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CHAPTER
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Objectives
1. Determine the number of units that must be After studying this sold to break even oryou should profit. earn a target chapter, 2. Calculate the amount of to: be able revenue required to break even or to earn a targeted profit. 3. Apply cost-volume-profit analysis in a multiple-product setting. 4. Prepare a profit-volume graph and a costvolume-profit graph, and explain the meaning of each.
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Objectives
5. Explain the impact of risk, uncertainty, and changing variables on cost-volume-profit analysis. 6. Discuss the impact of activity-based costing on cost-volume-profit analysis
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Sales revenue
Variable expenses
Fixed expenses
= Operating income
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$400,000
325,000 $ 75,000
45,000
$ 30,000
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$400,000 1,000
$325,000 1,000
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Operating income =
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Revenue
Total Variable Cost
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Revenue
Total Variable Cost
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Revenue
Total Variable Cost
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Multiple-Product Analysis
Sales Less: Variable expenses Contribution margin Less: Direct fixed expenses Product margin Less: Common fixed expenses Operating income Mulching Mower $480,000 390,000 $ 90,000 30,000 $ 60,000 Riding Mower Total $640,000 $1,120,000 480,000 870,000 $160,000 $ 250,000 40,000 70,000 $120,000 $ 180,000 26,250 $ 153,750
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Total
$431,200 334,950 $ 96,250 70,000 $ 26,250 26,250 $ 0
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The profit-volume graph portrays the relationship between profits and sales volume.
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Example
The Tyson Company produces a single product with the following cost and price data: Total fixed costs Variable costs per unit Selling price per unit $100 5 10
Profit-Volume Graph
Profit $100 or Loss 80 (40, $100) I = $5X - $100
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60
40 20 Break-Even Point (20, $0)
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The cost-volume-profit graph depicts the relationship among costs, volume, and profits.
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Cost-Volume-Profit Graph
Revenue $500 -450 -400 -350 -300 -250 -200 -150 -100 -Loss 50 -| 0 -- | 5 10 Total Revenue
Total Cost
15
20
25
30
35 40
45 50 55 Units Sold
60
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Relevant Range
$
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Total Revenue
Total Cost
Units
Relevant Range
Alternative 1: If advertising expenditures increase by 16 -28 $8,000, sales will increase from 1,600 units to 1,725 units.
BEFORE THE INCREASED ADVERTISING WITH THE INCREASED ADVERTISING
Units sold Unit contribution margin Total contribution margin Less: Fixed expenses Profit
DIFFERENCE IN PROFIT
Change in sales volume Unit contribution margin Change in contribution margin Less: Change in fixed expenses Increase in profits
Alternative 2: A price decrease from $400 to $375 per 16 -29 lawn mower will increase sales from 1,600 units to 1,900 units.
BEFORE THE PROPOSED CHANGES WITH THE PROPOSED CHANGES
Units sold Unit contribution margin Total contribution margin Less: Fixed expenses Profit
DIFFERENCE IN PROFIT
Alternative 3: Decreasing price to $375and increasing 16 -30 advertising expenditures by $8,000 will increase sales from 1,600 units to 2,600 units.
BEFORE THE PROPOSED CHANGES WITH THE PROPOSED CHANGES
Units sold Unit contribution margin Total contribution margin Less: Fixed expenses Profit
DIFFERENCE IN PROFIT
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Margin of Safety
Assume that a company has the following projected income statement:
Sales Less: Variable expenses Contribution margin Less: Fixed expenses Income before taxes Break-even point in dollars (R):
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Chapter Sixteen
The End
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