1. 11-121-1 Cost Behavior and Cost- Volume-Profit Analysis 21

2. 11-221-2 Learning Objective 1 3-1 Describe the nature of the adjusting process. Learning Objective 1 3-1 Describe the nature of the adjusting process. Insert Chapter Objectives Cost Behavior and Cost-Volume-Profit Analysis 1 Classify costs as variable costs, fixed costs, or mixed costs. 2 Compute the contribution margin, the contribution margin ratio, and the unit contribution margin. After studying this chapter, you should be able to: 21-2 3 Determine the break-even point and sales necessary to achieve a target profit.

3. 11-321-3 Cost Behavior and Cost-Volume-Profit Analysis (continued) 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. 21-3 5 Compute the break-even point for a company selling more than one product, the operating leverage, and the margin of safety.

4. 11-421-4 1 Classify costs as variable costs, fixed costs, or mixed costs.

5. 11-521-5 Cost Behavior Cost behavior is the manner in which a cost changes as a related activity changes. Understanding the behavior of a cost depends on the following: 1 1.Identifying the activities that cause the cost to change, called activity base (or activity driver). 2.Specifying the range of activity over which the changes in the cost are of interest. This range of activity is called the relevant range.

6. 11-621-6 Variable Costs Variable costs are costs that vary in proportion to changes in the level of activity. 1

7. 11-721-7 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

8. 11-821-8 For Model JS-12, the direct materials for the relevant range of 5,000 to 30,000 units of production are shown below. 1

9. 11-921-9 Variable Cost Graphs 1 Exhibit 1

10. 11-1021-10 Total Costs $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 102030 0 $20 $15 $10 $5 0 Cost per Unit 102030 Number of Units of Model JS-12 Produced Units Produced (000) Direct Materials Cost per Unit Total Direct Materials Cost 5,000 units$10$ 50,000 10,00010l00,000 15,00010150,000 20,00010200,000 25,00010250,000 30,00010300,000 Unit Cost Compared to Total Cost 1

11. 11-1121-11 Fixed Costs Fixed costs are costs that remain the same in total dollar amount as the activity base changes. 1

12. 11-1221-12 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

13. 11-1321-13 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

14. 11-1421-14 Fixed Cost Graphs 1 Exhibit 2

15. 11-1521-15 Total Costs $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 100200300 0 Bottles Produced (000) Number of Bottles of Perfume Produced Unit Cost $1.50 $1.25 $1.00 $.75 $.50 $.25 100200300 0 Units Produced (000) Total Salary for Jane Sovissi 50,000 bottles$75,000$1.500 100,00075,0000.750 150,00075,0000.500 200,00075,0000.375 Salary per Bottle of Perfume Produced 1

16. 11-1621-16 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

17. 11-1721-17 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

18. 11-1821-18 Mixed Costs 1 Exhibit 3

19. 11-1921-19 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

20. 11-2021-20 First, select the highest and lowest levels of activity. Variable Cost per Unit = Difference in Total Cost Difference in Production Estimating Variable Cost Using High-Low ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 Actual costs incurred 1

21. 11-2121-21 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

22. 11-2221-22 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

23. 11-2321-23 = $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

24. 11-2421-24 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

25. 11-2521-25 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

26. 11-2621-26 $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

27. 11-2721-27 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

28. 11-2821-28 Example Exercise 21-1 High-Low Method 1 The manufacturing costs of Alex Industries for the first three months of the year are provided below: Using the high-low method, determine the (a) variable cost per unit, and (b) the total fixed cost. Total Cost Production January$80,0001,000 units February$125,0002,500 March$100,0001,800 21-28

29. 11-2921-29 1 For Practice: PE 21-1A, PE 21-1B 21-29 Follow My Example 21-1 b.$50,000 = $125,000 – ($30 × 2,500) or $80,000 – ($30 × 1,000) a.$30 per unit = $125,000 – $80,000 (2,500 – 1,000) Example Exercise 21-1 (continued)

30. 11-3021-30 Total Variable Costs Total Units Produced Unit Variable Costs Total Units Produced Per Unit Cost Total costs increase and decrease proportionately with activity level. Summary of Cost Behavior Concepts Unit costs remain the same per unit regardless of activity. 1 Total Costs

31. 11-3121-31 Total Units Produced Total Costs Total Units Produced Unit costs remain the same regardless of activity. Total cost per unit decreases as activity increases. Total Fixed Costs Unit Fixed Costs Summary of Cost Behavior Concepts 1 Per Unit Cost

32. 11-3221-32 2 Compute the contribution margin, the contribution margin ratio, and the unit contribution margin.

33. 11-3321-33 Cost-Volume-Profit Relationships Cost-volume-profit analysis is the examination of the relationships among selling prices, sales and production volume, costs, expenses, and profits. 2

34. 11-3421-34 Some of the ways cost-volume-profit analysis may be used include the following: 1.Analyzing the effects of changes in selling prices on profits 2.Analyzing the effects of changes in costs on profits 3.Analyzing the effects of changes in volume on profits 4.Setting selling price (continued) 2

35. 11-3521-35 5.Selecting the mix of products to sell 6.Choosing among marketing strategies 2

36. 11-3621-36 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

37. 11-3721-37 Contribution Margin Income Statement 2 Exhibit 4

38. 11-3821-38 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

39. 11-3921-39 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

40. 11-4021-40 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

41. 11-4121-41 Unit Contribution Margin The unit contribution margin is also useful for analyzing the profit potential of proposed projects. The unit contribution margin is the sales price per unit less the variable cost per unit. 2

42. 11-4221-42 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

43. 11-4321-43 Proof of Shortcut Sales ($20)$1,000,000 Variable costs ($12) 600,000 Contribution margin ($8)$ 400,000 Fixed costs 300,000 Income from operations$ 100,000 50,000 units 65,000 units $1,300,000 780,000 $ 520,000 300,000 $ 220,000 $120,000 2

44. 11-4421-44 100% 60% 40% 30% 10% $20 12 $ 8 Sales (50,000 units)$1,000,000 Variable costs 600,000 Contribution margin$ 400,000 Fixed costs 300,000 Income from operations$ 100,000 Unit contribution margin analyses can provide useful information for managers. Review 2

45. 11-4521-45 1. Total contribution margin in dollars. 2. Contribution margin ratio (percentage). The contribution margin can be expressed three ways: 3. Unit contribution margin (dollars per unit). 100% 60% 40% 30% 10% $20 12 $ 8 Sales (50,000 units)$1,000,000 Variable costs 600,000 Contribution margin$ 400,000 Fixed costs 300,000 Income from operations$ 100,000 Review 2

46. 11-4621-46 Example Exercise 21-2 Contribution Margin 2 Molly Company sells 20,000 units at $12 per unit. Variable costs are $9 per unit, and fixed costs are $25,000. Determine the (a) contribution margin ratio, (b) unit contribution margin, and (c) income from operations. 21-46

47. 11-4721-47 2 For Practice: PE 21-2A, PE 21-2B 21-47 Follow My Example 21-2 a. 25% = ($12 – $9)/$12 or ($240,000 – $180,000)/$240,000 b.$3 per unit = $12 – $9 c.Sales$240,000(20,000 × $12) Variable costs 180,000(20,000 × $9) Contribution margin$ 60,000[20,000 × ($12 – $9)] Fixed costs 25,000 Income from operations$ 35,000 Example Exercise 21-2 (continued)

48. 11-4821-48 3 Determine the break- even point and sales necessary to achieve a target profit.

49. 11-4921-49 Break-Even Point The break-even point is the level of operations at which a company’s revenues and expenses are equal. 3

50. 11-5021-50 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

51. 11-5121-51 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

52. 11-5221-52 Proof of the Preceding Computation Income from operations is zero when 9,000 units are sold— hence, break-even is 9,000 units. 3

53. 11-5321-53 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

54. 11-5421-54 Effect of Changes in Fixed Costs Fixed Costs If Break- Even Break- Even then Fixed Costs Fixed Costs If then Break- Even Break- Even 3

55. 11-5521-55 Bishop Co. is evaluating a proposal to budget an additional $100,000 for advertising. Fixed costs before the additional advertising are estimated at $600,000, and the unit contribution margin is $20. Increasing Fixed Costs (continued) 3

56. 11-5621-56 Without additional advertising: Break-Even in Sales (units) = Fixed Costs Unit Contribution Margin Break-Even in Sales (units) = $600,000 $20 = 30,000 units With additional advertising: Break-Even in Sales (units) = $700,000 $20 = 35,000 units 3

57. 11-5721-57 Effect of Changes in Unit Variable Costs Unit Variable Cost If Break- Even Break- Even then Unit Variable Costs Unit Variable Costs If then Break- Even Break- Even 3

58. 11-5821-58 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

59. 11-5921-59 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

60. 11-6021-60 Effect of Changes in the Unit Selling Price Unit Selling Price If Unit Selling Price Unit Selling Price If Break- Even Break- Even then Break- Even Break- Even 3

61. 11-6121-61 Graham Co. is evaluating a proposal to increase the unit selling price of a product from $50 to $60. The following data have been gathered: Unit selling price$50$60 Unit variable cost 30 30 Unit contribution margin$20$30 CurrentProposed Total fixed costs$600,000 $600,000 3

62. 11-6221-62 Without price increase: Break-Even in Sales (units) = Fixed Costs Unit Contribution Margin Break-Even in Sales (units) = $600,000 $20 = 30,000 units With price increase: Break-Even in Sales (units) = $600,000 $30 = 20,000 units 3

63. 11-6321-63 Summary of Effects of Changes on Break-Even Point 3

64. 11-6421-64 Example Exercise 18-2 3 Break-Even Point Example Exercise 21-3 21-64 For Practice: PE 21-3A, PE 21-3B Nicholas Enterprises sells a product for $60 per unit. The variable cost is $35 per unit, while fixed costs are $80,000. Determine the (a) break-even point in sales units, and (b) break-even point if the selling price were increased to $67 per unit. Follow My Example 21-3 a.3,200 units = $80,000/($60 – $35) b.2,500 units = $80,000/($67 – $35)

65. 11-6521-65 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

66. 11-6621-66 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

67. 11-6721-67 Proof that sales of 10,000 units will provide a target profit of $100,000. Target profit 3

68. 11-6821-68 Contribution Margin Ratio = Unit Contribution Margin Unit Selling Price Contribution Margin Ratio = $30 $75 from Slide 66 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

69. 11-6921-69 Example Exercise 18-2 3 Target Profit Example Exercise 21-4 21-69 For Practice: PE 21-4A, PE 21-4B Forest Company sells a product for $140 per unit. The variable cost is $60 per unit, and fixed costs are $240,000. Determine the (a) break-even point in sales units, and (b) break-even point in sales units if the company desires a target profit of $50,000. Follow My Example 21-4 a.3,000 units = $240,000/($140 – $60) b.3,625 units = ($240,000 + $50,000)/($140 – $60)

70. 11-7021-70 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.

71. 11-7121-71 Cost-Volume-Profit (Break-Even) Chart A cost-volume-profit chart, sometimes called a break-even chart, graphically shows sales, costs, and the related profit or loss for various levels of units sold. 4

72. 11-7221-72 Unit selling price$ 50 Unit variable cost 30 Unit contribution margin$ 20 Total fixed costs $100,000 The cost-volume-profit chart in Slides 73 to 86 is based on Exhibit 5. Exhibit 5 was constructed using the following data: 4

73. 11-7321-73 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

74. 11-7421-74 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 75. 4

75. 11-7521-75 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.

76. 11-7621-76 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).

77. 11-7721-77 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)

78. 11-7821-78 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

79. 11-7921-79 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)

80. 11-8021-80 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

81. 11-8121-81 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)

82. 11-8221-82 The intersection point of the revenue line (the blue line) and the total cost line (the red line) is the break-even point. 4

83. 11-8321-83 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)

84. 11-8421-84 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)

85. 11-8521-85 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)

86. 11-8621-86 Cost-Volume-Profit Chart (concluded) 4 Exhibit 5

87. 11-8721-87 Revised Cost-Volume- Profit Chart A proposal to reduce fixed cost by $20,000 is to be evaluated. A cost- volume-profit chart can be created to assist in this evaluation. 4

88. 11-8821-88 Revised Cost-Volume-Profit Chart Break-even in sales would be reduced from $250,000 to $200,000 (5,000 to 4,000 in units). 4 Exhibit 6

89. 11-8921-89 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

90. 11-9021-90 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

91. 11-9121-91 Profit-Volume Chart 4 Exhibit 7

92. 11-9221-92 Sales (10,000 units × $50)$500,000 Variable costs (10,000 units × $30) 300,000 Contribution margin (10,000 units × $20)$200,000 Fixed costs 120,000 Operating profit$ 80,000 Assume an increase in fixed costs of $20,000 is to be evaluated. The maximum profit would be $80,000, as shown below: Revised Maximum Profit 4

93. 11-9321-93 Original Profit-Volume Chart and Revised Profit-Volume Chart Exhibit 8 (continued)

94. 11-9421-94 Original Profit-Volume Chart and Revised Profit-Volume Chart (continued) Exhibit 8

95. 11-9521-95 Assumptions of Cost- Volume-Profit Analysis The primary assumptions are: 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 divided into fixed and variable components. 4.The sales mix is constant. 5.There is no change in the inventory quantities during the period. 4

96. 11-9621-96 5 Compute the break-even point for a company selling more than one product, the operating leverage, and the margin of safety.

97. 11-9721-97 Sales Mix Considerations The sales volume necessary to break even or to earn a target profit for a business selling two or more products depends upon the sales mix. The sales mix is the relative distribution of sales among the various products sold by a business. 5

98. 11-9821-98 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

99. 11-9921-99 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

100. 11-10021-100 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

101. 11-10121-101 Verification of Analysis Break-even point 5

102. 11-10221-102 Example Exercise 21-5 Sales Mix and Break-Even Analysis 5 Megan Company has fixed costs of $180,000. The unit selling price, variable cost per unit, and contribution margin per unit for the company’s two products are provided below: VariableContribution SellingCost perMargin per ProductPriceUnitUnit Q$ 160$100$60 Z1008020 The sales mix for products Q and Z is 75% and 25%, respectively. Determine the break-even point in units of Q and Z. 21-102

103. 11-10321-103 5 For Practice: PE 21-5A, PE 21-5B 21-103 Follow My Example 21-5 Unit selling price of E: ($160 ×.75) + ($100 ×.25) =$145 Unit variable cost of E: ($100 ×.75) + ($80 ×.25) = 95 Unit contribution margin of E:$ 50 Break-even sales (units) = 3,600 units = $180,000 ÷ $50 Example Exercise 21-5 (continued)

104. 11-10421-104 The relative mix of a business’s variable costs and fixed costs is measured by the operating leverage. It is computed as follows: Operating Leverage = Contribution Margin Income from Operations Operating Leverage 5

105. 11-10521-105 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

106. 11-10621-106 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

107. 11-10721-107 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

108. 11-10821-108 5

109. 11-10921-109 5

110. 11-11021-110 Example Exercise 18-2 5 Operating Leverage Example Exercise 21-6 21-110 For Practice: PE 21-6A, PE 21-6B Tucker Company reports the following data: Sales$750,000 Variable costs$500,000 Fixed costs$187,500 Determine Tucker Company’s operating leverage. Follow My Example 21-6 4.0 =($750,000 – $500,000)/($750,000 – $500,000 – $187,500) = $250,000/$62,500

111. 11-11121-111 Margin of Safety The margin of safety indicates the possible decrease in sales that may occur before an operating loss results. 5

112. 11-11221-112 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

113. 11-11321-113 Example Exercise 18-2 5 Operating Leverage Example Exercise 21-7 For Practice: PE 21-7A, PE 21-7B The Rachel Company has sales of $400,000, and the break-even point in sales dollars is $300,000. Determine the company’s margin of safety. Follow My Example 21-7 25% = ($400,000 – $300,000)/$400,000 21-113

114. 11-11421-114 Appendix: Variable Costing

115. 11-11521-115 In variable costing, also called direct costing, the cost of goods manufactured is composed only of variable costs. These are: 1.Direct materials 2.Direct labor 3.Variable factory overhead

116. 11-11621-116 Variable Costing Income StatementExhibit 9

117. 11-11721-117 Absorption Costing Income StatementExhibit 10

118. 11-11821-118

119. 11-11921-119 Units Manufactured Exceed Units SoldExhibit 11

120. 11-12021-120