Note that the slope of the prot volume line equals

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Unformatted text preview: analysis is called profit-volume analysis. A graphic comparison of profit-volume and CVP relationships is shown in Exhibit 3.4. The cost and revenue lines are collapsed into a single profit line. Note that the slope of the profit-volume line equals the unit contribution margin. The intercept equals the loss at zero volume, which equals fixed costs. The vertical axis shows the amount of operating profit or loss. Orientation profit-volume analysis Version of CVP analysis using a single profit line. L.O. 2 Understand the effect of cost structure on decisions. Preparing and Organizing Yourself Exhibit 3.4 for Success in College Comparison of CVP Cost-Volume-Profit Relation Graph and Profit-Volume Graph—U-Develop $8,000 Total revenue TR $.60 X Dollars $6,000 $4,000 TC Total cost $1,500 $.36 X CHAPTERS IN PART ONE $2,000 1 $0 0 1,500 3,000 4,500 6,000 2 7,500 Making Yourself Successful in College Approaching College Reading and 9,000 10,500a 12,000 Developing College-Level Vocabulary Volume 3 Profit-Volume Relation Approaching College Assignments: Reading Textbooks and Following Directions $1,400 Operating profit Dollars $400 0 $600 1,500 3,000 4,500 6,000 7,500 9,000 10,500 12,000 Operating loss Profit Total contribution margin $.24X $1,500 ✓ Related Resources See pages 000 to 000 of the Annotated Instructor’s Edition for general suggestions related to the chapters in Part One. Total costs 1 $1,600 Volume cor50782_ch01_001-072.indd 1 lan27114_ch03_080-109.indd 87 10/5/09 11:09:29 PM 10/22/09 10:33:53 PM REVISED PAGES Part II 88 Cost Analysis and Estimation Use of CVP to Analyze the Effect PART of Different Cost Structures cost structure Proportion of an organization’s fixed and variable costs to its total costs. operating leverage Extent to which an organization’s cost structure is made up of fixed costs. 1 An organization’s cost structure is the proportion of fixed and variable costs to total costs. Cost structures differ widely among industries and among firms within an industry. Electric utilities such as Southern California Edison or Public Service of New Mexico have a large investment in equipment, which results in a cost structure with high fixed costs. In contrast, grocery retailers such as Albertsons or Safeway have a cost structure with a higher proportion of variable costs. The utility is capital intensive; the grocery store is labor intensive. An organization’s cost structure has a significant effect on the sensitivity of its profits to changes in volume. Operating leverage describes the extent to which an organization’s cost structure is made up of fixed costs. Operating leverage can vary within an industry as Preparing and Organizing Yourself well as between industries. The airline industry in the United States, for example, consists of so-called legacy carriers, such as American Airlines and Continental Airlines, which for Success in College have high fixed labor, pension, and other costs and which operate using a hub and spoke system. Newer carriers, such as...
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