Cost management accounting and control 6e by hansen mowen guan chapter 17

COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan

Chapter 17
Cost-Volume-Profit
Analysis
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.

1


Study Objectives
1. Determine the number of units that must be sold to
break even or to earn a targeted profit.
2. Calculate the amount of revenue required to break even
or to earn a targeted profit.
3. Apply cost-volume-profit analysis in a multiple-product
setting.
4. Prepare a profit-volume graph and a cost-volume-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 activity-based costing on costvolume-profit analysis.
2


The Break-Even Point in Units
The controller of More-Power Company has prepared the
following projected income statement:

Sales (72,500 units @ $40)
Less: Variable expenses
Contribution margin
Less: Fixed expenses
Operating income

$2,900,000
1,740,000
$1,160,000
800,000
$ 360,000

3


The Break-Even Point in Units
Operating Income Approach
0 = ($40 x Units) – ($24 x Units) – $800,000
0 = ($16 x Units) – $800,000

$1,740,000 ÷ 72,500

($16 x Units) = $800,000
Units = 50,000
Proof
Sales (50,000 units @ $40)
Less: Variable expenses
Contribution margin
Less: Fixed expenses

Operating income

$2,000,000
1,200,000
$ 800,000
800,000
$
0
4


The Break-Even Point in Units
Contribution Margin Approach
Number of
units

= $800,000 ÷ ($40 - $24)
= $800,000 ÷ $16 contribution margin per unit
= 50,000

5


The Break-Even Point in Units
Target Income as a Dollar
Amount

$424,000 = ($40 x Units) – ($24 x Units) – $800,000

$1,224,000 = $16 x Units

Units = $1,224,000 ÷ $16
= 76,500
Proof
Sales (76,500 units @ $40)
Less: Variable expenses
Contribution margin
Less: Fixed expenses
Operating income

$3,060,000
1,836,000
$1,224,000
800,000
$ 424,000
6


The Break-Even Point in Units
Target Income as a Percentage of Sales
Revenue

More-Power Company wants to know the number of sanders that
must be sold in order to earn a profit equal to 15 percent of sales
revenue.
0.15($40)(Units) = ($40 x Units) – ($24 x Units) – $800,000
$6 x Units = ($40 x Units) – ($24 x Units) – $800,000
$6 x Units = ($16 x Units) – $800,000
$10 x Units = $800,000
Units = 80,000

7


The Break-Even Point in Units
After-Tax Profit Targets
Net income = Operating income – Income taxes
= Operating income – (Tax rate × Operating income)
= Operating income × (1 – Tax rate)
Or

Net income
Operating income =
(1 - Tax rate)

8


The Break-Even Point in Units
After-Tax Profit Targets
More-Power Company wants to achieve net income of
$487,500 and its income tax rate is 35 percent.
$487,500 = Operating income – 0.35(Operating income)
$487,500 = 0.65(Operating income)
$750,000 = Operating income

Units = ($800,000 + $750,000) ÷ $16
= $1,550,000 ÷ $16
= $96,875

9

Break-Even Point in Sales Dollars

10


Break-Even Point in Sales Dollars
The following More-Power Company contribution margin
income statement is shown for sales of 72,500 sanders.
Sales
Less: Variable expenses
Contribution margin
Less: Fixed expenses
Operating income

$2,900,000
1,740,000
$1,160,000
800,000
$ 360,000

11


Break-Even Point in Sales Dollars
To determine the break-even in sales dollars, the contribution
margin ratio must be determined ($1,160,000 ÷ $2,900,000)
Sales
Less: Variable expenses

Contribution margin
Less: Fixed expenses
Operating income

$2,900,000
$2,900,000 100%
1,740,000
60%
$1,160,000
40%
800,000
$ 360,000

12


Break-Even Point in Sales Dollars
Operating income = Sales – Variable costs – Fixed Costs
0 = Sales – (Variable cost ratio × Sales) – Fixed costs
0 = Sales × (1 – Variable cost ratio) – Fixed costs
0 = Sales × (1 – .60) – $800,000
Sales × 0.40 = $800,000
Sales = $2,000,000

13


Break-Even Point in Sales Dollars

14

Break-Even Point in Sales Dollars

15


Break-Even Point in Sales Dollars

16


Break-Even Point in Sales Dollars
Profit Targets
How much sales revenue must More-Power generate to earn a
before-tax profit of $424,000?
Sales = ($800,000 + $424,000) ÷ 0.40
= $1,224,000 ÷ 0.40
= $3,060,000

17


Multiple-Product Analysis
More-Power plans on selling 75,000 regular sanders and
30,000 mini-sanders. The sales mix is 5:2

Sales
Less: Variable expenses
Contribution margin

Less: Direct fixed expenses
Product margin
Less: Common fixed exp.
Operating income

Regular
MiniSander
Sander
Total
$3,000,000 $1,800,000 $4,800,000
1,800,000
900,000 2,700,000
$1,200,000 $ 900,000 $2,100,000
250,000
450,000
700,000
$ 950,000 $ 450,000 $1,400,000
600,000
$ 800,000

18


Multiple-Product Analysis
Break-Even Point in Units
Regular sander break-even units
= Fixed costs ÷ (Price – Unit variable)
= $250,000 ÷ $16
= 15,625 units
Mini-sander break-even units

= Fixed costs ÷ (Price – Unit variable)
= $450,000 ÷ $30
= 15,000 units

19


Multiple-Product Analysis
Sales Mix and CVP Analysis

Package break-even units
= Fixed costs ÷ Package contribution margin
= $1,300,000 ÷ $140
= 9,285.71 units
Sales volume for break-even
Regular sander: 46,429 units
Mini sander: 18,571 units

20


Multiple-Product Analysis

21


Multiple-Product Analysis
Sales Dollar Approach
Projected Income:
Sales

Less: Variable expenses
Contribution margin
Less: Fixed expenses
Operating income

$4,800,000
2,700,000
$2,100,000
1,300,000
$ 800,000

0.4375

Break-even sales = Fixed costs ÷ contribution margin ratio
= 1,300,000 ÷ 0.4375
= $2,971,429

22


Graphical Representation of
CVP Relationships

23


Graphical Representation of
CVP Relationships

24

Graphical Representation of
CVP Relationships
Assumptions of C-V-P Analysis
1.
2.

3.
4.
5.

The analysis assumes a linear revenue function and
a linear cost function.
The analysis assumes that price, total fixed costs,
and unit variable costs can be accurately identified
and remain constant over the relevant range.
The analysis assumes that 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.
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