1. Copyright © 2012 The McGraw-Hill Companies, Inc. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA McGraw-Hill/Irwin Cost-Volume-Profit Analysis Chapter 20

2. 20-2 Total fixed costs remain constant as activity increases. Number of Local Calls Monthly Basic Telephone Bill Cost per call declines as activity increases. Number of Local Calls Monthly Basic Telephone Bill per Local Call Fixed Costs (and Fixed Expenses)

3. 20-3 Variable Costs (and Variable Expenses) Total variable costs increase as activity increases. Minutes Talked Cost per Minute Minutes Talked Cost per Minute is constant as activity increases. Total Long Distance Telephone Bill

4. 20-4 Cost Behavior Summary

5. 20-5 Variable Utility Charge Activity (Kilowatt Hours) Total Utility Cost Total mixed cost Fixed Monthly Utility Charge Slope is variable cost per unit of activity. Semivariable Costs (Mixed Costs)

6. 20-6 Volume in Units Costs and Revenue in Dollars Break-even Point Profit Loss  Draw the total cost line with a slope equal to the unit variable cost. CVP Relationships : A Graphical Analysis  Starting at the origin, draw the total revenue line with a slope equal to the unit sales price.  Total fixed cost extends horizontally from the vertical axis.

7. 20-7 Economies of Scale Economies of scale are most apparent in business with high fixed costs. Airlines Oil Refineries Steel Mills Utility Companies

8. 20-8 Activity Cost Total cost remains constant within a narrow range of activity. Total cost increases to a new higher cost for the next higher range of activity. Semivariable Costs

9. 20-9 Total Cost Relevant Range A straight line closely (constant unit variable cost) approximates a curvilinear variable cost line within the relevant range. Volume of Output Curvilinear Cost Function Curvilinear Costs

10. 20-10 Computing Break-Even Point How many units must this company sell to cover its fixed costs (break even)? Answer: $30,000 ÷ $20 per unit = 1,500 units How many units must this company sell to cover its fixed costs (break even)? Answer: $30,000 ÷ $20 per unit = 1,500 units Contribution margin is the amount by which revenue exceeds the variable costs of producing the revenue.

11. 20-11 We have just seen one of the basic CVP relationships – the break-even computation. Break-even point in units Fixed costs Contribution margin per unit How Many Units Must We Sell? Unit sales price less unit variable cost ($50 – $30 = $20 in previous example) =

12. 20-12 The break-even formula may also be expressed in sales dollars. Unit contribution margin Unit sales price How Many Dollars in Sales Must We Generate? Break-even point in dollars Fixed costs Contribution margin ratio =

13. 20-13 Break-even formulas may be adjusted to show the sales volume needed to earn any amount of operating income. Unit sales = Fixed costs + Target income Contribution margin per unit Dollar sales = Fixed costs + Target income Contribution margin ratio Computing Sales Needed to Achieve Target Operating Income

14. 20-14 What is Our Margin of Safety? Margin of safety is the amount by which sales may decline before reaching break-even sales: Margin of safety provides a quick means of estimating operating income at any level of sales: Margin of safety = Actual sales – Break-even sales Operating Margin Contribution Income of safety margin ratio =×

15. 20-15 Matrix, Inc. recorded the following production activity and maintenance costs for two months: Using these two levels of activity, compute:  the variable cost per unit.  the total fixed cost.  total cost formula. Determining Semivariable Cost Elements : The High-Low Method

16. 20-16  Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit  Fixed cost = Total cost – Total variable cost Fixed cost = $9,700 – ($0.90 per unit × 9,000 units) Fixed cost = $9,700 – $8,100 = $1,600  Total cost = $1,600 + $.90 per unit Determining Semivariable Cost Elements : The High-Low Method

17. 20-17 End of Chapter 20