1 / 27

# - PowerPoint PPT Presentation

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

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.

## PowerPoint Slideshow about '' - daniel_millan

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

Cost Volume Profit AnalysisChapter 6

INTRODUCTION

The Profit Function

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

Now, we’ll expand our

original equation for profits!

(P × X) - [(V × X) + F]

=

Now, we’ll expand our

original equation for profits!

(P × X) - [(V × X) + F]

=

(P – V)X – F

=

Here is the information from the Hap Bikes:

(P – V)X – F

=

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?

Target

Volume

(units)

Fixed costs + Target profit

Contribution margin per unit

=

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

(P – V)X – F

=

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.

Let’s use the Hap Bikes information again.

Contribution margin ratio

Break-Even

Volume

(units)

Fixed costs + Target profit

Contribution margin per unit

=

Break-Even

Volume

(sales \$)

Fixed costs + Target profit

Contribution margin ratio

=

\$80,000 + \$0

.40

=

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

Contribution margin per unit

Sales price per unit

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

Target

Volume

(sales \$)

Fixed costs + Target profit

Contribution margin ratio

=

Consider the following information for Hap Bikes:

Dollars

Volume per period (X)

Dollars

Break-even point

Volume per period (X)

• 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.

Let’s see what happens when both companies

experience a 10% increase in sales.

• 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

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