Cost-Volume-Profit Analysis
AGENDA
The Contribution Margin Concept CVP Analysis and Breakeven Point Margin of Safety and Operating Leverage Sales Mix & CVP Analysis Assumptions of CVP
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Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted.
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Graphical Approach
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Equation Method
Profits = Sales (Variable expenses + Fixed expenses) OR Sales = Variable expenses + Fixed expenses + Profits
Break-Even Analysis
Here is the information from Wind Bicycle Co.:
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Equation Method
We calculate the break-even point as follows:
Sales = Variable expenses + Fixed expenses + Profits
Equation Method
We calculate the break-even point as follows:
Sales = Variable expenses + Fixed expenses + Profits
$500Q = $300Q + $80,000 + $0 $200Q = $80,000 Q = $80,000 $200 per bike Q = 400 bikes
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Equation Method
We can also use the following equation to compute the break-even point in sales dollars.
Sales = Variable expenses + Fixed expenses + Profits
Equation Method
We can also use the following equation to compute the break-even point in sales dollars.
Sales = Variable expenses + Fixed expenses + Profits
X = 0.60X + $80,000 + $0
Where: X = Total sales dollars 0.60 = Variable expenses as a % of sales $80,000 = Total fixed expenses
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CVP Graph
Total Sales Total Expenses Fixed expenses
CVP Graph
Break-even point
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degree of
A low operating leverage is indicative of low committed costs (e.g. interest). More of the costs are variable in nature.
operating leverage
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Operating Leverage
With a operating leverage of 5, if Wind increases its sales by 10%, net operating income would increase by 50%.
$100,000 = 5 $20,000
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3 $2
2 $1
The Bag Three units of spray for every two units of liquid
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3 $2
2 $1 Breakeven
Sales mix
Concept Check
Coffee Klatch is an espresso kiosk. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the CM Ratio for Coffee Klatch? a.1.319 b.0.758 c.0.242 d.4.139
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Total cost can be separated into fixed and variable costs Total revenue and costs are linear within the relevant range Single product or constant sales mix Unit selling price, unit variable costs, and fixed costs are known and constant Time value of money ignored
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Concept Check
Coffee Klatch is an espresso kiosk. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. How many cups of coffee would have to be sold to attain target profits of $2,500 per month? a.3,363cups b.2,212cups c.1,150cups d.4,200cups
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Concept Check
Coffee Klatch is an espresso kiosk. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. 2,100 cups are sold each month on average. What is the margin of safety? a.3,250cups b.950cups c.1,150cups d.2,100cups
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Concept Check
At Coffee Klatch the average selling price of a cup of coffee is $1.49, the average variable expense per cup is $0.36, and the average fixed expense per month is $1,300. 2,100 cups are sold each month on average. If sales increase by 20%, by how much should net operating income increase? a.30.0% b.20.0% c.22.1% d.44.2%
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