Cost Volume Profit Analysis Chapter 6 - PowerPoint PPT Presentation

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Breakeven Analysis Differential Cost Analysis. Cost Volume Profit Analysis Chapter 6. INTRODUCTION The Profit Function. The Profit Equation. Operating Profit. Total Revenue. Total Costs. =. –. Operating profit equals total revenue less total costs. The Profit Equation. Operating

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Cost Volume Profit Analysis Chapter 6

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Presentation Transcript

• Breakeven Analysis

• Differential Cost Analysis

Cost Volume Profit AnalysisChapter 6

INTRODUCTION

The Profit Function

The Profit Equation

Operating

Profit

Total

Revenue

Total

Costs

=

Operating profit equals total revenue

less total costs.

Operating

Profit

Total

Revenue

Total

Costs

=

= TR – TC

Total

Revenue

Average Selling

Price Per Unit

Units of

Output

=

×

TR = P × X

Total

Costs

Variable Costs

Per Unit

Units of

Output

Fixed

Costs

+

=

×

TC = (V × X) + F

The Profit Equation

Now, we’ll expand our

original equation for profits!

(P × X) - [(V × X) + F]

=

The Profit Equation

Now, we’ll expand our

original equation for profits!

(P × X) - [(V × X) + F]

=

(P – V)X – F

=

Example

Here is the information from the Hap Bikes:

(P – V)X – F

=

Finding Target Volumes

The formula to find a volume expressed in units for a target profit is . . .

Target

Volume

(units)

Fixed costs + Target profit

Contribution margin per unit

=

How many bikes must Hap sell to

earn an annual profit of \$100,000?

Finding Target Volumes

Target

Volume

(units)

Fixed costs + Target profit

Contribution margin per unit

=

Proof

If Hap sells 900 bikes, its operating profit would be . . .

(P – V)X – F

=

Finding the Break-Even Point

The Break-Even Point is the volume level where profits equal zero.

• To find the break-even point in units, we use the target volume in units equation and set the profit to zero.

• To find the break-even point in sales dollars, we use the target volume in sales dollars equation and set the profit to zero.

Break-Even in Units

Let’s use the Hap Bikes information again.

Contribution margin ratio

Break-Even in Units

Break-Even

Volume

(units)

Fixed costs + Target profit

Contribution margin per unit

=

Break-Even in Sales Dollars

Break-Even

Volume

(sales \$)

Fixed costs + Target profit

Contribution margin ratio

=

\$80,000 + \$0

.40

=

Target Volume in Sales Dollars

We can calculate the target volume in sales dollars using the contribution margin ratio.

Contribution margin per unit

Sales price per unit

Target Volume in Sales Dollars

The equation for finding the target volume in sales dollars is . . .

Target

Volume

(sales \$)

Fixed costs + Target profit

Contribution margin ratio

=

Graphic Presentation

Consider the following information for Hap Bikes:

Graphic Presentation

Dollars

Volume per period (X)

Graphic Presentation

Dollars

Break-even point

Volume per period (X)

Using CVP to Analyze Different Cost Structures

• Cost structure - The proportion of fixed and variable to total costs of an organization.

• Operating leverage - The extent to which an organization’s costs structure is made up of fixed costs.

Let’s look at an example of different costs

structures for different companies.

Using CVP to Analyze Different Cost Structures

Let’s see what happens when both companies

experience a 10% increase in sales.

Margin of Safety

• Excess of projected (or actual) sales over the break-even volume.

• The amount by which sales can fall before the company is in the loss area of the break-even graph.

Sales Break-even

volume sales volume

= Margin of Safety

Margin of Safety

Hap is currently selling 500 bikes, and we calculated the break-even to be 400 units (\$80,000 fixed costs ÷ \$200 contribution margin).