MGMT_201_(Ganguly)_Lecture_13

# MGMT_201_(Ganguly)_Lecture_13 - MGMT 201(Ganguly Lecture 13...

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Unformatted text preview: MGMT 201 (Ganguly) Lecture 13: More about CVP analysis & An intro. to Operating Leverage 1 Contribution­Margin Approach Fixed expenses Fixed Unit contribution margin Sales (500 surf boards) Less: variable expenses Contribution margin Less: fixed expenses Net income Break-even point = (in units) Per Unit \$ 500 300 \$ 200 Percent 100% 60% 40% Total \$250,000 150,000 \$100,000 80,000 \$ 20,000 \$80,000 \$80,000 \$200 \$200 = 400 surf boards 2 Changes in Fixed Costs Curl is currently selling 500 surf boards per month. The owner believes that an increase of \$10,000 in the monthly advertising budget, would increase bike sales to 540 units. Should we authorize the requested increase Should we authorize the requested increase in the advertising budget? 3 Changes in Fixed Costs 540 units × \$500 per unit = \$270,000 \$80,000 + \$10,000 advertising = \$90,000 4 Changes in Fixed Costs Sales will increase by \$20,000, but net income decreased by \$2,000. 5 Changes in Unit Contribution Margin Because of increases in cost of raw materials, Curl’s variable cost per unit has increased from \$300 to \$310 per surf board. With no change in selling price per unit, what will be the new break­even point? (\$500 × X) – X) (\$310 × X) – \$80,000 = \$0 X) X = 422 units (rounded) (rounded) 422 6 CVP Analysis with Multiple Products For a company with more than one product, sales mix is the relative combination in which a company’s products are sold. Different products have different selling prices, cost structures, and contribution margins. Let’s assume Curl sells surf boards and sail boards and see how we deal with break­ even analysis. 7 CVP Analysis with Multiple Products Curl provides us with the following information: 8 CVP Analysis with Multiple Products Weighted-average unit contribution Weighted-average margin margin \$200 × 62.5% 9 CVP Analysis with Multiple Products Break-even point Break-even Fixed expenses = point Weighted-average unit contribution margin Break-even = point \$170,000 \$331.25 Break-even = 514 combined unit sales point 10 10 CVP Analysis with Multiple Products Break-even point Break-even = 514 combined unit sales point 11 11 Assumptions Underlying CVP Analysis Selling price is constant throughout the entire relevant range.  Costs are linear over the relevant range.  In multi­product companies, the sales mix is constant.  In manufacturing firms, inventories do not change (units produced = units sold).  12 12 Cost Structure and Operating Leverage The cost structure of an organization is the relative proportion of its fixed and variable costs. Operating leverage is . . . the extent to which an organization uses fixed costs in its cost structure. greatest in companies that have a high proportion of fixed costs in relation to variable costs. 13 13 Measuring Operating Leverage Operating leverage factor = Contribution margin Net income \$100,000 \$100,000 =5 \$20,000 \$20,000 14 14 The magic of Operating Leverage A measure of how a percentage change in sales will affect profits. If Curl increases its sales by 10%, what will be the percentage increase in net income? Percent increase in sales Operating leverage factor × Percent increase in profits 10% 5 50% 15 15 An afterthought: Overhead costs like setup, inspection, and material handling are fixed with respect to sales volume, but they are not fixed with respect to other cost drivers. This is the fundamental distinction between a traditional CVP analysis and an activity­based costing CVP analysis. 16 16 Move Toward JIT and Flexible Manufacturing End of Chapter 8 We made it! 17 17 ...
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