Identify how changes in volume affect costs


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1 Chapter 18 Identify how changes in volume affect Total variable change in direct proportion to changes in the volume of activity Unit variable cost remains constant Units produced 3 5 Total direct materials cost Direct materials cost 4 Do not change over wide ranges in volume Fixed cost is inversely proportional to activity 6
2 Sales Compensation $4, $4,000 $3, $3,000 $2, 7 $2,000 $1, $1,000 $ Have both a fixed and variable component 8 Method to separate mixed into variable and fixed components Select the highest level and the lowest level of activity over a period of time Fixed $10,000 $20,000 $30,000 $40,000 Total Sales 9 10 cost #1 Total fixed minus #
3 Total mixed cost cost cost Change in total cost Change in activity $4,400  $4, cost Total mixed cost Total fixed minus Total mixed cost Total variable cost.80 per inspection Number of inspections $4,000 Total fixed $3,280 minus 900 inspections x.80 $ Total fixed $ $3,280 1,000 inspections.80 per inspection 15 Band of volume Outside the relevant range, can differ Use CVP analysis to compute breakeven points 17 16
4 Sales level at which operating income is zero Two methods: Income statement approach margin approach 19 Sales revenue Sales = Operating income Selling price per unit x units sold cost per unit x units sold Fixed Operating income per unit 20 margin Solve for units sold Set to zero 21 margin Sales revenue Use CVP analysis for profit planning, and graph the CVP relations margin ratio 23 22
5 $20,000 + Desired operating income Dollars $15,000 margin ratio $10,000 Revenues $5,000 Target sales in dollars 0 1,000 1, Volume of Units $20,000 $20,000 $15,000 Dollars Dollars $15,000 Revenues $10,000 Revenues Total cost $10,000 $5,000 $5, ,000 1, 1,000 1, Volume of Units Volume of Units $20, point Dollars $15,000 Profit $10,000 Use CVP methods to perform sensitivity analysis $5,000 Loss 0 1,000 1, Volume of Units 29 28
6 Management tool to predict how changes in sale prices, cost or volume affects profits What if analysis Cause Effect Result margin point Selling price increases Selling price decreases cost increases cost decreases increase decrease Change All would impact breakeven point 31 Excess of expected sales over breakeven sales Expected sales in units Margin of safety in units sales in dollars 33 Margin of safety in dollars Sales price per unit margin Decreased Sales price Decreased margin $230 $70 $160 $200 $70 $130 margin $112,000 $160 point in units margin $112,000 students $ New point in units students 36
7 Sales price Decreased variable Increased margin Sales price per unit margin $230 $50 $180 $230 $70 $160 New point in units margin $112,000 Decreased fixed margin $102,000 students $180 point in units students $ Selling prices and variable differ for each product Weightedaverage contribution margin computed Calculate the breakeven point for multiple product lines or services Calculate weighted average contribution margin A company has two products with the sales Calculate breakeven point for the package of products prices and variable indicated in the table Product A Sales price Product B $100 Total Weighted average contribution margin The$150 sales mix weights are added as well as the 60 products contribution 90 margins cost 58 Last year, the company margin 42 sold 5,000 units of A and Sales mix 3,000 units of B. This results in margin a sale mix of 5: Weighted average contribution margin 40 assumed units $60 $60 The sales $480mix divided weight by is 8 results multiplied in by a weighted the product s average contribution contribution margin margin of $60 $600,
8 Calculate the breakeven point for each product line point Product A point Product B 10,000 x 5/8 units 10,000 x 3/8 units 43
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