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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 We plan on selling 30,000 units Sales Revenue Less: Variable costs Contribution margin Less: Fixed costs Net Income Volume 30,000 Unit $2.00 1.00 $1.00 Total $60,000 30,000 30,000 24,000 $6,000 CM Income Statement If we only sell 20,000 units Volume Sales Revenue Less: Variable costs Contribution margin Less: Fixed costs Net Income Unit Total Computing Sales for BreakEven Point (Unit Price x Vol) (Unit VC x Vol) FC = Net income CM Income Statement If we sell 24,000 units Volume Sales Revenue Less: Variable costs Contribution margin Less: Fixed costs Net Income Unit Total Computing Sales for a Target Income Unit sales = Fixed costs + Target income Contribution margin per unit 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 Sensitivity Analysis Red River Foods is considering switching to higher quality bags which would improve the freshness of its chips. If the company makes the change, variable costs would increase by $0.05 per unit; furthermore, the Sales Manager estimates that sales would improve by 10% provided the company does not change the current price. Should the company make the change? CM Income Statement Volume Sales Revenue Less: Variable costs Contribution margin Less: Fixed costs Net Income Unit Total Sensitivity Analysis Red River Foods is considering upgrading the equipment rented from the Fuzzy Spatula. The new equipment would cook its chips faster and use less corn oil. If the change is made the company's monthly bill would increase by $1,500, but the new equipment is expected to decrease the company's use of corn oil by $0.02 per unit Should the company rent the new equipment? CM Income Statement Volume Sales Revenue Less: Variable costs Contribution margin Less: Fixed costs Net Income Unit Total 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. ...
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