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Cornerstones of Financial & Managerial Accounting
Rich/Jones/Heitger/Mowen/Hansen
Chapter 15
Learning Objectives
LO1. Determine the break-even point in number of units and in total sales dollars.
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At break even, total costs (variable and fixed) equal total sales revenue.
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Break-even units equal total fixed costs divided by the contribution margin (price
minus variable cost per unit).
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Break-even revenue equals total fixed costs divided by the contribution mar gin
ratio.
LO2. Determine the number of units that must be sold, and the amount of revenue
required, to earn a targeted profit.
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To earn a target (desired) profit, total costs (variable and fixed) plus the amount of
target profit must equal total sales revenue.
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Units to earn target profit equal total fixed costs plus target profit divided by the
contribution margin.
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Sales revenue to earn target profit equals total fixed costs plus target profit
divided by the contribution margin ratio.
LO3. Prepare a profit-volume graph and a cost-volume-profit graph, and explain
the meaning of each.
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CVP assumes linear revenue and cost functions, no finished goods ending
inventories, constant sales mix, and that selling prices and fixed and variable costs
are known with certainty.
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Profit-volume graphs plot the relationship between profit (operating income) and
units sold. Break-even units are shown where the profit line crosses the horizontal
axis.
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CVP graphs plot a line for total costs and a line for total sales revenue. The
intersection of these two lines is the break-even point in units.
LO4. Apply cost-volume-profit analysis in a multiple-product setting.
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Multiple-product analysis requires the expected sales mix.
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Break-even units for each product will change as the sales mix changes.
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Increased sales of high contribution margin products decrease the break-even
point.
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Increased sales of low contribution margin products increase the break-even
point.
LO5. Explain the impact of risk, uncertainty, and changing variables on costvolume-profit analysis.
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Uncertainty regarding costs, prices, and sales mix affect the break-even point.
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Sensitivity analysis allows managers to vary costs, prices, and sales mix to show
various possible break-even points.
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Margin of safety shows how far the company's actual sales and/or units are above
or below the break-even point.
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Operating leverage is the use of fixed costs to increase the percentage changes in
profits as sales activity changes.