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Chapter 3: CVP Analysis

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Chapter 3: CVP Analysis

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    1. Chapter 3: Cost-Volume-Profit Analysis Slide # 1

    2. Chapter 3: Cost-Volume-Profit Analysis Slide # 2 This slide is entirely automated no clicks required.This slide is entirely automated no clicks required.

    3. Chapter 3: Cost-Volume-Profit Analysis Slide # 3 Q5: Assumptions in CVP Analysis CVP analysis assumes that costs and revenues are linear within a relevant range of activity. The first element is automated. The first click brings in the first primary bullet, and its secondary bullet is automated. The second click brings the second primary bullet, and its two secondary bullets are automated.The first element is automated. The first click brings in the first primary bullet, and its secondary bullet is automated. The second click brings the second primary bullet, and its two secondary bullets are automated.

    4. Chapter 3: Cost-Volume-Profit Analysis Slide # 4 Q5: Assumptions in CVP Analysis These assumptions may induce a small relevant range. The first primary bullet, and its secondary bullet, are automated. The first click brings in the second primary bullet, and its two secondary bullets are automated.The first primary bullet, and its secondary bullet, are automated. The first click brings in the second primary bullet, and its two secondary bullets are automated.

    5. Chapter 3: Cost-Volume-Profit Analysis Slide # 5 Q1, Q4: CVP Analysis and the Breakeven Point CVP analysis looks at the relationship between selling prices, sales volumes, costs, and profits. This slide is entirely automated no clicks required.This slide is entirely automated no clicks required.

    6. Chapter 3: Cost-Volume-Profit Analysis Slide # 6 Q1: How is CVP Analysis Used? CVP analysis can determine, both in units and in sales dollars: 1. One click starts automated sequence for the four secondary bullet points. 2. Another click displays the second primary bullet point.1. One click starts automated sequence for the four secondary bullet points. 2. Another click displays the second primary bullet point.

    7. Chapter 3: Cost-Volume-Profit Analysis Slide # 7 Q2: CVP Calculations for a Single Product 1. One click starts automated sequence that describes the variables. 2. Another click displays the set Profit = 0 comment.1. One click starts automated sequence that describes the variables. 2. Another click displays the set Profit = 0 comment.

    8. Chapter 3: Cost-Volume-Profit Analysis Slide # 8 Q2: CVP Calculations for a Single Product 1. One click starts automated sequence that describes the variables and the second way to find CMR. 2. Another click displays the set Profit = 0 comment.1. One click starts automated sequence that describes the variables and the second way to find CMR. 2. Another click displays the set Profit = 0 comment.

    9. Chapter 3: Cost-Volume-Profit Analysis Slide # 9 Bills Briefcases makes high quality cases for laptops that sell for $200. The variable costs per briefcase are $80, and the total fixed costs are $360,000. Find the BEP in units and in sales $ for this company. Q2: Breakeven Point Calculations

    10. Chapter 3: Cost-Volume-Profit Analysis Slide # 10 Q2: CVP Graph Draw a CVP graph for Bills Briefcases. What is the pretax profit if Bill sells 4100 briefcases? If he sells 2200 briefcases? Recall that P = $200, V = $80, and F = $360,000.

    11. Chapter 3: Cost-Volume-Profit Analysis Slide # 11 How many briefcases does Bill need to sell to reach a target pretax profit of $240,000? What level of sales revenue is this? Recall that P = $200, V = $80, and F = $360,000. Q2: CVP Calculations

    12. Chapter 3: Cost-Volume-Profit Analysis Slide # 12 How many briefcases does Bill need to sell to reach a target after-tax profit of $319,200 if the tax rate is 30%? What level of sales revenue is this? Recall that P = $200, V = $80, and F = $360,000. Q2: CVP Calculations

    13. Chapter 3: Cost-Volume-Profit Analysis Slide # 13 Suppose that Bills marketing department says that he can sell 6,000 briefcases if the selling price is reduced to $170. Bills target pretax profit is $210,000. Determine the highest level that his variable costs can so that he can make his target. Recall that F = $360,000. Q1,2: Using CVP to Determine Target Cost Levels

    14. Chapter 3: Cost-Volume-Profit Analysis Slide # 14 Q5: Uncertainties in Bills Decision After this analysis, Bill needs to consider several issues before deciding to lower his price to $170/unit. This slide is not automated in order to allow the instructor ample time to discuss each point. Use one mouse click to advance each of the four secondary bullets.This slide is not automated in order to allow the instructor ample time to discuss each point. Use one mouse click to advance each of the four secondary bullets.

    15. Chapter 3: Cost-Volume-Profit Analysis Slide # 15 Q1: Using CVP to Compare Alternatives CVP analysis can compare alternative cost structures or selling prices. This slide is not automated in order to allow the instructor ample time to discuss each point. Use one mouse click to advance each of the three secondary bullets, and one more to display the second primary bullet.This slide is not automated in order to allow the instructor ample time to discuss each point. Use one mouse click to advance each of the three secondary bullets, and one more to display the second primary bullet.

    16. Chapter 3: Cost-Volume-Profit Analysis Slide # 16 Currently Bills salespersons have salaries totaling $80,000 (included in F of $360,000) and earn a 5% commission on each unit ($10 per briefcase). He is considering an alternative compensation arrangement where the salaries are decreased to $35,000 and the commission is increased to 20% ($40 per briefcase). Compute the BEP in units under the proposed alternative. Recall that P = $200 and V = $80 currently. Q1,2: Using CVP to Compare Alternatives

    17. Chapter 3: Cost-Volume-Profit Analysis Slide # 17 Q1: Determining the Indifference Point Compute the volume of sales, in units, for which Bill is indifferent between the two alternatives.

    18. Chapter 3: Cost-Volume-Profit Analysis Slide # 18 Q1,2: CVP Graphs of the Indifference Point Draw a CVP graph for Bills that displays the costs under both alternatives. Notice that the total revenue line for both alternatives is the same, but the total cost lines are different. 1. The first click begins an automated sequence that shows the TC and BEP of the proposed plan 2. The second click begins the sequence to show the point of indifference between the plans.1. The first click begins an automated sequence that shows the TC and BEP of the proposed plan 2. The second click begins the sequence to show the point of indifference between the plans.

    19. Chapter 3: Cost-Volume-Profit Analysis Slide # 19 Q1,2: Comparing Alternatives This slide is entirely automated no clicks required.This slide is entirely automated no clicks required.

    20. Chapter 3: Cost-Volume-Profit Analysis Slide # 20 Q5: Uncertainties in Bills Decision Hopefully Bill is currently selling more than 1500 briefcases, because profits are negative under BOTH plans at this point. This slide is not automated in order to allow the instructor ample time to discuss each point. The first bullet is automated, and one click is required for each of the next 2 bullets. A final click is needed to bring in the however.This slide is not automated in order to allow the instructor ample time to discuss each point. The first bullet is automated, and one click is required for each of the next 2 bullets. A final click is needed to bring in the however.

    21. Chapter 3: Cost-Volume-Profit Analysis Slide # 21 Q5: Uncertainties in Bills Decision . . . this may not be true because the level of future sales is always uncertain. The first primary bullet and its secondary bullets are automated. Use one mouse click to advance the sequence for the second primary bullet and its secondary bulletThe first primary bullet and its secondary bullets are automated. Use one mouse click to advance the sequence for the second primary bullet and its secondary bullet

    22. Chapter 3: Cost-Volume-Profit Analysis Slide # 22 Q3: CVP Analysis for Multiple Products When a company sells more than one product the CVP calculations must be adjusted for the sales mix. The sales mix should be stated as a proportion This slide is entirely automated.This slide is entirely automated.

    23. Chapter 3: Cost-Volume-Profit Analysis Slide # 23 Q3: Sales Mix Computations The weighted average contribution margin is the weighted sum of the products contribution margins: All elements of the WACM discussion are automated. 1. One mouse click begins the sequence for the WAMR discussionAll elements of the WACM discussion are automated. 1. One mouse click begins the sequence for the WAMR discussion

    24. Chapter 3: Cost-Volume-Profit Analysis Slide # 24 Peggys Kitchen Wares sells three sizes of frying pans. Next year she hopes to sell a total of 10,000 pans. Peggys total fixed costs are $40,800. Each products selling price and variable costs is given below. Find the BEP in units for this company. Q3: Multiple Product Breakeven Point

    25. Chapter 3: Cost-Volume-Profit Analysis Slide # 25 Q3: Multiple Product Breakeven Point Next, compute the BEP in terms of total units:

    26. Chapter 3: Cost-Volume-Profit Analysis Slide # 26 Find the BEP in sales $ for Peggys Kitchen Wares. The total revenue and total variable cost information below is based on the expected sales mix. Q3: Multiple Product Breakeven Point

    27. Chapter 3: Cost-Volume-Profit Analysis Slide # 27 Q3: Multiple Product Breakeven Point . . . = 45.6%, of course! Depending on how the given information is structured, it may be easier to compute the CMR as Total contribution margin/Total revenue.

    28. Chapter 3: Cost-Volume-Profit Analysis Slide # 28 Q6: Margin of Safety The margin of safety is a measure of how far past the breakeven point a company is operating, or plans to operate. It can be measured 3 ways. The first click brings in the margin of safety in units formula. The second click brings in the margin of safety in $ formula. The third click brings in the margin of safety percentage based on units formula. The first click brings in the margin of safety in units formula. The second click brings in the margin of safety in $ formula. The third click brings in the margin of safety percentage based on units formula.

    29. Chapter 3: Cost-Volume-Profit Analysis Slide # 29 Suppose that Bills Briefcases has budgeted next years sales at 5,000 units. Compute all three measures of the margin of safety for Bill. Recall that P = $200, V = $80, F = $360,000, the BEP in units = 3,000, and the BEP in sales $ = $600,000. Q6: Margin of Safety

    30. Chapter 3: Cost-Volume-Profit Analysis Slide # 30 Q6: Degree of Operating Leverage The degree of operating leverage measures the extent to which the cost function is comprised of fixed costs. The first primary bullet is automated. The first click brings in the second primary bullet. The second click brings third primary bullet, and its 2 secondary bullets are automated on a 1.5 second delay.The first primary bullet is automated. The first click brings in the second primary bullet. The second click brings third primary bullet, and its 2 secondary bullets are automated on a 1.5 second delay.

    31. Chapter 3: Cost-Volume-Profit Analysis Slide # 31 Q6: Degree of Operating Leverage The degree of operating leverage can be computed 3 ways. This slide is entirely automated.This slide is entirely automated.

    32. Chapter 3: Cost-Volume-Profit Analysis Slide # 32 Suppose that Bills Briefcases has budgeted next years sales at 5,000 units. Compute Bills degree of operating leverage. Recall that P = $200, V = $80, F = $360,000, and the margin of safety percentage at 5,000 units is 40%. Q6: Degree of Operating Leverage

    33. Chapter 3: Cost-Volume-Profit Analysis Slide # 33 Q6: Using the Degree of Operating Leverage The degree of operating leverage shows the sensitivity of profits to changes in sales.

    34. Chapter 3: Cost-Volume-Profit Analysis Slide # 34 Relevant Question in Sample Exam1 SXF Corporation sells its single product for $14 per unit, and its variable cost per unit is $4. Total fixed costs are $800. Its CVP graph is as follows:

    35. Chapter 3: Cost-Volume-Profit Analysis Slide # 35 Relevant Question in Sample Exam1 15. Point A is best described as a. Fixed cost b. Margin of safety c. Estimated profit at actual volume d. Breakeven point 16. Area C is best described as a. Fixed cost b. Margin of safety c. Estimated profit at actual volume d. Breakeven point

    36. Chapter 3: Cost-Volume-Profit Analysis Slide # 36 Relevant Question in Sample Exam1 17. Smith Co. has a contribution margin ratio of 40% and a breakeven point of $200,000 in sales. If the firm reports net income of $50,000 after taxes of 50%, what were total sales for the year? a. $450,000 b. $466,667 c. $500,000 d. $700,000

    37. Chapter 3: Cost-Volume-Profit Analysis Slide # 37 Relevant Question in Sample Exam1 ZTL Corporation produces three products. Cost, price, and volume data is shown below: Total Fixed costs $2,400 Tax rate 40% Picture Candle CD Holders Holders Holders Normal volume 300 150 200 Price per unit $5 $7 $10 Variable cost per unit 2 3 4 18. The weighted average contribution margin ratio, rounded to the nearest whole percent, is a. 57% b. 59% c. 60% d. Some other number

    38. Chapter 3: Cost-Volume-Profit Analysis Slide # 38 Relevant Question in Sample Exam1 19. A firm with fixed costs of $61,500 per month sells three products with the following characteristics: Sales Mix Contribution Product Percentage Margin P 25% $48 Q 50% 50 R 25% 52 How many total units must be sold to breakeven? a. 1,230 b. 1,500 c. 1,533 d. 1,600

    39. Chapter 3: Cost-Volume-Profit Analysis Slide # 39 Relevant Question in Sample Exam1 20. Nunn Company produces a single product. Following is cost information: Variable Cost Fixed Costs Per Unit Manufacturing costs $35,000 $15 Non-manufacturing costs 60,000 10 If the product sells for $60, how many units must be sold to break even? a. 1,000 b. 2,375 c. 2,714 d. 3,800

    40. Chapter 3: Cost-Volume-Profit Analysis Slide # 40 Relevant Question in Sample Exam1 21. Ryan Company manufactures a single product. The product sells for $10. The variable manufacturing cost per unit is $2 and the variable selling cost is $2 per unit. Ryan incurs monthly fixed costs of $100,000 for manufacturing and $140,000 for administration and selling. Ryan is considering changes to its production and distribution procedures. If the changes are made, total variable costs (manufacturing and selling) will be $3 and total fixed costs (manufacturing, administration, and selling) will be $350,000 per month. The selling price will remain at $10. If the changes are made, the number of units required to break even will be a. Greater than before b. The same as before c. Less than before d. Cannot be determined

    41. Chapter 3: Cost-Volume-Profit Analysis Slide # 41 Relevant Question in Sample Exam1 22. Which of the following is not an assumption in CVP analysis? a. Actual costs will be exactly the amount that we predict in the analysis b. Operations are within the relevant range c. The revenue function is linear d. The cost function is linear

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