1. Accounting Principles, Eighth Edition
CHAPTER 22
COST - VOLUME - PROFIT
Accounting Principles, Eighth Edition

2. Study Objectives Distinguish between variable and fixed costs.
Explain the significance of the relevant range.
Explain the concept of mixed costs.
List the five components of cost-volume-profit analysis.
Indicate what contribution margin is and how it can be expressed
Identify the three ways to determine the break-even point.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

3. Study Objectives
Give the formulas for determining sales required to earn target net income
Define margin of safety, and give the formulas for computing it.
Describe the essential features of a cost-volume-profit income statement.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

4. Cost Behavior Analysis Cost-Volume-Profit Analysis
Variable costs
Fixed costs
Relevant range
Mixed costs
Identifying variable and fixed costs
Basic components
CVP income statement
Break-even analysis
Target net income
Margin of safety
Changes in business environment
CVP income statement revisited
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.
Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.
Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.
Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.
Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:
difference between the actual return and the expected return on plan assets and,
amortization of the unrecognized net gain or loss from previous periods

5. Cost Behavior Analysis
Cost Behavior Analysis is
the study of how specific costs respond to changes in the level of business activity.
Some costs change; others remain the same
Helps management plan operations and decide between alternative courses of action
Applies to all types of businesses and entities
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 1: Distinguish between variable and fixed costs.

6. Cost Behavior Analysis - continued
Starting point is measuring key business activities
Activity levels may be expressed in terms of:
Sales dollars (in a retail company)
Miles driven (in a trucking company)
Room occupancy (in a hotel)
Many companies use more
than one measurement base
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 1: Distinguish between variable and fixed costs.

7. Cost Behavior Analysis - continued
For an activity level to be useful:
Changes in the level or volume of activity should be correlated with changes in costs
The activity level selected is called the
activity or volume index
The activity index:
Identifies the activity that causes changes in the behavior of costs
Allows costs to be classified according to their response to changes in activity as either:
Variable Costs Fixed Costs Mixed Costs
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 1: Distinguish between variable and fixed costs.

8. LO 1: Distinguish between variable and fixed costs.
Variable Costs
Costs that vary in total directly and proportionately with changes in the activity level
Example: If the activity level increases 10 percent, total variable costs increase 10 percent
Example: If the activity level decreases by 25 percent, total variable costs decrease by 25 percent
Variable costs remain constant per unit at every level of activity.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 1: Distinguish between variable and fixed costs.

9. Variable Costs – Example
Damon Company manufactures radios that contain a $10 clock
Activity index is the number of radios produced
For each radio produced, the total cost of the clocks increases by $10:
If 2,000 radios are made, the total cost of the clocks is $20,000 (2,000 X $10)
If 10,000 radios are made, the total cost of the clocks is $100,000 (10,000 X $10)
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 1: Distinguish between variable and fixed costs.

10. Variable Costs – Graphs
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 1: Distinguish between variable and fixed costs.

11. Fixed Costs
Costs that remain the same in total regardless of changes in the activity level.
Per unit cost varies inversely with activity:
As volume increases,
unit cost declines, and vice versa
Examples include:
Property taxes
Insurance
Rent
Depreciation on buildings and equipment
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 1: Distinguish between variable and fixed costs.

12. LO 1: Distinguish between variable and fixed costs.
Fixed Costs - Example
Damon Company leases its productive facilities for $10,000 per month
Total fixed costs of the facilities remain constant at all levels of activity - $10,000 per month
On a per unit basis, the cost of rent decreases as activity increases and vice versa
At 2,000 radios, the unit cost is $5
($10,000 ÷ 2,000 units)
At 10,000 radios, the unit cost is $1
($10,000 ÷ 10,000 units)
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 1: Distinguish between variable and fixed costs.

13. LO 1: Distinguish between variable and fixed costs.
Fixed Costs - Graphs
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 1: Distinguish between variable and fixed costs.

14. Relevant Range
Throughout the range of possible levels of activity, a straight-line relationship usually does not exist for either variable costs or fixed costs
The relationship between variable costs and changes in activity level is often curvilinear
For fixed costs, the relationship is also nonlinear – some fixed costs will not change over the entire range of activities while other fixed costs may change
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 2: Explain the significance of the relevant range.

15. Relevant Range - Graphs
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 2: Explain the significance of the relevant range.

16. LO 2: Explain the significance of the relevant range.
Defined as the range of activity over which a company expects to operate during a year
Within this range, a straight-line relationship usually exists for both variable and fixed costs
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 2: Explain the significance of the relevant range.

17. LO 3: Explain the concept of mixed costs.
Costs that have
both a variable cost element
and a fixed
cost element
Sometimes called
semivariable cost
Change in total but not proportionately
with changes in
activity level
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 3: Explain the concept of mixed costs.

18. Mixed Costs: High–Low Method
Mixed costs must be classified into their fixed and variable elements
One approach to separate the costs is called the high-low method
Uses the total costs incurred at both the high and the low levels of activity to classify mixed costs
The difference in costs between the high and low levels represents variable costs, since only variable costs change as activity levels change
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 3: Explain the concept of mixed costs.

19. Mixed Costs: Steps in High–Low-Method
STEP 1: Determine variable cost per unit using the following formula:
STEP 2: Determine the fixed cost by subtracting the total variable cost at either the high or the low activity level from the total cost at that level
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 3: Explain the concept of mixed costs.

20. Mixed Costs: High–Low-Method Example
Data for Metro Transit Company for 4 month period:
High Level of Activity: April $63, ,000 miles
Low Level of Activity: January , ,000 miles
Difference $33, ,000 miles
Step 1: Using the formula, variable costs per unit are
$33,000  30,000 = $1.10 variable cost per mile
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 3: Explain the concept of mixed costs.

21. Mixed Costs: High–Low-Method Example
Step 2: Determine the fixed costs by subtracting total variable costs at either the high or low activity level from the total cost at that same level
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 3: Explain the concept of mixed costs.

22. Mixed Costs: High–Low-Method Example
Maintenance costs:
$8,000 per month plus $1.10 per mile
To determine maintenance costs at a particular activity level:
1. multiply the activity level times the variable cost per unit
2. then add that total to the fixed cost
EXAMPLE: If the activity level is 45,000 miles, the estimated maintenance costs would be $8,000 fixed and $49,500 variable ($1.10 X 45,000 miles) for a total of $57,500.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 3: Explain the concept of mixed costs.

23. Cost-Volume-Profit Analysis
Study of the effects of changes of costs and volume on a company’s profits
A critical factor in management decisions
Important in profit planning
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 4: List the five components of cost-volume-profit analysis.

24. Cost-Volume-Profit Analysis
CVP analysis considers the interrelationships among five basic components
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 4: List the five components of cost-volume-profit analysis.

25. Assumptions Underlying CVP Analysis
Behavior of both costs and revenues is linear throughout the relevant range of the activity index
All costs can be classified as either variable or fixed with reasonable accuracy
Changes in activity are the only factors that affect costs
All units produced are sold
When more than one type of product is sold, the sales mix will remain constant
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 4: List the five components of cost-volume-profit analysis.

26. CVP Income Statement A statement for internal use
Classifies costs and expenses as fixed or variable
Reports contribution margin in the body of the statement.
Contribution margin –
amount of revenue
remaining after
deducting variable costs
Reports the same net
income as a traditional
income statement
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 5: Indicate what contribution margin is and how it can be expressed.

27. CVP Income Statement - Example
Vargo Video Company produces DVD players.
Relevant data for June 2008:
Unit selling price of DVD player $500
Unit variable costs $300
Total monthly fixed costs $200,000
Units sold ,600
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 5: Indicate what contribution margin is and how it can be expressed.

28. Contribution Margin Per Unit
Contribution margin is available to cover fixed costs and to contribute to income
The formula for contribution margin per unit and the computation for Vargo Video are:
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 5: Indicate what contribution margin is and how it can be expressed.

29. CVP Income Statement-CM effect
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 5: Indicate what contribution margin is and how it can be expressed.

30. Contribution Margin Ratio
Shows the percentage of each sales dollar available to apply toward fixed costs and profits
The formula for contribution margin ratio and the computation for Vargo Video are:
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 5: Indicate what contribution margin is and how it can be expressed.

31. Contribution Margin Ratio
Ratio helps to determine the effect of changes in sales on net income
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 5: Indicate what contribution margin is and how it can be expressed.

32. Break-Even Analysis
Process of finding the break-even point
level of activity at which total revenues equal total costs (both fixed and variable)
Can be computed or derived
from a mathematical equation,
by using contribution margin, or
from a cost-volume profit (CVP) graph
Expressed either in sales units or in sales dollars
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 6: Identify the three ways to determine the break-even point.

33. Break-Even Analysis: Mathematical Equation
Break-even occurs where total sales equal variable costs plus fixed costs; i.e., net income is zero.
The formula for the break-even point and the computation for Vargo Video are:
To find sales dollars required to break-even:
1000 units X $500 = $500,000 (break-even dollars)
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 6: Identify the three ways to determine the break-even point.

34. Break-Even Analysis: Contribution Margin Technique
At the break-even point, contribution margin must equal total fixed costs
(CM = total revenues – variable costs)
The break-even point can be computed using either contribution margin per unit or contribution margin ratio.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 6: Identify the three ways to determine the break-even point.

35. Contribution Margin Technique
When the BEP in units is desired, contribution margin per unit is used in the following formula which shows the computation for Vargo Video:
When the BEP in dollars is desired, contribution margin ratio is used in the following formula which shows the computation for Vargo Video:
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 6: Identify the three ways to determine the break-even point.

36. Break-Even Analysis: Graphic Presentation
A cost-volume profit (CVP) graph shows costs, volume and profits.
Used to visually find the break-even point
To construct a CVP graph:
Plot the total sales line starting at the zero activity level
Plot the total fixed cost using a horizontal line
Plot the total cost line (starts at the fixed-cost line at zero activity
Determine the break-even point from the intersection of the total cost line and the total sales line
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 6: Identify the three ways to determine the break-even point.

37. Break-Even Analysis: Graphic Presentation
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 6: Identify the three ways to determine the break-even point.

38. Break-Even Analysis: Target Net Income
Level of sales necessary to achieve a specified income
Can be determined from each of the approaches used to determine break-even sales/units:
from a mathematical equation,
by using contribution margin, or
from a cost-volume profit (CVP) graph
Expressed either in sales units or in sales dollars
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 7: Give the formulas for determining sales required to earn target net income.

39. Break-Even Analysis: Target Net Income
Mathematical Equation
Using the formula for the break-even point, simply include the desired net income as a factor. The computation for Vargo Video is as follows:
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 7: Give the formulas for determining sales required to earn target net income.

40. Break-Even Analysis: Target Net Income
Contribution Margin Technique
To determine the required sales in units for Vargo Video:
To determine the required sales in dollars for Vargo Video:
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 7: Give the formulas for determining sales required to earn target net income.

41. Break-Even Analysis: Margin of Safety
Difference between actual or expected sales and sales at the break-even point
Measures the “cushion” that management has if expected sales fail to materialize
May be expressed in dollars or as a ratio
To determine the margin of safety in dollars for Vargo Video assuming that actual/expected sales are $750,000:
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 8: Define margin of safety, and give the formulas for computing it.

42. Break-Even Analysis: Margin of Safety
Margin of Safety Ratio
Computed by dividing the margin of safety in dollars by the actual or expected sales
To determine the margin of safety ratio for Vargo Video assuming that actual/expected sales are $750,000:
The higher the dollars or the percentage, the greater the margin of safety
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 8: Define margin of safety, and give the formulas for computing it.

43. CVP Income Statement Revisited
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
LO 9: Describe the essential features of a cost-volume-profit income statement.

44. Chapter Review - Brief Exercise 22-4
Deines Company accumulates the following data concerning a mixed cost, using miles as the activity level.
Miles Total Miles Total
Driven Cost Driven Cost
January 8, $14,150 March 8,500 $15,000
February 7, $13,600 April 8,200 $14,490
Compute the variable and fixed cost elements using the high-low method.

45. Chapter Review - Brief Exercise 22-4
High Level of Activity: March $15, ,500 miles
Low Level of Activity: February , ,500 miles
Difference $ 1, ,000 miles
Step 1:
Variable Cost per Unit = $1,400 ÷ 1,000 miles
= $1.40 variable cost per mile
Step 2: High Low
Total Cost: $15, $13,600
Variable Cost:
8,500 X $ ,900
7,500 X $ ,500
Total Fixed Costs $ 3, $ 3,100