TOC Concept in

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TOC Concept in

• COST-VOLUME-PROFIT
• ANALYSIS

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5 Factors on Profit

• Price
• Volume
• Variable Cost
• Fixed Cost
• Sales Mix

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• Traditional Income Statement
• Sales () 1000
• CGS (500)
• Gross Margin 500
• SA (300)
• Net Income 200
• Var CGS 350
• Fix CGS 150

• Contribution Margin Income Statement
• Sales () 1000
• Variable Costs (400)
• Contribution Mar. 600
• Fixed Costs (400)
• Net Income 200
• Var SA 50
• Fix SA 250

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DDC, Inc.

• Total Per Unit
• Sales 200,000 2.00 100
• Variable 80,000 0.80 40
• Contr. Marg. 120,000 1.20 60
• Fixed Cost 40,000
• Net Income 80,000
• Total CM? Unit CM? CM Ratio?

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Definitions

• Total CM Sales Total Variable Cost
• Unit CM Price Unit Variable Cost
• CM Ratio Total CM / Sales
• Unit CM / Price

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Meanings

• CM - By selling 1 additional unit, Net Income
  increases by CM.
• CMR- From 1 increase in sales, Net Income
  increases by CMR.

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Punch Line

• ? in Sales (Units) CM ? in NI
• ? in Sales () CMR ? in NI

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Contribution Margin

• Volume 0 1 2 33334
• Sales 0 2 4 66,668
• Variable 0 0.8 1.6 26,668
• CM 0 1.2 2.4 40,000
• Fixed 40,000 40,000 40,000 40,000
• NI (40,000) (39,999)
  (39,998) 0
• Breakeven Point 1. NI 0
• 2. Total CM Fixed
• 3. Revenue Expense

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Breakeven Point

• NI 0
• Fixed CM
• Revenue Expense
• B/E point (unit) Fixed / CM
• B/E point () Fixed / CMR

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Target Profit Analysis

• To achieve a certain level of target profit, what
  is the level of sales?
• Basically same approach as B/E analysis
• CM must be Fixed cost plus Target profit
• Sales (in units) (Fixed Target p)/CM
• Sales (in ) (Fixed Target p)/CMR

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Happy M Company

• Total () Per Unit ()
• Sales 100,000 12.50 100
• Variable 72,000 9.00 72
• CM 28,000 3.50 28
• Fixed 35,000
• NI (7,000)
• Volume 100,000 / 12.50 8,000 units

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Option 1 Reduce Variable by 10

• Variable cost 9.0 ? 8.1
• CM 3.5 ? 4.4
• New Total CM (8,000units4.4) 35,200
• Fixed 35,000
• NI 200

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Option 2 Increase sales by incentives

• Paying additional 0.30 commission per unit will
  increases volume by 2,400 units.
• CM 3.5 ? 3.2
• New CM (10,400 units 3.2) 33,280
• Old CM ( 8,000 units 3.5) 28,000
• Incremental CM 5,280

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Option 3 More ad bring more sales.

• Spending 10,000 on advertising will bring 3,200
  units of incremental sales.
• CM? Volume? Fixed?
• New CM (11,200 units 3.5) 39,200
• Old CM ( 8,000 units 3.5) 28,000
• Incremental CM 11,200
• Incremental Fixed cost 10,000
• Incremental NI 1,200

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Sales Mix ( A B 8 2)

• A B Total
• Sales 80,000 100 20,000 100 100,000 100
• Var 60,000 75 10,000 50 70,000
  70
• CM 20,000 25 10,000 50 30,000
  30
• Fix 27,000
• NI 3,000
• B/E 27,000 / 30 90,000 if sales mix is
  82
• Weighted Average CMR 25 0.8 50 0.2
  30

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Operating Leverage

• Proportion of fixed cost in cost structure
• Operating Leverage CM / NI
• (S V) / (S V F)

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Cost Structure

• X Y
• Sales 100,000 100,000
• Variable 60,000 30,000
• CM 40,000 70,000
• Fixed 30,000 60,000
• NI 10,000 10,000
• OL 4 7

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Punch Line

• ? in Sales () OL ? in NI ()
• Example
• X 10 4 40
• Y 10 7 70

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• Absorption Costing
• (Full Costing)
• Product Costs
• DM
• DL
• Var Mfg O/H
• Fix Mfg O/H
• Period Costs
• SA

• Variable Costing
• (Direct Costing)
• Product Costs
• DM
• DL
• Var Mfg O/H
• Period Costs
• SA
• Fix Mfg O/H

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Absorption vs. Variable Costing

• Fixed Mfg OH 100,000 per year
• Production Volume 100,000 units per year
• Expensed Fixed Mfg O/H
• Absorption Variable
• Sales 90,000 90,000 100,000
• Sales100,000 100,000 100,000
• Sales110,000 110,000 100,000

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Summary

• If Sales Production
• NIAC NIVC
• If Sales gt Production
• NIAC lt NIVC
• If Sales lt Production
• NIAC gt NIVC