Cost-volume-profit anlysis

เอกสารประกอบการสอน สุรินทร์ พรหมนุรักษ์กจิ Managerial AccountingCost-Volume-Profit Analysis Chakrabongse Bhuvanarth Campus © Surin PromnurakkijVariable Costs Managerial AccountingTotal Variable Costs Fixed Costs Total Fixed Costs Total Costs Total Costs Used for planning. Total Units ProduRceedmains the same Total Units Produced regardless ofUnit Variable Costs activity level. Unit Fixed CostsPer Unit Cost Per Unit Cost Total Units Produced Total Units Produced Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial Accounting Contribution Margin Income Statement Total The contribution margin isSales (50,000 units) $1,000,000 available to coverVariable costs 600,000 the fixed costsContribution margin $400,000 and income from operations.Fixed costs 300,000Income from operations $100,000 Sales Variable costs Fixed costs Income from operations Chakrabongse Bhuvanarth Campus © Surin Promnurakkij 1

เอกสารประกอบการสอน สรุ นิ ทร์ พรหมนุรักษก์ ิจ Managerial AccountingContribution Margin Income Statement Total Per Unit PercentSales (50,000 units) $1,000,000 $20 100% 60%Variable costs 600,000 12 $ 8 40%Contribution margin $400,000Fixed costs 300,000Income from operations $100,000 The statement can be extended to include per unit dollars and percentage numbers. Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial AccountingContribution Margin Income Statement Total Per Unit PercentSales (50,000 units) $1,000,000 $20 100% 60%Variable costs 600,000 12 $ 8 40%Contribution margin $400,000Fixed costs 300,000Income from operations $100,000 Variable Fixed Income costs costsSales = + + from operationsSales – Variable = Contribution costs margin Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial Accounting Contribution Margin Analysis Sales – Variable = Contribution costs margin Chakrabongse Bhuvanarth Campus © Surin Promnurakkij 2

เอกสารประกอบการสอน สรุ นิ ทร์ พรหมนุรักษก์ ิจ Managerial AccountingContribution Margin Income Statement Total Per Unit PercentSales (50,000 units) $1,000,000 $20 100% 60%Variable costs 600,000 12 40%Contribution margin $400,000 $ 8Fixed costs 300,000Income from operations $100,000 Unit Contribution Margin Contribution Margin RatioThe contribution margin can be expressed three ways:1. Total contribution margin in dollars.2. Unit contribution margin (dollars per unit).3. Contribution margin ratio (percentage). Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial AccountingCalculating the Break-Even Point Total Per Unit PercentSales (50,000 units) ? $20 100% 60%Variable costs ? 12 $ 8 40%Contribution margin $300,000Fixed costs 300,000Income from operations $ 0 At the break-even point, fixed costs and the contribution margin are equal. Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial AccountingCalculating the Break-Even Point Total Per Unit PercentSales (50,000 units) ? $20 100%Variable costs ? 12 60%Contribution margin $ 300,000 / $ 8 or 40%Fixed costs 300,000Income from operations $ 0 Divide by either: $8 per unit or 40%Break-even = Fixed / Contribution sales costs margin Chakrabongse Bhuvanarth Campus © Surin Promnurakkij 3

เอกสารประกอบการสอน สุรินทร์ พรหมนรุ ักษ์กจิ Managerial AccountingCalculating the Break-Even Point Total Per Unit PercentSales (50,000 units) ? $20 100%Variable costs ? 12 60%Contribution margin $ 300,000  $ 8 or 40%Fixed costs 300,000Income from operations $ 0Break-even = Fixed / Contribution sales costs marginWhat is the break-even sales in units? Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial AccountingCalculating the Break-Even Point Total Per Unit PercentSales (50,000 units) ? $20 100%Variable costs ? 12 60%Contribution margin $ 300,000 / $ 8 or 40%Fixed costs 300,000Income from operations $ 0Break-even = Fixed / Contribution sales costs marginBreak-even sales = $300,000 / $8 = 37,500 unitsWhat is the break-even sales in dollars? Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial AccountingCalculating the Break-Even Point Total Per Unit PercentSales (50,000 units) ? $20 100%Variable costs ? 12 60%Contribution margin $ 300,000 / $ 8 or 40%Fixed costs 300,000Income from operations $ 0Break-even = Fixed / Contribution sales costs marginBreak-even sales = $300,000 / $8 = 37,500 unitsBreak-even sales = $300,000 / 40% = $750,000 Chakrabongse Bhuvanarth Campus © Surin Promnurakkij 4

เอกสารประกอบการสอน สุรนิ ทร์ พรหมนุรักษก์ จิ Managerial AccountingCalculating a Planned Sales Level Total Per Unit PercentSales (50,000 units) ? $20 100%Variable costs ? 12 60%Contribution margin $ 400,000 / $ 8 or 40%Fixed costs 300,000Income from operations $ 100,000Planned = Fixed + Target / Contribution sales costs profit margin Fixed costs plus the target profit equals the required total contribution margin. Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial AccountingCalculating a Planned Sales Level Total Per Unit PercentSales (50,000 units) ? $20 100%Variable costs ? 12 60%Contribution margin $ 400,000 / $ 8 or 40%Fixed costs 300,000Income from operations $ 100,000Planned = Fixed + Target / Contribution sales costs profit margin $8 per unit or 40% Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial AccountingCalculating a Planned Sales Level Total Per Unit PercentSales (50,000 units) ? $20 100%Variable costs ? 12 60%Contribution margin $ 400,000 / $ 8 or 40%Fixed costs 300,000Income from operations $ 100,000Planned = Fixed + Target / Contribution sales costs profit marginWhat is the planned sales level in units? Chakrabongse Bhuvanarth Campus © Surin Promnurakkij 5

เอกสารประกอบการสอน สรุ นิ ทร์ พรหมนรุ ักษก์ จิ Managerial Accounting Calculating a Planned Sales Level Total Per Unit PercentSales (50,000 units) ? $20 100%Variable costs ? 12 60%Contribution margin $ 400,000 / $ 8 or 40%Fixed costs 300,000Income from operations $ 100,000Planned = Fixed + Target / Contribution sales costs profit marginPlanned sales = ($300,000 + $100,000) / $8 = 50,000 units What is the planned sales level in dollars? Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial Accounting Calculating a Planned Sales Level Total Per Unit PercentSales (50,000 units) $1,000,000 $20 100%Variable costs 600,000 12 60%Contribution margin $ 400,000 / $ 8 or 40%Fixed costs 300,000Income from operations $ 100,000Planned = Fixed + Target / Contribution sales costs profit marginPlanned sales = ($300,000 + $100,000) / $8 = 50,000 unitsPlanned sales = ($300,000 + $100,000) / 40% = $$11,0,00000,0,00000 Chakrabongse Bhuvanarth Campus © Surin PromnurakkijSales and Costs ($000) $500 Managerial Accounting $450 $400 Cost-Volume-Profit Chart $350 $300 Total Sales $250 $200 40% Contribution $150 Margin $100 $ 50 60% Variable Costs 0 1 2 3 4 5 6 7 8 9 10 Units of Sales (000) Unit selling price $ 50 100% 60% Unit variable cost 30 40% Unit contribution margin $ 20 Total fixed costs $100,000 Chakrabongse Bhuvanarth Campus © Surin Promnurakkij 6

เอกสารประกอบการสอน สรุ นิ ทร์ พรหมนุรักษ์กจิSales and Costs ($000) $500 Managerial Accounting $450 $400 Cost-Volume-Profit Chart $350 $300 Total Sales $250 $200 Total Costs $150 $100 Fixed Costs $ 50 60% Variable Costs 0 1 2 3 4 5 6 7 8 9 10 Units of Sales (000) Unit selling price $ 50 100% 60% Unit variable cost 30 40% Unit contribution margin $ 20 Total fixed costs $100,000 Chakrabongse Bhuvanarth Campus © Surin PromnurakkijSales and Costs ($000) $500 Managerial Accounting $450 $400 Cost-Volume-Profit Chart $350 $300 Total Sales $250 Total Costs $200 $150 Operating Profit Area $100 $ 50 Operating Loss Area 0 1 2 3 4 5 6 7 8 9 10 Units of Sales (000) Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $ 20 Total fixed costs $100,000 Chakrabongse Bhuvanarth Campus © Surin PromnurakkijSales and Costs ($000) $500 Managerial Accounting $450 $400 Cost-Volume-Profit Chart $350 $300 Total Sales 2$52500 Total Costs $200 Break-even point $150 $100 2 3 4 55 6 7 $100,000 = 5,000 units $ 50 1 Units of Sales (000) 8 9$2010 0 Unit selling price $ 50 Unit variable cost 30 Unit contribution margin $ 20 Total fixed costs $100,000 Chakrabongse Bhuvanarth Campus © Surin Promnurakkij 7

เอกสารประกอบการสอน สุรนิ ทร์ พรหมนุรักษก์ ิจ Managerial Accounting Profit-Volume ChartOperating Profit $100 Relevant range (Loss) $000’s $75 is 10,000 units. $50 $25 $0 $(25) $(50) $(75) $(100) 1 2 3 4 5 6 7 8 9 10 Units of Sales (000’s) Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000 Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial Accounting Profit-Volume Chart $100Operating Profit $75 (Loss) $000’s $50 $25 $0 Maximum profit $(25) within the $(50) relevant range. $(75) $(100) 1 2 3 4 5 6 7 8 9 10Maximum loss is Units of Sales (000’s)equal to Sthaeletso(ta1l0,000 units x $50) $500,000fixed cosVtsa.riable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000 Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial Accounting Profit-Volume Chart $100 Profit Line $75Operating Profit $50 Profit (Loss) $000’s $25 $0 Loss Break-Even Point $(25) $(50) $(75) $(100) 1 2 3 4 5 6 7 8 9 10 Units of Sales (000’s) Sales (10,000 units x $50) $500,000 Variable costs (10,000 units x $30) 300,000 Contribution margin (10,000 units x $20) $200,000 Fixed costs 100,000 Operating profit $100,000 Chakrabongse Bhuvanarth Campus © Surin Promnurakkij 8

เอกสารประกอบการสอน สรุ นิ ทร์ พรหมนุรักษ์กิจ Managerial AccountingSales Mix ConsiderationsContribution margin Products ABSales $ 90 $140Variable costs 70 95Contribution margin $ 20 $ 45Total fixed costs $200,000Sales mix AB 80% 20% Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial AccountingSales Mix ConsiderationsContribution margin Products ABSales $ 90 $140Variable costs 70 95Contribution margin $ 20 $ 45Sales mix x 80% x 20%Product contribution $ 16 $ 9 What is the total product contribution? Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial AccountingSales Mix ConsiderationsContribution margin Products ABSales $ 90 $140Variable costs 70 95Contribution margin $ 20 $ 45Sales mix x 80% x 20%Product contribution $ 16 $ 9Total product contribution $ 25Break-even sales unitsTotal fixed costs $200,000Product contribution $25What is the break-even sales units? Chakrabongse Bhuvanarth Campus © Surin Promnurakkij 9

เอกสารประกอบการสอน สรุ นิ ทร์ พรหมนรุ ักษ์กิจ Managerial AccountingSales Mix ConsiderationsContribution margin Products ABSales $ 90 $140Variable costs 70 95Contribution margin $ 20 $ 45Sales mix x 80% x 20%Product contribution $ 16 $ 9Total product contribution $ 25Break-even sales unitsTotal fixed costs $200,000 = 8,000 unitsProduct contribution $25Break-even sales units 8,000Product A units (80%) 6,400Product B units (20%) 1,600 Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial AccountingSales Mix ConsiderationsContribution margin Products ABSales $ 90 $ 140Variable costs 70 95Contribution margin $ 20 $ 45Sales mix 60% 40%If the sales mix is 60% for productA and 40% for product B, what isthe break-even sales units? Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial AccountingSales Mix ConsiderationsContribution margin Products ABSales $ 90 $140Variable costs 70 95Contribution margin $ 20 $ 45Sales mix x 60% x 40%Product contribution $ 12 $ 18Total product contribution $ 30Break-even sales unitsTotal fixed costs $200,000 = 6,667 unitsProduct contribution $30Break-even sales units 6,667Product A units (60%) 4,000Product B units (40%) 2,667 Chakrabongse Bhuvanarth Campus © Surin Promnurakkij 10

เอกสารประกอบการสอน สุรินทร์ พรหมนรุ ักษ์กจิ Managerial Accounting Applying CVP Analysis Margin of Safety The difference between budgeted sales revenue and break-even sales revenue. The amount by which sales can drop before losses begin to be incurred. Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial Accounting Margin of SafetySales – Sales at break-even point SalesSales Dollars UnitsBreak-even sales $250,000 10,000Excess 200,000 8,000 $ 50,000 2,000 Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial Accounting Margin of SafetySales – Sales at break-even point SalesA Sales Dollars Units Break-even sales $250,000 10,000 Excess 200,000 8,000 Actual sales level. $ 50,000 2,000 Chakrabongse Bhuvanarth Campus © Surin Promnurakkij 11

เอกสารประกอบการสอน สรุ ินทร์ พรหมนุรักษ์กจิ Managerial Accounting Margin of SafetySales – Sales at break-even point SalesA Sales Dollars Units Break-even sales $250,000 10,000B Excess 200,000 8,000 Margin of safety (B/A) $ 50,000 2,000Excess of actual What is the margin ofsales over the safety as a percentage?break-even sales. Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial Accounting Margin of SafetySales – Sales at break-even point Sales Dollars UnitsA Sales $250,000 10,000Break-even sales 200,000 8,000B Excess $ 50,000 2,000Margin of safety (B/A) 20% Margin of safety indicates the Margin ofdecrease in sales that may occur safetybefore an operating loss results. expressed in units. Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial AccountingCost Structure and Operating Leverage  The cost structure of an organization is the relative proportion of its fixed and variable costs.  Operating leverage is . . .  the extent to which an organization uses fixed costs in its cost structure.  greatest in companies that have a high proportion of fixed costs in relation to variable costs. Chakrabongse Bhuvanarth Campus © Surin Promnurakkij 12

เอกสารประกอบการสอน สรุ นิ ทร์ พรหมนรุ ักษก์ ิจ Managerial AccountingCost Structure and Operating Leverage Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial Accounting Operating LeverageContribution margin Operating leverage is a Operating income measure of the relative mix of variable costs and fixed costs. Jones Inc. Wilson Inc.Sales $400,000 $400,000 300,000Variable costs 300,000 $100,000Contribution margin $100,000 50,000 $ 50,000Fixed costs 80,000Income from operations $20,000 Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial Accounting Operating LeverageContribution margin Operating leverage is a Operating income measure of the relative mix of variable costs and fixed costs. Jones Inc. Wilson Inc.Sales $400,000 $400,000 300,000Variable costs 300,000 $100,000A Contribution margin $100,000 50,000 $ 50,000Fixed costs 80,000Income from operations $20,000Both companies have the same contribution margin. Chakrabongse Bhuvanarth Campus © Surin Promnurakkij 13

เอกสารประกอบการสอน สุรินทร์ พรหมนุรักษ์กจิ Managerial Accounting Operating LeverageContribution margin Operating leverage is a Operating income measure of the relative mix of variable costs and fixed costs. Jones Inc. Wilson Inc.Sales $400,000 $400,000 300,000Variable costs 300,000 $100,000A Contribution margin $100,000 50,000 $ 50,000Fixed costs 80,000B Income from operations $20,000Operating leverage (A/B) What is the operating leverage? Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial Accounting Operating LeverageContribution margin Operating leverage is a Operating income measure of the relative mix of variable costs and fixed costs. Jones Inc. Wilson Inc.Sales $400,000 $400,000 300,000Variable costs 300,000 $100,000A Contribution margin $100,000 50,000 $ 50,000Fixed costs 80,000 2B Income from operations $20,000Operating leverage (A/B) 5 What do these numbers mean? Chakrabongse Bhuvanarth Campus © Surin Promnurakkij Managerial Accounting Operating LeverageContribution margin Operating leverage is a Operating income measure of the relative mix of variable costs and fixed costs. Jones Inc. Wilson Inc.Sales $400,000 $400,000 300,000Variable costs 300,000 $100,000A Contribution margin $100,000 50,000 $ 50,000Fixed costs 80,000 2B Income from operations $20,000Operating leverage (A/B) 5 Capital Labor intensive? intensive? Chakrabongse Bhuvanarth Campus © Surin Promnurakkij 14

เอกสารประกอบการสอน สุรินทร์ พรหมนรุ ักษ์กจิ Managerial AccountingAssumptions of Cost-Volume-Profit Analysis The reliability of cost-volume-profit analysis depends upon several assumptions. 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 accurately divided into fixed and variable components. 4. The sales mix is constant. 5. There is no change in the inventory quantities during the period. Chakrabongse Bhuvanarth Campus © Surin Promnurakkij 15