@ 2012, Cengage Learning Cost Behavior and Cost-Volume-Profit Analysis LO 4 – Using the Graphic Approach for CVP Analysis

Cost-Volume-Profit (Break-Even) Chart  A cost-volume-profit chart, sometimes called a break-even chart, graphically shows sales, costs, and the related profit or loss for various levels of units sold. LO 4

Cost-Volume-Profit (Break-Even) Chart LO 4  The cost-volume-profit charts in this section are based on Exhibit 5, which was constructed using the following data: (continued )

Cost-Volume-Profit (Break-Even) Chart LO 4 Sales and Costs (in thousands) 0 Units of Sales (in thousands) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Dollar amounts are indicated along the vertical axis Volume is shown along the horizontal axis.

Cost-Volume-Profit (Break-Even) Chart LO 4 Point A Sales and Costs (in thousands) 0 $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Units of Sales (in thousands) Point A could have been plotted at any sales level, because linearity is assumed.

Cost-Volume-Profit (Break-Even) Chart LO 4 Beginning at zero on the left corner of the graph, connect a straight line to the dot (Point A). This is the total revenue or total sales line. Point A Sales and Costs (in thousands) 0 $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Units of Sales (in thousands) Total Revenue

Sales and Costs (in thousands) 0 $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Units of Sales (in thousands) Cost-Volume-Profit (Break-Even) Chart LO 4 Fixed cost of $100,000 is a horizontal line. Fixed Cost

Sales and Costs (in thousands) 0 $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Units of Sales (in thousands) Cost-Volume-Profit (Break-Even) Chart LO 4 A point is marked at $400,000, where 10,000 units are sold. (continued )

Sales and Costs (in thousands) 0 $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Units of Sales (in thousands) Cost-Volume-Profit (Break-Even) Chart LO 4 A line is drawn from fixed costs at zero sales ($100,000) to this point. This is the total costs line. (continued ) Total Costs

Cost-Volume-Profit (Break-Even) Chart LO Sales and Costs (in thousands) 0 $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Units of Sales (in thousands) Cost-Volume-Profit (Break-Even) Chart LO 4 The point where the revenue (blue) line and the total costs (orange) line intersect is the break- even point. Break-even Point (continued )

Cost-Volume-Profit (Break-Even) Chart LO Sales and Costs (in thousands) 0 $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Units of Sales (in thousands) Cost-Volume-Profit (Break-Even) Chart LO 4 Break-even is sales of 5,000 units or $250,000. Break-even Point

Cost-Volume-Profit (Break-Even) Chart LO Sales and Costs (in thousands) 0 $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Units of Sales (in thousands) Cost-Volume-Profit (Break-Even) Chart LO 4 Break-even Point Operating Loss Area Operating Profit Area

Cost-Volume-Profit (Break-Even) Chart LO 4 Cost-Volume-Profit (Break-Even) Chart LO 4

Cost-Volume-Profit (Break-Even) Chart LO 4 Cost-Volume-Profit (Break-Even) Chart LO 4 A proposal to reduce fixed costs by $20,000 is to be evaluated. The cost-volume-profit chart in Exhibit 6 (next page) was designed to assist in this evaluation. Note that the total costs line has been drawn from fixed costs at zero sales of $80,000, reducing the break-even point to dollar sales of $200,000, or 4,000 units.

Cost-Volume-Profit (Break-Even) Chart LO 4 Cost-Volume-Profit (Break-Even) Chart LO 4

Profit-Volume Chart  Another graphic approach to cost-volume-profit analysis, the profit-volume chart, plots only the difference between total sales and total costs (or profits). Again, data from Exhibit 5 are used. LO 4 Unit selling price$ 50 Unit variable cost 30 Unit contribution margin$ 20 Total fixed costs $100,000 Unit selling price$ 50 Unit variable cost 30 Unit contribution margin$ 20 Total fixed costs $100,000

Profit-Volume Chart LO 4  The maximum operating loss is equal to the fixed costs of $100,000. Assuming that the maximum unit sales within the relevant range is 10,000 units, the maximum operating profit is $100,000, as shown below. Maximum profit

Profit-Volume Chart LO 4

Profit-Volume Chart LO 4 Sales (10,000 units x $50)$500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20)$200,000 Fixed costs 120,000 Operating profit$ 80,000 Sales (10,000 units x $50)$500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20)$200,000 Fixed costs 120,000 Operating profit$ 80,000 Assume that an increase in fixed costs of $20,000 is to be evaluated. The maximum operating profit would be $80,000, as shown below: Revised Maximum profit

Profit-Volume Chart LO 4

Assumptions of Cost-Volume-Profit Analysis  The primary assumptions are as follows: 1.Total sales and total costs can be represented by straight lines. 2.Within the relevant range of operating activity, the efficiency of operations does not change. 3.Costs can be divided into fixed and variable components. 4.The sales mix is constant. 5.There is no change in the inventory quantities during the period. LO 4