1. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 7 Cost-Volume- Profit Analysis

2. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 1

3. 7-3 The Break-Even Point The break-even point is the point in the volume of activity where the organization’s revenues and expenses are equal.

4. 7-4 Equation Approach Sales revenue – Variable expenses – Fixed expenses = Profit UnitsalespriceSalesvolume in units × UnitvariableexpenseSalesvolume × × X) ($500 × X) × X) ($300 × X)– –$80,000 = $0 X) ($200X)–$80,000 = $0 X = 400 surf boards

5. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 2

6. 7-6 Contribution-Margin Approach For each additional surf board sold, Curl generates $200 in contribution margin. Consider the following information developed by the accountant at Curl, Inc.:

7. 7-7 Contribution-Margin Approach Fixed expenses Fixed expenses Unit contribution margin Unit contribution margin = Break-even point (in units) $80,000 $80,000 $200 = 400 surf boards

8. 7-8 Contribution-Margin Approach Here is the proof! 400 × $500 = $200,000 400 × $300 = $120,000

9. 7-9 Contribution Margin Ratio Calculate the break-even point in sales dollars rather than units by using the contribution margin ratio. Contribution margin Sales = CM Ratio Fixed expense Fixed expense CM Ratio Break-even point (in sales dollars) =

10. 7-10 Contribution Margin Ratio $80,000 $80,00040% $200,000 sales =

11. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 3

12. 7-12 Graphing Cost-Volume-Profit 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.:

13. 7-13 Cost-Volume-Profit Graph Fixed expenses Total expenses Total sales Break-even point Break-even point Profit area Loss area

14. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 4

15. 7-15 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 Unit contribution margin = Units sold to earn the target profit $80,000 + $100,000 $200 $80,000 + $100,000 $200 = 900 surf boards See the Equation Approach example in text book (LO1)

16. 7-16 Applying CVP Analysis Safety Margin The difference between budgeted sales revenue and break-even sales revenue. The amount by which sales can drop before losses begin to be incurred. Safety Margin The difference between budgeted sales revenue and break-even sales revenue. The amount by which sales can drop before losses begin to be incurred. See example the Safety Margin example in text book LO4)

17. 7-17 What would happen to BREAK EVEN POINT if there is a: Changes in Fixed Costs: See example in text book (LO4) Changes in Unit Contribution Margin: See example in text book (LO4) for: –Unit Variable expenses –Sale prices Changes in Fixed Costs: See example in text book (LO4) Changes in Unit Contribution Margin: See example in text book (LO4) for: –Unit Variable expenses –Sale prices

18. 7-18 Predicting Profit Given Expected Volume Fixed expenses Unit contribution margin Target net profit Find: {req’d sales volume}Given: Fixed expenses Unit contribution margin Expected sales volume Find: {expected profit} Given: See the example in text book (LO4)

19. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 5

20. 7-20 CVP Analysis with Multiple Products For a company with more than one product, sales mix is the relative combination in which a company’s products are sold. Different products have different selling prices, cost structures, and contribution margins. See the example in text book (LO5) For a company with more than one product, sales mix is the relative combination in which a company’s products are sold. Different products have different selling prices, cost structures, and contribution margins. See the example in text book (LO5)

21. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 6

22. 7-22 Assumptions Underlying CVP Analysis 1.Selling price is constant throughout the entire relevant range. 2.Costs are linear over the relevant range. 3.In multi-product companies, the sales mix is constant. 4.In manufacturing firms, inventories do not change (units produced = units sold). 1.Selling price is constant throughout the entire relevant range. 2.Costs are linear over the relevant range. 3.In multi-product companies, the sales mix is constant. 4.In manufacturing firms, inventories do not change (units produced = units sold).

23. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 7 – 11 can be found in the text book.

24. 7-24 End of Chapter 7 We made it!