1. 11-121-1 Accounting Using Excel for Success PowerPoint Presentation by: Douglas Cloud, Professor Emeritus Accounting, Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. Cost Behavior and Cost- Volume-Profit Analysis 21 Student Version

2. 11-221-2 1 Classify costs as variable costs, fixed costs, or mixed costs.

3. 11-321-3 Variable Costs Variable costs are costs that vary in proportion to changes in the level of activity. 1

4. 11-421-4 Jason Sound Inc. produces stereo systems. The parts for the stereo system are purchased from suppliers for $10 per unit (a variable cost) and assembled by Jason Sound Inc. Jason Sound Inc. 1

5. 11-521-5 For Model JS-12, the direct materials for the relevant range of 5,000 to 30,000 units of production are shown below. 1

6. 11-621-6 Fixed Costs Fixed costs are costs that remain the same in total dollar amount as the activity base changes. 1

7. 11-721-7 Minton Inc. manufactures, bottles, and distributes perfume. The production supervisor is Jane Sovissi. She is paid $75,000 per year. The plant produces from 50,000 to 300,000 bottles of La Fleur Perfume. Minton Inc. 1

8. 11-821-8 Number of Bottles of Perfume Produced Total Salary for Jane Sovissi 50,000 bottles$75,000$1.500 100,00075,0000.750 150,00075,0000.500 200,00075,0000.375 250,00075,0000.300 300,00075,0000.250 Salary per Bottle of Perfume Produced Fixed Versus Variable Cost of Jane Sovissi’s Salary per Bottle of Perfume 1

9. 11-921-9 Mixed Costs Mixed costs (sometimes called semivariable or semifixed costs) have characteristics of both a variable and a fixed cost. Over one range of activity, the total mixed cost may remain the same. Over another range of activity, the mixed cost may change in proportion to changes in level of activity. 1

10. 11-1021-10 Simpson Inc. manufactures sails, using rented equipment. The rental charges are $15,000 per year, plus $1 for each machine hour used over 10,000 hours. Simpson Inc. 1

11. 11-1121-11 The high-low method is a cost estimation method that may be used for separating mixed costs into their fixed and variable components. High-Low Method 1

12. 11-1221-12 ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 Fill in the formula for difference in cost. $61,500 41,250 $20,250 Variable Cost per Unit = Difference in Production Difference in Total cost $20,250 1 Estimating Variable Cost Using High-Low

13. 11-1321-13 Difference in total cost 2,100 750 1,350 Then, fill in the formula for difference in production. ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 Variable Cost per Unit = Difference in Production $20,250 1,350 1 Estimating Variable Cost Using High-Low

14. 11-1421-14 = $15 Variable cost per unit is $15 ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 Variable Cost per Unit = $20,250 1,350 1 Estimating Variable Cost Using High-Low

15. 11-1521-15 The first step in determining fixed cost is to insert the variable cost of $15 into the following formula: Total Cost = ($15 × Units of Production) + Fixed Cost Estimating Fixed Cost Using High-Low Total Cost = (Variable Cost per Unit × Units of Production) + Fixed Cost 1

16. 11-1621-16 Using the highest level of production, we insert the total cost and units produced in the formula. Total cost = ($15 × Units of Production) + Fixed Cost $61,500 2,100 units) ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 Total Cost = (Variable Cost per Unit × Units of Production) + Fixed Cost 1

17. 11-1721-17 $61,500 = ($15 × 2,100 units) + Fixed cost $61,500 = $31,500 + Fixed cost $61,500 – $31,500 = Fixed cost $30,000 = Fixed cost If the lowest level had been chosen, the results of the formula would provide the same fixed cost of $30,000. 1

18. 11-1821-18 With fixed costs and variable costs estimated at $30,000 and $15 per unit, a formula is in place to estimate production at any level. If the company is expected to produce 950 units in November, the estimated total overhead would be calculated as follows: Total Cost = (Variable Cost per Unit × Units of Production) + Fixed cost Total Cost = $15 (950) + $30,000 Total Cost = $44,250 1

19. 11-1921-19 2 Compute the contribution margin, the contribution margin ratio, and the unit contribution margin.

20. 11-2021-20 The contribution margin is the excess of sales revenues over variable costs. It is especially useful because it provides insight into the profit potential of a company. Contribution Margin 2

21. 11-2121-21 Contribution Margin Ratio The contribution margin ratio, sometimes called the profit-volume ratio, indicates the percentage of each sales dollar available to cover fixed costs and to provide income from operations. The contribution margin ratio is computed as follows: Contribution Margin Ratio = Contribution Margin Sales 2

22. 11-2221-22 Contribution Margin Ratio (in dollars) The contribution margin ratio is most useful when the increase or decrease in sales volume is measured in sales dollars. In this case, the following formula is used to determine change in income from operations. Change in Income from Operations Change in Sales Dollars × Contribution Margin Ratio = 2

23. 11-2321-23 Contribution Margin Ratio 100% 60% Contribution Margin Ratio = 40% Contribution Margin Ratio = Sales – Variable Costs Sales $1,000,000 – $600,000 $1,000,000 Contribution Margin Ratio = 40% 30% 10% 2

24. 11-2421-24 Using Contribution Margin per Unit as a Shortcut Lambert Inc.’s sales could be increased by 15,000 units from 50,000 to 65,000 units. Lambert’s income from operations would increase by $120,000 (15,000 × $8) as shown below. Change in Income from Operations Changes in Sales Units × Unit Contribution Margin = Change in Income from Operations 15,000 × $8 = Change in Income from Operations $120,000 = 2

25. 11-2521-25 3 Determine the break- even point and sales necessary to achieve a target profit.

26. 11-2621-26 Baker Corporation’s fixed costs are estimated to be $90,000. The unit contribution margin is calculated as follows: Unit selling price$25 Unit variable cost 15 Unit contribution margin$10 3

27. 11-2721-27 The break-even point (in units) is calculated using the following equation: Break-Even Sales (units) = Fixed Costs Unit Contribution Margin Break-Even Sales (units) = $90,000 $10 Break-Even Sales (units) = 9,000 units 3

28. 11-2821-28 The break-even point (in dollars) is calculated using the following equation: Break-Even Sales (dollars) = Fixed Costs Contribution Margin Ratio Break-Even Sales (dollars) = $225,000 $90,000.40 Break-Even Sales (dollars) = Unit Contribution Margin Unit Selling Price $10 $25 3

29. 11-2921-29 Park Co. is evaluating a proposal to pay an additional 2% commission on sales to its salespeople (a variable cost) as an incentive to increase sales. Fixed costs are estimated at $840,000. The unit contribution margin before the additional 2% commission is determined below. Unit selling price$250 Unit variable cost 145 Unit contribution margin$105 3

30. 11-3021-30 Without additional 2% commission: $250 – [$145 + ($250 × 2%)] = $100 Break-Even in Sales (units) = $840,000 $105 = 8,000 units With additional 2% commission: Break-Even in Sales (units) = $840,000 $100 = 8,400 units Break-Even in Sales (units) = Fixed Costs Unit Contribution Margin 3

31. 11-3121-31 Target Profit The sales volume required to earn a target profit is determined by modifying the break-even equation. Sales (units) = Fixed Costs + Target Profit Unit Contribution Margin 3

32. 11-3221-32 Units Required for Target Profit Fixed costs are estimated at $200,000, and the desired profit is $100,000. Unit contribution margin is $30. Unit selling price$75 Unit variable cost 45 Unit contribution margin$30 Sales (units) = Fixed Costs + Target Profit Unit Contribution Margin $30 Sales (units) = 10,000 units $200,000 $100,000 3

33. 11-3321-33 Contribution Margin Ratio = Unit Contribution Margin Unit Selling Price Contribution Margin Ratio = $30 $75 from Slide 32 Contribution Margin Ratio = 40% Sales (dollars) = Fixed Costs + Target Profit Contribution Margin Ratio Sales (dollars) = $200,000 + $100,000 40% = $750,000 3 Target Profit Necessary sales to have a $100,000 target profit

34. 11-3421-34 4 Using a cost-volume-profit chart and a profit-volume chart, determine the break-even point and sales necessary to achieve a target profit.

35. 11-3521-35 Unit selling price$ 50 Unit variable cost 30 Unit contribution margin$ 20 Total fixed costs $100,000 The cost-volume-profit chart in Slides 36 to 48 is based on Exhibit 5. Exhibit 5 was constructed using the following data: 4

36. 11-3621-36 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. 12345678910 (continued) Volume is shown on the horizontal axis. Cost-Volume-Profit Chart 4 Exhibit 5

37. 11-3721-37 Using maximum sales of $500,000 and knowing that each unit sells for $50, we can find the values of the two axis. Where the horizontal sales and costs line intersects the vertical 10,000 unit of sales line is Point A in Slide 38. 4

38. 11-3821-38 Point A Cost-Volume-Profit Chart (continued) 4 Exhibit 5 123456789 10 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.

39. 11-3921-39 Point A Cost-Volume-Profit Chart (continued) 4 Exhibit 5 Sales and Costs (in thousands) 0 $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 123456789 10 Units of Sales (in thousands) Beginning at zero on the left corner of the graph, connect a straight line to the dot (Point A).

40. 11-4021-40 Fixed cost of $100,000 is a horizontal line. 4 Cost-Volume-Profit Chart (continued)Exhibit 5 Sales and Costs (in thousands) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 0 123456789 10 Units of Sales (in thousands)

41. 11-4121-41 A point on the chart is needed to establish the revenue line. An arbitrary sales amount is picked of 10,000 units. At this sales level, the cost should be $400,000, calculated as follows: [(10,000 × $30) + $100,000] = $400,000. 4

42. 11-4221-42 A line is drawn between fixed cost ($100,000) and the point. 4 Cost-Volume-Profit Chart (continued)Exhibit 5 Sales and Costs (in thousands) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 0 123456789 10 Units of Sales (in thousands)

43. 11-4321-43 The line would be the same if another point had been picked. For example, assume that 8,000 units had been chosen. At this sales level, the cost should be $400,000 [(8,000 × $30) + $100,000 = $340,000]. 4

44. 11-4421-44 4 Break-Even Point Cost-Volume-Profit Chart (continued)Exhibit 5 Sales and Costs (in thousands) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 0 123456789 10 Units of Sales (in thousands)

45. 11-4521-45 Break-even is sales of 5,000 units or $250,000. Break- Even Point 4 Cost-Volume-Profit Chart (continued)Exhibit 5 Sales and Costs (in thousands) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 0 123456789 10 Units of Sales (in thousands)

46. 11-4621-46 Operating Loss Area 4 Cost-Volume-Profit Chart (continued)Exhibit 5 Sales and Costs (in thousands) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 0 123456789 10 Units of Sales (in thousands)

47. 11-4721-47 Operating Profit Area 4 Cost-Volume-Profit Chart (continued)Exhibit 5 Sales and Costs (in thousands) $500 $450 $400 $350 $300 $250 $200 $150 $100 $ 50 0 123456789 10 Units of Sales (in thousands)

48. 11-4821-48 Cost-Volume-Profit Chart (concluded) 4 Exhibit 5

49. 11-4921-49 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. Unit selling price$ 50 Unit variable cost 30 Unit contribution margin$ 20 Total fixed costs $100,000 4

50. 11-5021-50 Sales (10,000 units × $50)$500,000 Variable costs (10,000 units × $30) 300,000 Contribution margin (10,000 units × $20)$200,000 Fixed costs 100,000 Operating profit$100,000 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, computed as follows: Maximum Profit 4

51. 11-5121-51 5 Compute the break-even point for a company selling more than one product, the operating leverage, and the margin of safety.

52. 11-5221-52 Cascade Company sold 8,000 units of Product A and 2,000 units of Product B during the past year. Cascade Company’s fixed costs are $200,000. Other relevant data are as follows: UnitUnitUnitSales SellingVariableContributionMix ProductPriceCostMargin% A$ 90$70$2080% B140954520% Cascade Company Example 5

53. 11-5321-53 It is useful to think of the individual products as components of one overall enterprise product. For Cascade Company, the overall enterprise product is called E. Unit selling price of E: ($90 × 0.8) + ($140 × 0.2) = $100 Unit variable cost of E: ($70 × 0.8) + ($95 × 0.2) = 75 Unit contribution margin of E: $ 25 5

54. 11-5421-54 Break-Even Sales (units) = Fixed Costs Unit Contribution Margin Break-Even Sales (units) = $200,000 $25 Break-Even Sales (units) = 8,000 units Break-Even Point of 8,000 Units of E 5

55. 11-5521-55 Both companies have the same contribution margin. Jones Inc. Wilson Inc. Sales$400,000$400,000 Variable costs 300,000 300,000 Contribution margin$100,000$100,000 Fixed costs 80,000 50,000 Income from operations$ 20,000$ 50,000 Operating leverage? ? Operating Leverage Example 5

56. 11-5621-56 Contribution Margin Income from Operations $100,000 $20,000 = 5 Jones Inc.: Jones Inc. Wilson Inc. Sales$400,000$400,000 Variable costs 300,000 300,000 Contribution margin$100,000$100,000 Fixed costs 80,000 50,000 Income from operations$ 20,000$ 50,000 Operating leverage? ? Operating Leverage Example 5 5

57. 11-5721-57 Jones Inc. Wilson Inc. Sales$400,000$400,000 Variable costs 300,000 300,000 Contribution margin$100,000$100,000 Fixed costs 80,000 50,000 Income from operations$ 20,000$ 50,000 Operating leverage? ? Operating Leverage Example 5 2 Contribution Margin Income from Operations $100,000 $50,000 = 2 Wilson Inc.: 5

58. 11-5821-58 Margin of Safety = Sales – Sales at Break-Even Point Sales Margin of Safety = 20% If sales are $250,000, the unit selling price is $25, and the sales at the break-even point are $200,000, the margin of safety is 20%, computed as follows: Margin of Safety = $250,000 – $200,000 $250,000 5

59. 11-5921-59