1. Managerial Accounting by James Jiambalvo
Chapter 4:
Cost-Volume-Profit-Analysis
Slides Prepared by:
Scott Peterson
Northern State University

2. Objectives Identify common cost behavior patterns.
Estimate the relation between cost and activity using account analysis and the high-low method.
Perform cost-volume-profit-analysis for single products.
Perform cost-volume-profit-analysis for multiple products.

3. Objectives (continued)
Discuss the effect of operating leverage.
Use the contribution margin per unit of the constraint to analyze situations involving a resource constraint.

4. Common Cost Behavior Patterns
Cost-Volume-Profit-Analysis (C-V-P)
Variable Costs
Fixed Costs
Discretionary Fixed Costs
Committed Fixed Costs
Mixed Costs
Step Costs

5. Variable Costs

6. Fixed Costs

7. Mixed Costs

8. Cost Estimation Methods
Cost Estimation Methods are frequently required to separate the fixed and variable components of a total cost pool. Methods include:
Account Analysis
Scattergraph
High-Low Method
Regression
Relevant Range

9. Scattergraph

10. High-Low Method
Example: Let total costs at 500 units of output be $150,000 and at 3,000 units of output be $400,000. Calculate variable and fixed costs, respectively.

11. High-Low Method Solution: High Low Change
Costs: $400,000 $150,000 $250,000
Units: 3, ,500
Calculate Variable Cost Per Unit:
$250,000/2,500 = $100
Calculate Total Fixed Costs:
$400,000 – (3,000 x 100) = $100,000

12. High-Low Method

13. Regression Analysis

14. Relevant Range

15. Cost-Volume-Profit Analysis
The Profit Equation
Breakeven Point
Margin of Safety
Contribution Margin
Contribution Margin Ratio
What-if Analysis

16. The Profit Equation Profit = SP(x) –VC(x) – TFC
X = Quantity of units produced and sold
SP = Selling price per unit
VC = Variable cost per unit
TFC = Total fixed cost

17. Break-Even Point TFC/CM(per unit) = Break-Even (units)
X = Quantity of units produced and sold
SP = Selling price per unit
VC = Variable cost per unit
CM = Contribution margin
TFC = Total fixed cost

18. Break-Even Point

19. Contribution Margin SP(u) – VC(u) = CM (u) SP = Selling price per unit
VC = Variable cost per unit
CM = Contribution margin
u = per unit

20. Contribution Margin Ratio
(SP – VC) / SP = CM%
SP = Selling Price per unit
VC = Variable Cost per unit
CM = Contribution Margin

21. “What If” Analysis Examples include analyzing changes in:
Selling price per unit
Variable cost per unit
Total fixed cost

22. Multiproduct Analysis
C-V-P applied to multiple products.
Contribution Margin Approach (used for similar products).
Contribution Margin Ratio Approach (used for substantially different products).

23. Contribution Margin Approach
Example: the contribution margin of product A is $8 and B is $5. Two units of B are sold for each unit of A. The Weighted Average Contribution Margin is $6.00.

24. Contribution Margin Ratio Approach
Example: the contribution margin ratio of product A is 20% and B is 50%. Two units of B are sold for each unit of A. The Weighted Average Contribution Margin Ratio is 40%.

25. Assumptions in C-V-P Analysis
Costs can be accurately separated into variable and fixed components.
Fixed costs remain fixed.
Variable costs per unit do not change over the relevant range.

26. Operating Leverage Example of Operating Leverage: Firm 1 Firm 2
Sales $10,000,000 $10,000,000
VC ,000, ,000,000
CM ,000, ,000,000
FC ,000, ,000,000
Profit $2,000,000 $2,000,000
Which firm has more?

27. Constraints A reference to scarce resources.
Examples of constraints include manufacturing space, labor, parts and materials etc..
The focus shifts away from Contribution Margin and to the scarce resource or constraint.

28. Quick Review Question #1
At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Contribution Margin per unit is?
$65
$75
$175
$30

29. Quick Review Answer #1
At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Contribution margin per unit is?
$65
$75
$175
$30

30. Quick Review Question #2
At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Break-Even Point is?
1,000 units
1,083 units
2,000 units
None of these

31. Quick Review Answer #2
At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Break-Even Point is?
1,000 units
1,083 units
2,000 units
None of these

32. Quick Review Question #3
At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Expected sales are 4,200 units. The Margin of Safety is?
$264,000
$384,000
$143,000
$121,000

33. Quick Review Answer #3
At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Expected sales are 4,200 units. The Margin of Safety is?
$264,000
$384,000
$143,000
$121,000

34. Quick Review Question #4
At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Expected sales are 4,200 units. What is profit expected to be?
Answer here: _________________

35. Quick Review Answer #4
At Winford Corp., the selling price per unit for lawn mowers is $120, variable cost per unit is $55. Fixed costs are $130,000. Expected sales are 4,200 units. What is profit expected to be?
Answer here: $143,000

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