C3 - 1 Learning Objectives Power Notes 1.Cost Behavior 2.Cost-Volume-Profit Relationships 3.Mathematical Approach to Cost-Volume-Profit Analysis 4.Graphic Approach to Cost-Volume-Profit Analysis 5.Sales Mix Considerations 6.Special Cost-Volume-Profit Relationships 7.Assumptions of Cost-Volume-Profit Analysis Chapter M3 C3 Cost Behavior and Cost-Volume-Profit Analysis Cost Behavior and Cost-Volume-Profit Analysis

C3 - 2 Variable, Fixed, and Mixed Costs Contribution Margin Income Statement Break-Even Point, Planned Sales Level Cost-Volume-Profit Charts Sales Mix Considerations Margin of Safety, Operating Leverage Slide # Power Note Topics Note: To select a topic, type the slide # and press Enter. Power Notes Chapter M3 Cost Behavior and Cost-Volume-Profit Analysis Cost Behavior and Cost-Volume-Profit Analysis

C3 - 3 Variable Costs Total Variable Cost Graph Total Costs $300,000 $250,000 $200,000 $150,000 $100,000 $50, Unit Variable Cost Graph $20 $15 $10 $5 0 Cost per Unit ,000 $ 50,000 $10 10, , , , , , , , , , Units Total Cost Produced Cost per Unit Units Produced (000)

C3 - 4 Variable Costs Total Variable Cost Graph Total Costs $300,000 $250,000 $200,000 $150,000 $100,000 $50, Unit Variable Cost Graph $20 $15 $10 $5 0 Cost per Unit ,000 $ 50,000 $10 10, , , , , , , , , , Units Total Cost Produced Cost per Unit Units Produced (000)

C3 - 5 Variable Costs Total Variable Cost Graph Total Costs $300,000 $250,000 $200,000 $150,000 $100,000 $50, Unit Variable Cost Graph $20 $15 $10 $5 0 Cost per Unit ,000 $ 50,000 $10 10, , , , , , , , , , Units Total Cost Produced Cost per Unit Units Produced (000)

C3 - 6 Fixed Costs Total Fixed Cost Graph Total Costs 0 Unit Fixed Cost Graph Cost per Unit 50,000 $75,000 $ ,000 75, ,000 75, ,000 75, ,000 75, ,000 75, Units Total Cost Produced Cost per Unit Units Produced (000) $150,000 $125,000 $100,000 $75,000 $50,000 $25, $1.50 $1.25 $1.00 $.75 $.50 $

C3 - 7 Fixed Costs Total Fixed Cost Graph Total Costs 0 Unit Fixed Cost Graph Cost per Unit 50,000 $75,000 $ ,000 75, ,000 75, ,000 75, ,000 75, ,000 75, Units Total Cost Produced Cost per Unit $150,000 $125,000 $100,000 $75,000 $50,000 $25, $1.50 $1.25 $1.00 $.75 $.50 $ Units Produced (000)

C3 - 8 Fixed Costs Total Fixed Cost Graph Total Costs 0 Unit Fixed Cost Graph Cost per Unit 50,000 $75,000 $ ,000 75, ,000 75, ,000 75, ,000 75, ,000 75, Units Total Cost Produced Cost per Unit $150,000 $125,000 $100,000 $75,000 $50,000 $25, $1.50 $1.25 $1.00 $.75 $.50 $ Units Produced (000)

C3 - 9 Mixed Costs Total Mixed Cost Graph Total Costs 0 Total Machine Hours (000) $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5, Mixed costs are usually separated into their fixed and variable components for management analysis. Mixed costs are sometimes called semivariable or semifixed costs.

C Mixed Costs: High-Low Method Actual costs incurred June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 ProductionTotal UnitsCost Highest level Lowest level Difference ProductionTotal UnitsCost Highest and lowest levels

C Mixed Costs: High-Low Method Actual costs incurred ProductionTotal UnitsCost Highest level2,100$61,500 Lowest level Difference ProductionTotal UnitsCost Highest and lowest levels June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250

C Mixed Costs: High-Low Method Actual costs incurred ProductionTotal UnitsCost Highest level2,100$61,500 Lowest level75041,250 Difference ProductionTotal UnitsCost Highest and lowest levels June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250

C Mixed Costs: High-Low Method Actual costs incurred ProductionTotal UnitsCost Variable cost per unit Difference in total cost Difference in production = Highest level2,100$61,500 Lowest level75041,250 Difference1,350$20,250 ProductionTotal UnitsCost Highest and lowest levels 1 June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250

C Mixed Costs: High-Low Method Actual costs incurred June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 ProductionTotal UnitsCost Variable cost per unit Difference in total cost Difference in production $20,250 1,350 units === ProductionTotal UnitsCost Highest and lowest levels 1 $15 Highest level2,100$61,500 Lowest level75041,250 Difference1,350$20,250

C Mixed Costs: High-Low Method Actual costs incurred June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 ProductionTotal UnitsCost Variable cost per unit Difference in total cost Difference in production $20,250 1,350 units $15 === Total cost =– Fixed cost Highest level2,100$61,500 Lowest level75041,250 Difference1,350$20,250 ProductionTotal UnitsCost Highest and lowest levels Variable cost per unit x Units of production 1 2

C Mixed Costs: High-Low Method Actual costs incurred June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 ProductionTotal UnitsCost Variable cost per unit Difference in total cost Difference in production $20,250 1,350 units $15 == = Total cost =– Fixed cost Highest level2,100$61,500 Lowest level75041,250 Difference1,350$20,250 ProductionTotal UnitsCost Highest and lowest levels Variable cost per unit x Units of production Highest level: $61,500 =– ( $15 x 2,100 ) = $30,

C Mixed Costs: High-Low Method Actual costs incurred June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 ProductionTotal UnitsCost Variable cost per unit Difference in total cost Difference in production $20,250 1,350 units $15 === Total cost =– Fixed cost Highest level2,100$61,500 Lowest level75041,250 Difference1,350$20,250 ProductionTotal UnitsCost Highest and lowest levels Variable cost per unit x Units of production Highest level: $61,500 =– ( $15 x 2,100 ) = $30,000 Lowest level: $41,250 =– ( $15 x 750 ) = $30,

C Mixed Costs: High-Low Method Actual costs incurred June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 ProductionTotal UnitsCost Variable cost per unit Difference in total cost Difference in production $20,250 1,350 units $15 === Total cost =– Fixed cost Highest level2,100$61,500 Lowest level75041,250 Difference1,350$20,250 ProductionTotal UnitsCost Highest and lowest levels Variable cost per unit x Units of production Highest level: $61,500 =– ( $15 x 2,100 ) = $30,000 Lowest level: $41,250 =– ( $15 x 750 ) = $30,

C Variable Costs Total Fixed Costs Total Units Produced Total Costs Unit Fixed Costs Total Units Produced Per Unit Cost Total Variable Costs Total Units Produced Unit Variable Costs Total Units Produced Total Costs Per Unit Cost Fixed Costs

C Variable Costs Total Fixed Costs Total Units Produced Total Costs Unit Fixed Costs Total Units Produced Per Unit Cost Total Variable Costs Total Units Produced Unit Variable Costs Total Units Produced Total Costs Per Unit Cost Fixed Costs Used for planning. Remains the same regardless of activity level. $10 per unit $75,000 total

C Sales (50,000 units) $1,000,000 Variable costs 600,000 Contribution margin $400,000 Fixed costs 300,000 Income from operations $100,000 Contribution Margin Income Statement Total The contribution margin is available to cover the fixed costs and income from operations. Sales Variable costs Fixed costs Income from operations

C Contribution Margin Income Statement Sales (50,000 units) $1,000,000 $20 100% Variable costs 600, % Contribution margin $400,000 $ 8 40% Fixed costs 300,000 Income from operations $100,000 Total Per Unit Percent The statement can be extended to include per unit dollars and percentage numbers.

C Sales (50,000 units) $1,000,000 $20 100% Variable costs 600, % Contribution margin $400,000 $ 8 40% Fixed costs 300,000 Income from operations $100,000 Contribution Margin Income Statement Total Per Unit Percent Sales Sales Variable Variablecosts Fixed Fixedcosts Incomefrom operations operations =++ Sales Sales Variable VariablecostsContributionmargin –=

C Contribution Margin Income Statement Total Per Unit Percent Unit Contribution Margin Contribution Margin Ratio Sales (50,000 units) $1,000,000 $20 100% Variable costs 600, % Contribution margin $400,000$ 8 40% Fixed costs 300,000 Income from operations $100,000 The contribution margin can be expressed three ways: 1. Total contribution margin in dollars. 2. Unit contribution margin (dollars per unit). 3. Contribution margin ratio (percentage). The contribution margin can be expressed three ways: 1. Total contribution margin in dollars. 2. Unit contribution margin (dollars per unit). 3. Contribution margin ratio (percentage).

C Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $300,000 $ 8 40% Fixed costs 300,000 Income from operations $ 0 Calculating the Break-Even Point Total Per Unit Percent At the break-even point, fixed costs and the contribution margin are equal.

C Calculating the Break-Even Point Total Per Unit Percent Break-even Break-evensales Fixedcosts =/ Contributionmargin Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 300,000 $ 8 40% Fixed costs 300,000 Income from operations $ 0 /or Divide by either: $8 per unit or 40%

C Calculating the Break-Even Point Total Per Unit Percent Break-even Break-evensales Fixedcosts = / Contribution Margin per unit Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 300,000 $ 8 40% Fixed costs 300,000 Income from operations $ 0 or What is the break-even sales in units?

C Calculating the Break-Even Point Total Per Unit Percent Break-even Break-evensales Fixedcosts =/ Contributionmargin Break-even sales = $300,000 / $8 = 37,500 units Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 300,000 $ 8 40% Fixed costs 300,000 Income from operations $ 0 What is the break-even sales in dollars? /or

C Calculating the Break-Even Point Total Per Unit Percent Break-even Break-evensales Fixedcosts =/ Contributionmargin Break-even sales = $300,000 / $8 = 37,500 units Break-even sales = $300,000 / 40% = $750,000 Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 300,000 $ 8 40% Fixed costs 300,000 Income from operations $ 0 /or

C Calculating a Planned Sales Level Total Per Unit Percent Plannedsales Fixed Target costs profit Fixed Target costs profit =/ Contributionmargin Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 400,000 $ 8 40% Fixed costs 300,000 Income from operations $ 100,000 + /or Fixed costs plus the target profit equals the required total contribution margin.

C Calculating a Planned Sales Level Total Per Unit Percent Plannedsales Fixed Target costs profit =/ Contributionmargin Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 400,000 $ 8 40% Fixed costs 300,000 Income from operations $ 100,000 + /or $8 per unit or 40%

C Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 400,000 $ 8 40% Fixed costs 300,000 Income from operations $ 100,000 Calculating a Planned Sales Level Total Per Unit Percent Plannedsales Fixed Target costs profit =/ Contributionmargin + /or What is the planned sales level in units?

C Sales (50,000 units) ? $20 100% Variable costs ? 12 60% Contribution margin $ 400,000 $ 8 40% Fixed costs 300,000 Income from operations $ 100,000 Calculating a Planned Sales Level Plannedsales Fixed Target costs profit =/ Contributionmargin Planned sales = ($300,000 + $100,000) / $8 = 50,000 units + What is the planned sales level in dollars? Total Per Unit Percent /or

C Calculating a Planned Sales Level Total Per Unit Percent Plannedsales Fixed Target costs profit =/ Contributionmargin Planned sales = ($300,000 + $100,000) / $8 = 50,000 units + Planned sales = ($300,000 + $100,000) / 40% = $1,000,000 /or $1,000,000 Sales (50,000 units) $1,000,000 $20 100% Variable costs 600, % Contribution margin $ 400,000 $ 8 40% Fixed costs 300,000 Income from operations $ 100,000

C Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Total Sales

C Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Total Sales Variable Costs 60%

C % 60% 40% 100% 60% 40% Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Total Sales Variable Costs Contribution Margin 40% 60%

C Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Total Costs Total Sales Fixed Costs Variable Costs

C Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Total Costs Total Sales

C Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$100,000 Operating Loss Area Operating Profit Area Total Costs Total Sales

C Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) Break-Even Point Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs $100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs $100,000 Total Costs Total Sales $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50

C Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) Break-Even Point Unit selling price$ 50 Unit variable cost30 Unit contribution margin$20 Total fixed costs$100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$20 Total fixed costs$100,000 Total Costs Total Sales $100,000 $20 = 5,000 units $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50

C Cost-Volume-Profit Chart (Break-Even) Sales and Costs ($000) 0 Units of Sales (000) Break-Even Point Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs $100,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs $100,000 Operating Loss Area Operating Profit Area Total Costs Total Sales $100,000 $20 = 5,000 units $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50

C Revised Cost-Volume-Profit Chart Sales and Costs ($000) 0 Units of Sales (000) Revised Break- Even Point Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$80,000 Unit selling price$ 50 Unit variable cost30 Unit contribution margin$ 20 Total fixed costs$80,000 Operating Loss Area Operating Profit Area Total Costs Total Sales $80,000 $20 = 4,000 units $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50

C Profit-Volume Chart Operating Profit (Loss) $000’s $100 $75 $50 $25 $ 0 $(25) $(50) $(75) $(100) 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 100,000 Operating profit $100,000 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 100,000 Operating profit $100,000 Units of Sales (000’s) Relevant range is 10,000 units.

C Profit-Volume Chart Operating Profit (Loss) $000’s $100 $75 $50 $25 $ 0 $(25) $(50) $(75) $(100) 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 100,000 Operating profit $100,000 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 100,000 Operating profit $100,000 Units of Sales (000’s) Maximum profit within the relevant range. Maximum loss is equal to the total fixed costs.

C Profit-Volume Chart Operating Profit (Loss) $000’s $100 $75 $50 $25 $ 0 $(25) $(50) $(75) $(100) 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 100,000 Operating profit $100,000 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 100,000 Operating profit $100,000 Profit Line Units of Sales (000’s) Operating Profit Operating Loss

C Profit-Volume Chart Operating Profit (Loss) $000’s $100 $75 $50 $25 $ 0 $(25) $(50) $(75) $(100) 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 100,000 Operating profit $100,000 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 100,000 Operating profit $100,000 Profit Line Units of Sales (000’s) Operating Profit Operating Loss Break-Even Point

C Sales Mix Considerations Sales $ 90 $140 Variable costs Contribution margin $ 20 $ 45 Sales mix 80% 20% Contribution margin Contribution margin Products A B What is the average contribution for each product?

C Sales Mix Considerations Sales $ 90 $140 Variable costs Contribution margin $ 20 $ 45 Sales mix x 80% x 20% Product contribution $ 16 $ 9 Contribution margin Contribution margin Products AB What is the total product contribution?

C Sales Mix Considerations Sales $ 90 $140 Variable costs Contribution margin $ 20 $ 45 Sales mix x 80% x 20% Product contribution $ 16 $ 9 Total product contribution$ 25 Contribution margin Contribution margin Break-even sales units Break-even sales units Products AB Total fixed costs $200,000 Product contribution $25 What is the break-even sales units?

C Sales Mix Considerations Sales $ 90 $140 Variable costs Contribution margin $ 20 $ 45 Sales mix x 80% x 20% Product contribution $ 16 $ 9 Total product contribution $ 25 Contribution margin Contribution margin Break-even sales units Break-even sales units Products AB Total fixed costs $200,000 Product contribution $25 Break-even sales units 8,000 Product A units (80%) 6,400 Product B units (20%) 1,600 = 8,000 units

C Sales Mix Considerations Sales $ 90 $ 140 Variable costs Contribution margin $ 20 $ 45 Sales mix 60% 40% Contribution margin Contribution margin Products AB If the sales mix is 60% for product A and 40% for product B, what is the break-even sales units?

C Sales Mix Considerations Sales $ 90 $140 Variable costs Contribution margin $ 20 $ 45 Sales mix x 60% x 40% Product contribution $ 12 $ 18 Total product contribution $ 30 Contribution margin Contribution margin Break-even sales units Break-even sales units Products AB Total fixed costs $200,000 Product contribution $30 Break-even sales units 6,667 Product A units (60%) 4,000 Product B units (40%) 2,667 = 6,667 units

C Margin of Safety Sales – Sales at break-even point Sales Sales – Sales at break-even point Sales Dollars Units Sales $250,00010,000 Break-even sales 200,000 8,000 Excess $ 50,000 2,000

C Margin of Safety Sales – Sales at break-even point Sales Sales – Sales at break-even point Sales Dollars Units A Sales $250,00010,000 Break-even sales 200,000 8,000 Excess $ 50,000 2,000 Actual sales level.

C Margin of Safety Sales – Sales at break-even point Sales Sales – Sales at break-even point Sales Dollars Units A B Sales $250,00010,000 Break-even sales 200,000 8,000 Excess $ 50,000 2,000 Margin of safety (B/A) Excess of actual sales over the break-even sales. What is the margin of safety as a percentage?

C Margin of Safety Sales – Sales at break-even point Sales Sales – Sales at break-even point Sales Margin of safety indicates the decrease in sales that may occur before an operating loss results. Dollars Units A B Sales $250,00010,000 Break-even sales 200,000 8,000 Excess $ 50,000 2,000 Margin of safety (B/A)20% Margin of safety expressed in units.

C Operating Leverage Contribution margin Operating income Contribution margin Operating income Sales $400,000 $400,000 Variable costs 300, ,000 Contribution margin $100,000 $100,000 Fixed costs 80,000 50,000 Income from operations $20,000$ 50,000 Jones Inc. Wilson Inc. Operating leverage is a measure of the relative mix of variable costs and fixed costs.

C Operating Leverage Contribution margin Operating income Contribution margin Operating income Sales $400,000 $400,000 Variable costs 300, ,000 Contribution margin $100,000 $100,000 Fixed costs 80,000 50,000 Income from operations $20,000$ 50,000 Jones Inc. Wilson Inc. A Operating leverage is a measure of the relative mix of variable costs and fixed costs. Both companies have the same contribution margin.

C Operating Leverage Contribution margin Operating income Contribution margin Operating income Sales $400,000 $400,000 Variable costs 300, ,000 Contribution margin $100,000 $100,000 Fixed costs 80,000 50,000 Income from operations $20,000$ 50,000 Operating leverage (A/B) Jones Inc. Wilson Inc.A B Operating leverage is a measure of the relative mix of variable costs and fixed costs. What is the operating leverage?

C Operating Leverage Contribution margin Operating income Contribution margin Operating income Sales $400,000 $400,000 Variable costs 300, ,000 Contribution margin $100,000 $100,000 Fixed costs 80,000 50,000 Income from operations $20,000$ 50,000 Operating leverage (A/B) Jones Inc. Wilson Inc.A B Operating leverage is a measure of the relative mix of variable costs and fixed costs. What do these numbers mean? 5 2

C Operating Leverage Contribution margin Operating income Contribution margin Operating income Sales $400,000 $400,000 Variable costs 300, ,000 Contribution margin $100,000 $100,000 Fixed costs 80,000 50,000 Income from operations $20,000$ 50,000 Operating leverage (A/B) Jones Inc. Wilson Inc. A B Operating leverage is a measure of the relative mix of variable costs and fixed costs. Capital intensive? Labor intensive? 5 2

C Assumptions of Cost-Volume-Profit Analysis 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 accurately divided into fixed and variable components. 4.The sales mix is constant. 5.There is no change in the inventory quantities during the period. The reliability of cost-volume-profit analysis depends upon several assumptions.

C Note: To see the topic slide, type 2 and press Enter. This is the last slide in Chapter M3. Power Notes Chapter M3 Cost Behavior and Cost-Volume-Profit Analysis