Cost Behavior Cost Volume Profit Analysis Chapter M3.
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Transcript of Cost Behavior Cost Volume Profit Analysis Chapter M3.
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Cost Behavior
Cost Volume Profit Analysis
Chapter M3
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Cost Behavior
Refers to the manner in which a cost changes as a related activity changes– Activity Bases– Relevant range
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Cost Classification
Variable Costs•Costs that vary in proportion to changes in the level of activity•Such as
•Direct Materials•Direct Labor
Units Produced
DM per unit
Total DM Costs
5,000 units $10 $50,000
10,000 $10 $100,000
15,000 $10 $150,000
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Cost Classification
Fixed Costs•Costs that remain the same in total dollar amounts as the level of activity changes.•salaries
# of Bottles
Total Salary
Salary per Bottle
50,000 $75,000 $1.50
100,000 $75,000 $0.75
150,000 $75,000 $0.50
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Cost Classification
Mixed Costs– Has characteristics of both a variable and a fixed
cost.– Could behave as a fixed cost for part of the relevant
range and then variable cost
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High-Low Method
Cost estimation techniques
Steps– Find the highest and
lowest level of production– Find the difference in total
cost from highest to lowest level of production
– Find the difference in total units from highest to lowest level of production
– Variable cost per unit Difference in Total cost
Difference in Total units
– Find fixed cost by solving this equation
– Total cost = Fixed cost plus Variable cost
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Example 1
Month Production Total Cost
June 1,000 $45,550
July 1,500 $52,000
Aug 2,100 $61,500
Sept 1,800 $57,500
Oct 750 $41,250
High: Aug 2,100 unitsLow: Oct 750 unitsDiff 1,350
High: Aug $61,500 Oct $41,250 Diff 20,250
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Variable cost = Diff in TC Diff in units =$20,250 1,350 = $15 per unit Total cost = FC + VC $61,500 = FC + ($15 *2,100 units) $61,500 = FC + 31,500 FC = $30,000
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Example 2
Month Production Total Cost
June 2,500 $45,000
July 2,000 $40,000
Aug 1,500 $35.000
Sept 3,000 $50,000
Oct 1,800 $38,000
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Example 2
High Sept 3,000 $50,000 Low Aug 1,500 $35,000 Diff 1,500 15,000 Variable cost per unit $15,000/1,500 = $10 per unit Total cost = FC + VC $50,000 = FC + (3,000 units * $10) FC = $20,000
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Cost-Volume-Profit Relationship
Is the systematic examination of the relationships among selling prices, sales, and production volume, costs, expenses and profits
Provides management with useful information for decision making
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Contribution Margin Concept
Contribution Margin =
Sales – Variable Costs Contribution margin ratio
Sales – VC
Sales Unit Contribution margin
Sales per unit
- VC per unit
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Example 3
The company has sales of $1,000,000, variable costs of $800,000. Compute the contribution margin and the contribution margin ratio
CM = Sales – VC = $1,000,000 - $800,000
=$200,000 CM ratio = Sales – VC/Sales = 200,000/1000000
= 20%
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Example 4
The company has sales of $800,000, variable costs of $600,000. Compute the contribution margin and contribution margin ratio
CM = sales – VC = $800 - $600 = $200 CM ratio = CM/Sales = 200/800 = 25%
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Cost Volume Profit Analysis
To determine the units of sales necessary to achieve the break even point in operations
To determine the units of sales necessary to achieve a target or desired profit
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Break-Even Point
Is the level of operations at which a business’ revenues and expired costs are exactly equal
No income or loss BEP = Fixed Costs
Unit Contribution Margin
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Break Even Point
Example 5: Suppose that selling price is $35, variable cost is $15 and fixed costs are $90,000. What is break even point?
BEP = fixed costs Unit contribution margin (Sales – VC) = $90,000 $35 - $15 = 4,500 units
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Break even point
Check Sales = FC + VC ($35 * 4,500 units) = $90,000 + ($25 * 4,500) $157,500 = $90,000 + $67,500
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Example 6
Suppose that selling price is $45, variable cost is $30 and fixed costs are $60,000. What is break even point?
BEP = Fixed cost Unit CM = $60,000 $45-30 = 4,000 units
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Graphical
Fixed Costs
0
Costs
Units
Variable costsTotal Cost
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Graphical – Break even point
$
Units0
Total costs
Sales
Break even pointSales = TC
Profit
Loss
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Effect of Changes on BEP
Changes in fixed costs– Increase in fixed costs
Increases BEP
– Decrease in fixed cost Decrease BEP
Changes in Variable cost– Increase in variable cost
Increases BEP
– Decreases in variable cost Decreases BEP
Changes in Selling Price– Increase in SP
Decrease BEP
– Decrease in SP Increase in BEP
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Desired Profit
Firms would like to earn a profit and not just to break even
BEP = FC + Desired Profit
Unit CM
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Example 5:
Suppose that selling price is $45, variable cost is $30, and fixed costs are $60,000. The company wants a desired profit of $45,000. What is BEP?
BEP = FC + Unit CM = $60,000 + $45,000 = $105,000 = 7,000 $45- $30 $15
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Example 5:
Check Sales – ( FC + VC) = Desired profit ($45 * 7,000) – {$60,000 – ($30 *7,000) = $315,000 – (60,000 + 210,000) = $45,000
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Example 6:
Suppose that selling price is $25, variable cost is $15 and fixed costs are $90,000. The company wants a desired profit of $10,000. What is break even point?
BEP = FC + Desired Profit
Unit CM
= $90,000 + $10,000
$10
= 10,000 units
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Sales Mix Consideration
More than one product is sold at varying selling prices
Products often have different unit variable costs
Products have different contribution margin
Sales volume necessary must a mix of both products
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Example 6:
Cascade Co produces two products Yuk and Gunk. Yuk has a selling price of $90, variable cost of $70 and is 80% of total sales. Gunk has a selling price of $140, variable cost of $95, and is 20% of total sales. Fixed costs are $200,000. What is the break even point for the sales mix?
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Example 6:
Product Selling Price
Variable Cost
CM Sales
%
Sales mix CM
Yuk $90 $70 $20 80% $16
Gunk $140 $95 $45 20% $9
$25
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Example 6:
BEP = Fixed Costs = $200,000 Sales mix CM $25BEP = 8,000 units
Of what products:
YUK: 8,000 units * 80% = 6,400 unitsGUK: 8,000 units * 20% = 1,600 units
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Example 7:
ABC Company has two products Y and X. Y has a selling price of $100, variable costs of $60 and is 70% of total sales. X has a selling price of $50, variable cost of $25. Fixed costs are $248,500. What is BEP?
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Example 7:
Product Selling Price
Variable Cost
CM Sales
%
Sales mix CM
Y $100 $60 $40 70% $28
X $50 $25 $25 30% $7.50
$35.50
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Example 7:
BEP = Fixed cost
Sales mix CM
= $248,500
$35.50
= 7,000 units
Y: 7,000 units * 70% = 4,900 units
X: 7,000 units * 30% = 2,100 units
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Margin of Safety
Indicates possible decrease in sales that may occur before an operating loss occurs.
Ms = S – Sat BEP
Sales
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Margin of Safety
If sales are $400,000 and sales at break even are $300,000 what is margin of safety?
Ms = Sales – Sales BEP = $400 - $300
Sales $400
= 25%
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Operating Leverage
Relative mix of business variable costs and fixed costs
Contribution margin
Income from operations High = large fixed costs Low – small fixed costs
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Remember
Get detailed handouts at http://faculty.mdc.edu/mmari Homework assigned in class.