]

See problem: ____________________________

On page _________ of the Handy Handouts

For an example of multi-product breakeven.

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Alcatraz Artifacts

???

Let ’s Take Not es ... BREAKEVEN (C-V-P) REVIEW / SELF-QUIZ Do you know the answers to these questions?? Can you draw a graph of Fixed Costs in total? … Fixed Costs per unit? … Variable Costs in total? … Variable Costs per unit? … Mixed Costs in total? What formula can we use to draw a line in XY space? What is the Variable Costing income statement format? How does one calculate the VC Ratio in total? … per unit? How does one calculate the CM Ratio in total? … per unit? Does is CM calculated in total? … per unit? The following formulas are important: (why don’t you fill them in here) BE(units) = BE($) = SPU(x) = TR = MS($) = MS Ratio = NIBT =

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• IN CLASS:– East Meets West Company (A)

• BE and desired profit

– East Meets West Company (B)• Desired profit as % of revenue

– East Meets West Company (E)• Margin of Safety

– Alcatraz Artifacts• Multiproduct breakeven

• EXTRA:– Deering Banjo Company– East Meets West Company (C)– East Meets West Company (D)

CostCost

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