1. © 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. Chapter 9: Break-Even Point and Cost- Volume-Profit Analysis Cost Accounting: Foundations & Evolutions, 8e Kinney and Raiborn

2. © 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. Variable Costing and CVP Variable costing  Separates costs into fixed and variable components  Indicates the contribution margin on the Income Statement Sales Less: Variable product costs Less: Variable general and administrative Contribution margin

3. © 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. Equations Break-even point Total Revenues = Total Costs Total Revenues – Total Costs = Zero Profit

4. © 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. Equations Contribution Margin (CM) Sales Price – Variable Cost per Unit = CM per Unit Revenue – Total Variable Costs = CM in Total Break-even in units = FC / CM per unit Target profit = FC + Profit / CM per unit Contribution Margin Ratio (CMR) Sales Price – Variable Cost Sales Price BE in dollars = FC / CMR Target profit = FC + Profit / CMR

5. © 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. Traditional CVP Graph Total $ Activity Level Total Costs Total Revenues BE Loss Profit

6. © 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. Incremental Analysis Changes in revenues, costs, and/or volume Break-even point increases when  fixed costs increase  sales price decreases  variable costs increase

7. © 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. Margin of Safety How far the company is operating from its break-even point Budgeted (or actual) sales after the break- even point The amount that sales can drop before reaching the break-even point Measure of the amount of “cushion” against losses Indication of risk

8. © 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. Margin of Safety Units Actual units - break-even units Dollars Actual sales dollars - break-even sales dollars (Sales – BE sales) / Sales or (250-200) / 250 = 20% Percentage Margin of Safety in units or dollars Actual unit sales or dollar sales

9. © 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. Operating Leverage High Operating Leverage Low variable costs High fixed costs High contribution margin High break-even point Sales after break-even have greater impact on profits Low Operating Leverage High variable costs Low fixed costs Low contribution margin Low break-even point Sales after break-even have lesser impact on profits Effect on profits when volume changes Operating leverage = CM / Profit before tax (100 / 50 = 5) Change in sales 10%, Change in profit = 10% x 5 or 50%

10. © 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-Volume-Profit Assumptions Company is operating within the relevant range Revenue and variable costs per unit are constant Total contribution margin increases proportionally with increases in unit sales Total fixed costs remain constant Mixed costs are separated into variable and fixed elements

11. © 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 Accounting: Foundations & Evolutions, 8e Kinney and Raiborn Chapter 10: Relevant Information for Decision Making

12. © 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. Relevant Costing Incremental Revenue — the amount of revenue that differs across decision choices Incremental Cost or Differential Cost — the amount of cost that varies across decision choices Incremental Profit or Loss — the difference between incremental revenue and incremental cost

13. © 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. Relevant Costing Opportunity Costs — benefits foregone because one course of action is chosen over another or the value of alternative use. Sunk Costs are  costs incurred in the past to acquire an asset or a resource  not relevant because they cannot be changed regardless of future actions  not recoverable SUNK COSTS ARE IRRELEVANT

14. © 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. Relevant Costing and Business Decisions Outsourcing a product or part Allocating scarce resources Accepting special orders Determining the sales/production mix

15. © 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. Outsourcing— Make-or-Buy Decisions Quantitative Factors  Production capacity available  Incremental production costs per unit  Cost to purchase outside  Opportunity costs of production facilities

16. © 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. Qualitative Factors  Reliability of supply sources  Ability to control quality of items purchased outside  Nature/importance of the work to be subcontracted  Impact on customers and markets  Future bargaining position with supplier(s)  Perceptions about future price changes Outsourcing— Make-or-Buy Decisions

17. © 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. Scarce Resources  Choose product or service with highest contribution margin per unit of scarce resource

18. © 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. Special Order Decisions Sales price should cover  Variable production and selling costs  Incremental fixed costs  Profit  Variable costs is always the minimum.

19. © 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. Special Order Decision Private label order  Buyer’s name (not producer’s) attached to the product  Accept during slack periods to use available capacity  Fixed costs usually not allocated  Variable selling costs often reduced/eliminated  Sales price set to generate a positive contribution margin

20. © 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. Special Order Decisions Qualitative Factors Impact on future prices and sales Positive contribution Impact on scarce resources and other opportunities Available capacity Consider Robinson-Patman Act

21. © 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. BEP & CVP Analysis Green Thumb (Demo Problem) 21

22. © 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. BEP & CVP Analysis Green Thumb (Demo Problem) Prepare a variable costing income statement at the current level of production and sales. 22

23. © 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. BEP & CVP Analysis Green Thumb (Demo Problem) Calculate the unit contribution margin in dollars and the contribution margin ratio for a plant stand. 23

24. © 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. BEP & CVP Analysis Green Thumb (Demo Problem) Calculate the unit contribution margin in dollars and the contribution margin ratio for a plant stand. 24

25. © 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. BEP & CVP Analysis Green Thumb (Demo Problem) Determine the break-even point in number of plant stands. 25

26. © 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. BEP & CVP Analysis Green Thumb (Demo Problem) Calculate the dollar break-even point using the contribution margin ratio. 26

27. Ex 9-9 Direct materials ? Direct Labor ? Var. Mfg overhead ? Total var. prod cost? Divided by units prod 300,000 Variable prod cost per cap $ 1.083

28. © 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. Ex 9-9 Contribution margin per unit: Revenue $ ? Less variable costs: Cost of goods sold (180,000 * 1.08) ? Selling and adm ? ? Cont margin ? Divided by units sold 180,000 Contribution margin per unit $ 1.087 Income Statement: Cost of goods sold (180,000 * 1.08) Net Income (Loss) (16,900)

29. © 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. Ex 9-16 Sales price ? Variable product costs DM ? DL ? OH ? Total Variable Product Cost ? a. Contribution margin (SP – TVC)? b. CMR (216/360) = ? c. What is the BE units? FC 125280 / CM 216 = BE units ?

30. © 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. Ex 9-16 d. What is BE in dollars? FC 125280 / CMR = ? e. Required unit sales for a pre-tax profit of 51,840? FC 125280 + Profit 51840 = 177120 / CM 216 = ? units

31. © 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. Ex 10-22 MP3 PDA CM 12 20 Labor hours 1 2 CM per labor hr. 12 10 Which product has the greatest profit per labor hour? How many can we produce in 100,000 hours available? a. What product should be made?

32. © 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. Ex 10-27 Special Price (per ton)? DM ? DL? VOH ? Total VPC ? CM per ton 10 Tons(Multiply) 200 Total Profit on special order $ ?