Cost Volume Profit Analysis Chapter 6

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Cost Volume Profit AnalysisChapter 6
INTRODUCTION The Profit Function
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The Profit Equation
Operating Profit
Total Revenue
Total Costs


Operating profit equals total revenue less total
costs.
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The Profit Equation
Operating Profit
Total Revenue
Total Costs


TR TC
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The Profit Equation
Total Revenue
Average Selling Price Per Unit
Units of Output


TR P X
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The Profit Equation
Total Costs
Variable Costs Per Unit
Units of Output
Fixed Costs



TC (V X) F
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The Profit Equation
Now, well expand our original equation for
profits!
(P X) - (V X) F

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The Profit Equation
Now, well expand our original equation for
profits!
(P X) - (V X) F

(P V)X F

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Example

• Here is the information from the Hap Bikes

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Example
(P V)X F

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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?
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Finding Target Volumes
Target Volume (units)
Fixed costs Target profit Contribution margin
per unit

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Proof

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

(P V)X F

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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.

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Break-Even in Units

• Lets use the Hap Bikes information again.

Contribution margin ratio
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Break-Even in Units
Break-Even Volume (units)
Fixed costs Target profit Contribution margin
per unit

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Break-Even in Sales Dollars
Break-Even Volume (sales )
Fixed costs Target profit Contribution
margin ratio

80,000 0 .40

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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
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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

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Graphic Presentation

• Consider the following information for Hap Bikes

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Graphic Presentation
Dollars
Volume per period (X)
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Graphic Presentation
Dollars
Break-even point
Volume per period (X)
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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
  organizations costs structure is made up of
  fixed costs.

Lets look at an example of different
costs structures for different companies.
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Using CVP to Analyze Different Cost Structures
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Using CVP to Analyze Different Cost Structures
Lets see what happens when both
companies experience a 10 increase in sales.
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Using CVP to Analyze Different Cost Structures
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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
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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).