Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
COST-VOLUME-PROFIT ANALYSIS CHAPTER 16 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. CHAPTER 16 OBJECTIVES 1. Determine the number of units and amount of sales revenue needed to break even and to earn a target profit 2. Determine the number of units and sales revenue needed to earn an after-tax target profit 3. Apply cost-volume-profit analysis in a multiple-product setting © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. CHAPTER 16 OBJECTIVES 4. Prepare a profit-volume graph and a costvolume-profit graph, and explain the meaning of each 5. Explain the impact of risk, uncertainty, and changing variables on cost-volume-profit analysis 6. Discuss the impact of non-unit cost drivers on cost-volume-profit analysis © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. THE BREAK EVEN POINT AND TARGET PROFIT IN UNITS AND SALES REVENUE Cost-Volume-Profit (CVP) Analysis • Powerful tool for planning and decision making • As it emphasizes the interrelationships of costs, quantity sold, and price, it brings together all of the financial information of the firm LO-1 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. THE BREAK EVEN POINT AND TARGET PROFIT IN UNITS AND SALES REVENUE • Two frequently used approaches to finding the break-even point • Operating income approach • Contribution margin approach • Break-even point: the point of zero profit LO-1 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. THE BREAK EVEN POINT AND TARGET PROFIT IN UNITS AND SALES REVENUE • First step in implementing a units-sold approach to CVP analysis is to determine just what a unit is • Second step is to separate costs into fixed and variable components • CVP focuses on the firm as a whole • All costs of the company—manufacturing, marketing, and administrative—are taken into account LO-1 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. THE BREAK EVEN POINT AND TARGET PROFIT IN UNITS AND SALES REVENUE Basic Concepts for CVP Analysis • A useful tool for organizing the firm’s costs into fixed and variable categories is the contribution-marginbased income statement • Operating income: income before income taxes (includes only revenues and expenses from the firm’s normal operations) • Net income: operating income minus income taxes LO-1 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. THE BREAK EVEN POINT AND TARGET PROFIT IN UNITS AND SALES REVENUE The Equation Method for Break-Even and Target Income Operating income = Sales revenues – Variable expenses – Fixed expenses Operating income = (Price × Number of units) – (Variable cost per unit × Number of units) – Total fixed costs LO-1 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. THE BREAK EVEN POINT AND TARGET PROFIT IN UNITS AND SALES REVENUE The Equation Method for Break-Even and Target Income • Equation for a target profit put in terms of units Units for a target profit = (Total fixed cost + Target income)/(Price - Variable cost per unit) • Break-even equation when target income is zero Break-even units = (Total fixed cost + 0)/Price Variable cost per unit LO-1 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. THE BREAK EVEN POINT AND TARGET PROFIT IN UNITS AND SALES REVENUE Contribution Margin Approach • Contribution margin is sales revenue minus total variable costs • By substituting the unit contribution margin for price minus unit variable cost in the operating income equation, the following break-even expression is obtained • Number of units = Fixed costs/Unit contribution margin LO-1 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. EXHIBIT 16.1—DIVISION OF REVENUE INTO VARIABLE COST AND CONTRIBUTION MARGIN LO-1 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. THE BREAK EVEN POINT AND TARGET PROFIT IN UNITS AND SALES REVENUE Break-Even Point and Target Income in Sales Revenue • A units sold measure can be converted to a salesrevenue measure by multiplying the unit sales price by the units sold • To calculate the break-even point in sales revenue, variable costs are defined as a percentage of sales rather than as an amount per unit sold • The contribution margin ratio is the proportion of each sales dollar available to cover fixed costs and provide for profit LO-1 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. THE BREAK EVEN POINT AND TARGET PROFIT IN UNITS AND SALES REVENUE Sales-Revenue Approach Operating income = Sales – Variable costs – Total fixed costs Operating income = Sales – (Variable cost ratio × Sales) – Total fixed costs Operating income = Sales (1- Variable cost ratio) – Total fixed costs Operating income = Sales × Contribution margin ratio – Total fixed costs LO-1 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. THE BREAK EVEN POINT AND TARGET PROFIT IN UNITS AND SALES REVENUE Sales-Revenue Approach Sales = (Total fixed costs + Operating income)/ Contribution margin ratio At break even, operating income equals zero Break-even sales = Total fixed costs/Contribution margin ratio LO-1 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. AFTER TAX PROFIT TARGETS • When calculating the break-even point, income taxes play no role because the taxes paid on zero income are zero • The after-tax profit, or net income, is computed by subtracting income taxes from the operating income (or before-tax profit) Operating Income = Net income /(1-tax rate) LO-2 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. MULTIPLE PRODUCT ANALYSIS • Direct fixed expenses: fixed costs that can be traced to each segment and would be avoided if the segment did not exist • Common fixed expenses: fixed costs that are not traceable to the segments and that would remain even if one of the segments was eliminated LO-3 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. MULTIPLE PRODUCT ANALYSIS Break-Even Point in Units for the MultipleProduct Setting Break-even sales = Fixed costs/Contribution margin ratio • Sales mix is the relative combination of products being sold by a firm • Defining a particular sales mix allows us to convert a multiple-product problem to a single-product CVP format LO-3 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. GRAPHICAL REPRESENTATIONS OF CVP RELATIONSHIPS The Profit-Volume Graph • Portrays the relationship between profits and sales volume • The graph of the operating income equation [Operating income = (Price × Units) – (Unit variable cost × Units) – Fixed Costs] • Operating income is the dependent variable and number of units is the independent variable LO-4 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. EXHIBIT 16.2—PROFIT VOLUME GRAPHS LO-4 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. GRAPHICAL REPRESENTATIONS OF CVP RELATIONSHIPS The Cost-Volume-Profit Graph •Depicts relationships among cost, volume, and profits •To obtain the more detailed relationships, it is necessary to graph two separate lines • The total revenue line; revenue = price × units • The total cost line; (unit variable cost × units) + Fixed costs •Vertical axis is measured in dollars and horizontal axis is measured in units sold LO-4 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. EXHIBIT 16.3—COST-VOLUME-PROFIT GRAPH LO-4 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. ASSUMPTIONS OF COST-VOLUME-PROFIT ANALYSIS Assumptions of Cost-Volume-Profit Analysis • A linear revenue function and a linear cost function • Price, total fixed costs, and unit variable costs can be accurately identified and remain constant over the relevant range • What is produced is sold • For multiple-product analysis, the sales mix is assumed to be known • The selling price and costs are assumed to be known with certainty LO-4 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. EXHIBIT 16.4—COST AND REVENUE RELATIONSHIPS LO-4 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. EXHIBIT 16.5—SUMMARY OF EFFECTS OF ALTERNATIVE 1 LO-5 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. EXHIBIT 16.6—SUMMARY OF EFFECTS OF ALTERNATIVE 2 LO-5 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. EXHIBIT 16.7—SUMMARY OF EFFECTS OF ALTERNATIVE 3 LO-5 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. CHANGES IN THE CVP VARIABLES Margin of Safety • Units sold or expected to be sold or the revenue earned or expected to be earned above the break-even volume • If a firm’s margin of safety is large given the expected sales for the coming year, the risk of suffering losses should sales take a downward turn is less than if the margin of safety is small LO-5 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. CHANGES IN THE CVP VARIABLES Operating Leverage • Use of fixed costs to extract higher percentage changes in profits as sales activity changes • The greater the degree of operating leverage, the more that changes in sales activity will affect profits • The mix of costs than an organization chooses can have a considerable influence on its operating risk and profit level Degree of operating leverage = Total contribution margin/Profit LO-5 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. CHANGES IN THE CVP VARIABLES Sensitivity Analysis and CVP • A what-if technique that examines the impact of changes in underlying assumptions on an answer • It is relatively simple to input data on prices, variable costs, fixed costs, and sales mix and set up formulas to calculate break-even points and expected profits • Then, the data can be varied as desired to see what impact changes have on the expected profit LO-5 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. EXHIBIT 16.8—DIFFERENCES BETWEEN MANUAL AND AUTOMATED SYSTEMS LO-5 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. CVP ANALYSIS AND NON-UNIT COST DRIVERS • Conventional CVP analysis assumes that all costs can be divided into variable and fixed costs • Costs are assumed to be a linear function of sales volume • An activity-based costing (ABC) system divides costs into unit and non unit based categories LO-6 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. CVP ANALYSIS AND NON-UNIT COST DRIVERS Total cost = Fixed costs + (Unit variable cost × Number of units) + (Setup cost × Number of setups) + (Engineering cost X Number of engineering hours) LO-6 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. CVP ANALYSIS AND NON-UNIT COST DRIVERS Operating income = Total revenue – [Fixed costs + (Unit variable cost × Number of units) + (Setup cost × Number of setups) + (Engineering cost × Number of engineering hours)] LO-6 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. CVP ANALYSIS AND NON-UNIT COST DRIVERS Break-even units = [Fixed costs + (Setup cost × Number of setups) + (Engineering cost × Number of engineering hours)]/Price – Unit variable cost) LO-6 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. CVP ANALYSIS AND NON-UNIT COST DRIVERS Differences Between ABC Break-Even Point and Conventional Break-Even Point • The fixed costs differ • The numerator of the ABC break-even equation has two non unit-variable cost terms LO-6 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use. END OF CHAPTER 16 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.