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Unformatted text preview: MGMT 201 (Ganguly)
Lecture 12: CVP Analysis The BreakEven Point
The breakeven point is the point in the volume of activity where the organization’s revenues and expenses are equal.
Sales $ 250,000 Less: variable expenses 150,000 Contribution margin 100,000 Less: fixed expenses 100,000 Net income $ - ContributionMargin Approach Consider the following information developed by the accountant at Curl, Inc.:
Sales (500 surf boards) Less: variable expenses Contribution margin Less: fixed expenses Net income Total $250,000 150,000 $100,000 80,000 $ 20,000 Per Unit $ 500 300 $ 200 Percent 100% 60% 40% ContributionMargin Approach ContributionMargin Approach For each additional surf board sold, Curl generates $200 in contribution margin.
Sales (500 surf boards) Less: variable expenses Contribution margin Less: fixed expenses Net income Total $250,000 150,000 $100,000 80,000 $ 20,000 Per Unit $ 500 300 $ 200 Percent 100% 60% 40% 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 1. So, what is the BEP in dollars?
A. B. C. D. E. $400 Sales (500 surf boards) Less: variable expenses $100,000 Contribution margin Less: fixed expenses $200,000 Net income $250,000 None of the above Total $250,000 150,000 $100,000 80,000 $ 20,000 Per Unit $ 500 300 $ 200 Percent 100% 60% 40% $80,000 $80,000 = 400 surf boards $200 $200 Show me the Proof! Here is the proof!
Total Sales (? surf boards) Less: variable expenses Contribution margin Less: fixed expenses Net income Per Unit Percent Remember Variable Costing vs. Absorption Costing? CVP includes all fixed costs to compute breakeven. (Remember to include even Selling and Administrative!) Variable costing and CVP are consistent as both treat Absorption costing defers fixed costs into fixed costs as a lump sum. inventory. Absorption costing is inconsistent with CVP because absorption costing treats fixed costs on a per unit basis. That does not mean absorption costing is “inferior” … it’s just that each has its purpose ! Contribution Margin Ratio
Often used to calculate the breakeven point in sales dollars rather than units.
Contribution margin Contribution Sales Sales
@ BEP = CM Ratio Fixed expense Fixed CM Ratio CM Break-even point = (in sales dollars) Contribution Margin Ratio
2. A company has fixed expenses of $80,000 and BEP is $400,000. If variable expenses are $400,000, what is the sales amount? A. $320,000 B. $400,000 C. $480,000 D. $500,000 E. $580,000 Contribution Margin Ratio
Total Sales (? surf boards) Less: variable expenses Contribution margin Less: fixed expenses Net income Per Unit Percent Graphing CostVolumeProfit Relationships
Viewing CVP relationships in a graph gives managers a perspective that can be obtained in no other way. Consider the following information for Curl, Inc.: CostVolumeProfit Graph
Sales in Dollars Total sales
rea fit a Pro Total expenses os L rea sa Fixed expenses Units Sold ProfitVolume Graph
Some managers like the profit-volume graph because it focuses on profits and volume.
a re it a of Pr Profit a re sa os L
1 Break-even point
3 2 4 5 6 7 8 Units sold (00s) Now, Target Net Profit We can determine the number of surfboards that Curl must sell to earn a profit of $100,000 using the contribution margin approach.
Fixed expenses + Target profit Target Unit contribution margin Unit = Units sold to earn the target profit $80,000 + $100,000 $200 = 900 surf boards Equation Approach
Sales revenue – Variable expenses – Fixed expenses = Profit ($500 × X) – X) ($300 × X) – $80,000 = $100,000 X) $100,000 ($200X) = $180,000 X = 900 surf boards 4. Sales price = $500/unit; Variable expenses= $300/unit; Fixed Expenses=$80,000. What is the targeted sales in units to earn an aftertax profit of $140,000, when the tax rate is 30%? A. B. C. D. 890 surf boards 900 surf boards 1400 surf boards 1800 surf boards 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? Changes in Fixed Costs 540 units × $500 per unit = $270,000 $80,000 + $10,000 advertising = $90,000 Changes in Fixed Costs
Sales will increase by $20,000, but net income decreased by $2,000. 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 CVP Analysis, ActivityBased Costing, and Advanced Manufacturing Systems
An activitybased costing system can provide a much more complete picture of costvolumeprofit relationships and thus provide better information to managers.
Break-even = Fixed costs Fixed point Unit contribution margin Unit A Move Toward JIT and Flexible Manufacturing
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 activity based costing CVP analysis. End of the basic discussion of CVP!
Now I’m ready Now for the harder stuff next class! stuff ...
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This note was uploaded on 03/18/2011 for the course MGMT 201 taught by Professor Rowe during the Spring '08 term at Purdue University-West Lafayette.
- Spring '08