Web Chapter 22 - CostVolumeProfit Analysis Chapter 22...

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Unformatted text preview: CostVolumeProfit Analysis Chapter 22 Classification of Costs By Behavior Fixed Cost Variable Cost Mixed Cost CM Income Statement Sales Revenue (2,000 units) Less: Variable costs Contribution margin Less: Fixed costs Net income Total $ 200,000 140,000 $ 60,000 24,000 $ 36,000 Unit $ 100 70 $ 30 CM Income Statement Sales Revenue (800 units) Less: Variable costs Contribution margin Less: Fixed costs Net income Total $ 80,000 56,000 $ 24,000 24,000 $0 Unit $ 100 70 $ 30 Computing BreakEven Point Break-even point in units = Break-even point in dollars = Computing Sales for a Target Income Unit sales = Dollar sales = Sensitivity Analysis Example Rydell Company is considering buying a new machine that would increase monthly fixed costs from $24,000 to $30,000, but decrease unit variable costs from $70 to $60. The $100 per unit selling price would remain unchanged. CM Income Statement Sales Revenue (2,000 units) Less: Variable costs Contribution margin Less: Fixed costs Net income Total $ 200,000 120,000 $ 80,000 30,000 $50,000 Unit $ 100 60 $ 40 Sensitivity Analysis Example Rydell Company is considering whether to use higher quality components in its products in an effort to increase customer demand. The new components would cost an additional $5 per unit. If the change is made the company expects sales to increase 10 percent. CM Income Statement Sales Revenue (2,200 units) Less: Variable costs Contribution margin Less: Fixed costs Net income Total $ 220,000 165,000 $ 55,000 24,000 $31,000 Unit $ 100 75 $ 25 Example Halko Company had sales in 2005 of $1,500,000 on 60,000 units. Variable costs totaled $720,000 and fixed costs totaled $500,000. A new raw material is available that will decrease the variable costs per unit by 20%. However, to process the new raw material, fixed operating costs will increase by $50,000. Management feels that one-half of the decline in the variable costs per unit should be passed on to customers in the form of a sales price reduction. The marketing department expects that this sales price reduction will result in a 5% increase in the number of units sold. Example Example Computing Multiproduct CVP or BreakEven Analysis The CVP formulas may be modified for use when a company sells more than one product. The unit contribution margin is replaced with the contribution margin for a composite unit. A composite unit is composed of specific numbers of each product in proportion to the product sales mix. Sales mix is the ratio of the volumes of the various products. Assumptions of CVP Analysis A limited range of activity called the relevant range, where CVP relationships are linear. Unit selling price remains constant. Total fixed costs remain constant. Unit variable costs remain constant. Production = sales (no inventory changes). Joe Vida owns the Peace Barber Shop. He employs five barbers and pays each a base rate of $1,200 per month. One of the barbers serves as the manager and receives an extra $600 per month. In addition to the base rate each barber also receives a commission of $3.50 per haircut. Joe charges $10.00 for each haircut. Other costs are as follows: Advertising Rent Barber supplies Utilities Magazines $200 per month $800 per month $0.30 per haircut $175 per month plus $0.20 per haircut $25 per month Example Example ...
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