FINance - Cost-Volume-Profit Analysis (1) Because of the...

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Unformatted text preview: Cost-Volume-Profit Analysis (1) Because of the unique patterns of fixed and variable costs, we can use these patterns to assist us in forecasting costs and planning optimal production activities. This can be done graphically by plotting FC and VC for various production levels, or can be done with simple algebra Break even costs: S = VC + FC where S=PxQ and VC=Cost x Q C-V-P Analysis (2) Illustration: Selling price= $10 per unit, VC=$6 per unit, and FC=$100,000. What is break even sales level? Formula 10q = 6q + 100,000 Thus: 4q = 100,000 (contribution margin is S VC or $4 per unit) q = 25,000 units (to break even) C-V-P Analysis (3) Suppose we desire a $2 profit per unit? Just add to the formula: Sales = VC + FC + Profit, or 10q = 6q + 100,000 + 2q 2q = 100,000 q = 50,000 units required sales to make a $2 profit per unit sold Estimating Costs: High-Low Previous data assumed FC and VC were easily obtained, but what if costs are mixedelements of both fixed and variable costs combined? Linear regressionmost accurate method to break out costs High-Low: quick method to estimate variable and fixed cost portions High-Low: Illustration (1) M onth Qua ntity Tota l Cost January 3,400 $222,000 February 3,600 $231,600 M arch 3,800 $241,600 A pril 4,000 $244,000 M ay 4,200 $246,000 June 4,300 $244,700 July 4,400 $252,000 A ugust 4,600 $262,600 S eptem ber 4,700 $270,400 October 4,900 $262,100 Novem ber 5,200 $276,000 Decem ber 5,400 $282,000 Totals 52,500 $3,035,000 There is a clear relationship between quantity and cost, but it is not yet specified High-Low: Illustration (2) Cost Quantity Per unit High December $282,000 5,400 Low January-$222,000-3,400 difference $60,000 2,000 $30.00 divide by VC or slope High Low Total cost $282,000 $222,000 less VC= slope x qty-$162,000-$102,000 FC $120,000 $120,000 Thus VC estimated = $30 per unit and VC estimate =$120 K or Total costs = $30q + $120,000 Pause here to review class exercises on C-V-P Analysis...
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FINance - Cost-Volume-Profit Analysis (1) Because of the...

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