Cost-Volume-Profit Analysis: A Managerial Planning Tool Management Accounting: The Cornerstone for...

Cost-Volume-Profit Analysis: A Managerial

Planning Tool

Management Accounting: The Cornerstone for

Business Decisions

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.

Learning Objectives

1. Determine the break-even point in number of units and in total sales dollars.

2. Determine the number of units that must be sold and the amount of revenue required, to earn a targeted profit.

3. Prepare a profit-volume graph and a cost-volume-profit graph and explain the meaning of each.

Learning Objectives

4. Apply cost-volume-profit analysis in a multiple-product setting

5. Explain the impact of risk, uncertainty, and changing variables on cost-volume-profit analysis.

Define Contribution Margin

Describe the layout of the Contribution Margin Income

Statement

How to prepare a contribution margin income statement.

Whittier Company plans to sell 1,100 mowers in the next year at $440 each.

Direct materials per mower $ 185Direct labor per mower 105Variable overhead per mower 28Total fixed factory overhead 17,000Variable selling expense is a

commission of $22 per mower; fixed selling and administrative expense totals $ 33,000

4-1

REQUIRED:◙ Calculate the total variable cost

per unit.◙ Calculated the total fixed

expense for the year.◙ Prepare a contribution margin

income statement.Calculation:


4-1


4-1

What is the formula for break-even?

The Break-Even Concept

How to solve for the break-even point in

units.Whittier Company plans to sell 1,100

mowers in the next year at $440 each. Direct materials per mower $ 185Direct labor per mower 105Variable overhead per mower 28Total fixed factory overhead 17,000Variable selling expense is a commission of

$22 per mower; fixed selling and administrative expense totals $ 33,000

4-2

REQUIRED: 1. Calculate the total variable cost per

unit.2. Calculated the total fixed expense

for the year.3. Calculate the number of mowers

that Whitter Company must sell to break even.

4. Check your answer by preparing a contribution margin income statement based on the break-even point.


4-2

Calculation:


units.4-2


units.4-2

Whittier Company plans to sell 1,100 mowers at $440 each in the coming year. Variable cost per unit is $340. Total fixed cost is $50,000

REQUIRED:1. Calculate the variable cost ratio.2. Calculate the contribution margin ratio

using unit figures.3. Prepare a contribution margin income

statement based on the budgeted figures for next year. In a column next to the income statement, show the percentages based on sales for sales, total variable costs, and total contribution margin.

How to calculate the variable cost ratio and the contribution margin ratio.

4-3

Calculation:


4-3


4-3

Discuss the Relationship of the Size of Fixed Costs and

Contribution Margin

Whittier Company plans to sell 1,000 mowers at $400 each in the coming year. Variable cost per unit is $325. Total fixed cost is $45,000

REQUIRED:1. Calculate the contribution margin ratio. 2. Calculate the sales revenue that Whittier

Company must make to break-even by using the break-even point in sales equation.

3. Check your answer by preparing a contribution margin income statement based on the break-even point in sales dollars.

Calculation: On the following slide.


sales dollars.4-4


sales dollars.4-4

Whittier Company sells mulching mowers at $400 each in the coming year. Variable cost per unit is $325. Total fixed cost is $45,000.

REQUIRED:1. Calculate the number of units Whittier

Company must sell to earn an operating profit of $60,000.

2. Check your answer by preparing a contribution margin income statement based on the number of units calculated.

How to solve for the number of units to be sold to earn a target operating

income.4-5

How to solve for the number of units to be sold to earn a target operating

income.4-5

How to solve for the sales needed to earn a target

operating income.4-6

Whittier Company sells mulching mowers at $400 each in the coming year. Variable cost per unit is $325. Total fixed cost is $45,000.

REQUIRED:1. Calculate the contribution margin ratio.2. Calculate the number of units Whittier

Company must sell to earn an operating profit of $75,000.

3. Check your answer by preparing a contribution margin income statement based on the number of units calculated.

Calculation:



The Profit-Volume Graph

$(150)

$(100)

$(50)

$-

$50

$100

$150

- 20 40 60

Units Sold

Pro

fit o

r Lo

ss

The Cost-Volume-Profit Graph

Units Sold

$

List 5 C-V-P Assumptions

Define Sales Mix

What is the package contribution margin?

Recall that Whittier Company sells two products: mulching mowers priced at $400 and riding mowers priced at $800. The variable costs per unit are $325 per mulching mower and $600 per riding mower. Total fixed expense is $96,250. Whittier’s expected sales mix is three mulching mowers to two riding mowers.

REQUIRED:1. Form a package of mulching and riding

mowers based on the sales mix and calculate the package contribution margin.

2. Calculate the break-even point in units for mulching and riding mowers.

3. Check you answers by preparing a contribution margin income statement.

How to calculate the break-even units for a multiple

product firm.4-7

How to calculate the break-even units for a multiple product firm.

Calculation:

4-7


product firm.4-7


product firm.3. Income statement – break-even solution:

4-7

Recall that the Whittier Company sells two products that are expected to produce total revenue of $1,120,000 and total variable costs of $870,000. Total fixed costs are expected to equal $96,250.

REQUIRED:1. Calculate the break-even point in

dollars for the Whittier Company.2. Check your answer by preparing a

contribution margin income statement.

How to calculate the break-even dollars for a multiple

product firm.4-8

How to calculate the break-even dollars for a multiple

product firm.4-8

List Ways C-V-P Can Be Used

Differentiate Between Risk and Uncertainty

Define: Margin of Safety

Margin of Safety

How to compute margin of safety.

Whittier Company plans to sell 1,050 mowers at $420 each in the next year. Whittier has a variable cost of $335 and fixed cost of $48,875. The break-even was calculated as 575 units.

REQUIRED:1. Calculate the margin of safety for

Whittier Company in number of units.

2. Calculate the margin of safety for Whittier Company in sales revenue.

4-9

How to compute margin of safety.

Calculation:

4-9

Define Operating Leverage and Degree of

Operating Leverage (DOL)

How to compute the degree of operating

leverage.Recall that Whittier Company plans

to sell 1,050 mowers at $420 each in the next year. Whittier has a variable cost of $335 and fixed cost of $48,875. Operating income on Cornerstone 4-9 was computed as $40,375.

REQUIRED: Calculate the degree of operating leverage for Whittier Company.

Calculation:

4-10

How to compute the impact of increased sales on operating income using the degree of

operating leverage.Recall that Whittier Company had expected to sell

1,050 mowers and earn operating income equal to $40,375. Whittier’s degree of operating leverage is equal to 2.21. The company plans to increase sales by 20% next year.

REQUIRED:1. Calculate the percent change in operating

income expected by Whittier Company for next year using the degree of operating leverage.

2. Calculate the operating income expected by Whittier Company next year using the percent change in operating income calculated in Requirement 1.

4-11

Calculation:

How to compute the impact of increased sales on operating income using the degree of

operating leverage4-11

What is sensitivity analysis?

Cost-Volume-Profit Analysis: A Managerial Planning Tool Management Accounting: The Cornerstone for...

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