Basics of CVP. Contribution Margin. Contribution Margin

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1 Cost-Volume Profit Relationships Emillion Chandra Ratu Adelia Ariani Alvin Reynard Jeremy S Monica Lusiani S Nathasya Noveria Christian Ryan Nixon Salim Sales mix Basics of CVP Level or volume of activity Cost-Volume-Profit Analysis Unit selling prices Variable cost per unit Total fixed costs Contribution Margin Acoustic Concept Inc. For The Month Of June Bagaimanakalauhanya1 Total Per Unit yang terjual? Sales(400 Speakers) $100,000 $250 Variable Expenses $60,000 $150 Contribution Margin $40,000 $100 Fixed Expenses $35,000 Net Operating Income $5,000 Contribution Margin Acoustic Concept Inc. (Only 1 speaker sold) Total Per Unit Sales(1 Speaker) $250 $250 Variable Expenses $150 $150 Contribution Margin $100 $100 Fixed Expenses $35,000 Net Operating Income ($34,900) Sales Revenue Variable Expense 1

2 BEP Acoustic Concept Inc. (Break Even Point) Total Per Unit Sales(350 Speakers) $87,500 $250 Variable Expenses 52,500 $150 Contribution Margin 35,000 $100 Fixed Expenses 35,000 Net Operating Income 0 Sales (@ $250 per Speakers) VariablesExpenses (@ $150 per Speakers) Perbandingan Sales Volume 400 Speakers 425 Speakers Differences (25 Speakers) Per Unit $ 100,000 $ 106,250 $ 6,250 $ 250 $60,000 $ 63,750 $ 3,750 $ 150 Contribution Margin $ 40,000 $ 42,500 $ 2,500 $ 100 Fixed Expenses $ 35,000 $ 35,000 $ 0 Net Operating Income $ 5,000 $ 7,500 $ 2,500 = Bila perusahaan hanya memiliki 1 produk, maka CVP Relationships in Equation Form = = = = Chen & Chen Furniture Inc. sells a small hand-crafted table for $30 per unit. The variable costs related to the table, including product and shipping costs, are $18 per unit. Total fixed costs for the company are $60,000. Prepare a CVP graph to approximate the break-even point in dollars and units. CVP Graphic For Chen & Chen Furniture Inc. Fixed Expense Total Revenue Total Expense = Bagaimana menggambarnya?

3 Contribution Margin Ratio = Example CM Ratio 1 Acoustic Concept, Inc For the Month of June Total Per Unit CM Ratio Sales (400 speakers) $ $ % Less: Variable expenses % Contribution margin $ % Less: Fixed expenses Net operating income $ CM Ratio= 40% Sales 1$ = Net Operating Income 0.4$ Example CM Ratio 2 Previous Example: Quantity Sold = 400 speakers Price = $ 250 Sales Revenue = $ 100,000 Contribution Margin = 40% Example CM Ratio 2 Acoustic Concept, Inc For the Month of June Present 400 speaker Sales Volume Expected 520 speaker Increase Per Unit CM Ratio Sales $ 100,000 $ 130,000 $ 30,000 $ % Less: Variable expenses 60,000 78,000 18, % Contribution margin 40,000 52,000 12,000 $ % Less: Fixed expenses 35,000 35,000 0 Net operating income $ 5,000 $ 17,000 $ 12,000 Contributin Margin al / Net Operating Income = 40% X $ 30,000 = $ 12,000 OR Expected Contribution Margin = $130,000 X 40% = $ 52,000 3

4 Application of CVP Concept Basic data for Acoustic Concept, Inc Per Unit CM Ratio Sales $ % Less: Variable expenses % Contribution margin $ % Advertising Expense $10,000 = Monthly Sales $30,000 Should the advertising budget be increased? Acoustic Concept, Inc For the Month of June Sales Volume Present 400 speaker Expected 520 speaker Increase Per Unit CM Ratio Sales $ 100,000 $ 130,000 $ 30,000 $ % Less: Variable expenses 60,000 78,000 18, % Contribution margin 40,000 52,000 12,000 $ % Less: Fixed expenses 35,000 45,000 10,000 Net operating income $ 5,000 $ 7,000 $ 2,000 Alternative 1 Expected Total Contribution Margin $ 130,000 X 40% CM Ratio.$52,000 Present Total Contribution Margin $ 100,000 X 40% CM Ratio.. 40,000 Incremental Contribution Margin... 12,000 Change in Fixed Expenses : Less : Incremental Advertising Expenses...10,000 Increase Net Operating Income.$ 2,000 Alternative 2 Incremental Contribution Margin : $ 30,000 X 40% CM Ratio $ 12,000 Less : Incremental Advertising Expenses 10,000 Increased Net Operating Income $ 2,000 Incremental Analysis Application of CVP Concept Basic data for Acoustic Concept, Inc Per Unit CM Ratio Sales $ % Less: Variable expenses % Contribution margin $ % Basic data for Acoustic Concept, Inc Per Unit CM Ratio Sales $ % Less: Variable expenses % Contribution margin $ 90 36% Acoustic Concept, Inc For the Month of June Sales Volume Present 400 speaker Expected 520 speaker Increase Sales $ 100,000 $ 130,000 $ 30,000 Less: Variable expenses 60,000 83,200 23,200 Contribution margin 40,000 46,800 6,800 Less: Fixed expenses 35,000 35,000 0 Net operating income $ 5,000 $ 11,800 $ 6,800 4

5 Expected Total Contribution Margin with Higher- Quality Components : 520 speakers X $ 90/speaker $ 46,800 Present Total Contribution Margin : 400 speakers X $ 100/speaker 40,000 Increase in Total Contribution Margin $ 6,800 Comparison of Changes in Fixed and Variable Costs Increase (Fixed) Increase (Variable) Sales $ 30,000 $ 30,000 Less: Variable expenses 18,000 23,200 Contribution margin 12,000 6,800 Less: Fixed expenses 10,000 0 Net operating income $ 2,000 $ 6,800 Next Case Case : Current Sales Volume = 400 speakers Price $20 Advertising Budget $15,000 Expected Sales Volume = 600 speakers Should the changes be made? Change in Profit Solution Expected Total Contribution Margin with Lower Selling Price : 600 speakers X $ 80 per speaker $ 48,000 Present Total Contribution Margin : 400 speakers X $ 100 per speaker 40,000 Incremental contribution margin 8,000 Change in fixed expenses : Less incremental advertising expense 15,000 Reduction in net operating income $ (7,000) Comparison Present 400 speakers per month Expected 600 speakers per month Total Per Unit Total Per Unit Difference Sales $100,000 $250 $138,000 $230 $38,000 Variable Expenses 60, , ,000 Contribution Margin 40, , ,000 Fixed Expenses 35,000 50,000 15,000 Change in Variable Cost, Fixed Cost, and Sales Volume Case : Current Sales Volume = 400 speakers To increase sales : Sales Commission = $15 Salary = $6,000 Expected Sales Volume = 460 speakers Net Operating Income 5, ,000 5

6 Change in Profit Expected Total Contribution margin with sales staff on comissions : 460 speakers X $ 85/speaker $ 39,000 Present total contribution margin : 400 speakers x $ 100/per speaker 40,000 Decrease in total contribution margin (900) Change in fixed expenses : Add salaries avoided if a commission is paid 6,000 Increase in net operating income $ 5,100 Comparison Present 400 speakers per month Expected 460 speakers per month Total Per Unit Total Per Unit Difference Sales $100,000 $250 $115,000 $250 $15,000 Variable Expenses 60, , ,900 Contribution Margin 40, , Fixed Expenses 35,000 29,000-6,000 Net Operating Income 5,000 10,100 5,100 Change in Selling Price Case : Current Sales Volume = 400 speakers Chance to bulk sale of 150 speakers No change in regular sales No change in fixed expenses Solution Variable Cost per Speaker $150 Desired profit per speaker: $3000 / 150 speakers 20 Quoted price per speaker $170 What price per speaker should be quoted to the wholesaler if Acoustic Concepts wants to increase its total monthly profits by $ 3,000? Case Target Profit Analysis Target Profit = $40,000 Unit CM = $100 Fixed Expense = $35,000 Jumlah minimal terjual agar tidak rugi? 6

7 Target Profit Analysis - In Terms of Unit Sales Equation Method = $40,000=$100 $35,000 =750 Target Profit Analysis Equation Method = $40,000=0.4 $35,000 =$187,500 - In Terms of Sales Dollars Formula Method + = = $40,000+$35,000 $100 =750 Formula Method + = = $40,000+$35,000 40% =$187,500 Break-Even Analysis - In Terms of Unit Sales = = $35,000 $100 =350 - In Terms of Sales Dollars = = $35, =$87,500 Margin of Safety = = Sales(at 400 speakers) $100,000 Break-even Sales(at 350 speakers) 87,500 Margin of Safety in Dollars $ 12,500 Margin of Safety Percentage 12.5% The Connection % = %= =1 =1 and Profit Stability %=1 % 7

8 Price 100 Variable Expense A 60 Variable Expense B 30 Quantity Produced A 1000 Quantity Produced B 1000 Comparison Bogside Farm (A) Sterling Farm (B) What Happens Amount if Quantity Percent Produced Amount Percent Sales go up to ? 100% % Variable expenses % % Contribution margin % % Fixed expenses Net operating income Dollar sales to breakeven Margin of safety in sales dollars Margin of safety in percentage 25% 14% Price 100 Variable Expense A 60 Variable Expense B 30 Quantity Produced A 1100 Quantity Produced B 1100 Comparison Bogside Farm (A) Sterling Farm (B) Amount Percent Amount Now what Happens if Quantity Percent Sales % % Produced go down to 900? Variable expenses % % Contribution margin % % Fixed expenses Net operating income Dollar sales to breakeven Margin of safety in sales dollars Margin of safety in percentage 32% 22% Price 100 Variable Expense A 60 Variable Expense B 30 Quantity Produced A 900 Quantity Produced B 900 Comparison Bogside Farm (A) Sterling Farm (B) Amount Percent Amount Percent Sales % % Variable expenses % % Contribution margin % % Fixed expenses Net operating income Sales Net Operating Income BogsideFarm (A) Sterling Farm (B) Margin of Safety BogsideFarm (A) Sterling Farm (B) % 14% % 22% % 5% Dollar sales to breakeven Margin of safety in sales dollars Margin of safety in percentage 17% 5% DOL Price = 100 variable expense A 60 variable expense B 30 Qa 1000 Qb 1000 Bogside Farm Sterling Farm Amount Percent Amount Percent Sales % % Variable expenses % % Contribution margin % % Fixed expenses Net operating income DOL 4 7 Setiap kenaikan 10% penjualan Bogside Farm, net income profit naik 10% * 4 = 40% Price = 100 Price = 100 variable expense A 60 variable expense A 60 Qa 1000 Qa 1100 Bogside Farm Bogside Farm Amount Percent Amount Percent Sales % Sales % Variable expenses % Variable expenses % Contribution margin % Contribution margin % Fixed expenses Fixed expenses Net operating income Net operating income DOL 4 DOL Percentage of increase in net operating income 40% 8

9 Commission Contoh( Pipeline Unlimited) MODEL Sales Compensation XR7 Turbo Selling price $ 695 $ 749 Variable expenses Contribution margin $ 351 $ 339 Combination Salary Bila, sales mendapatkomisi10% darisales revenue, model mana yang akan lebih dipush oleh sales? Sales Mix Sales Mix Product A Company Product B Product C BEP Lebih rumit Mengapa lebih rumit? Cost berbeda Harga jual berbeda Contribution Margin berbeda Price : $50 Price : $100 Price : $200 Menghitung Sales Mix Le Louvre Le Vin Total Sales Unit $ 200 $ 400 Selling Price $ 100 $ 200 Sales $ 20, % $ 80, % $ 100, % Variable Expenses $ 15,000 75% $ 40,000 50% $ 55,000 55% Menghitung Sales Mix Verification of the BEP Le Louvre DVD Le Vin DVD Total Current Sales $20,000 $80,000 $100,000 Percentage of sales 20% 80% 100% Contribution Margin $ 5,000 25% $ 40,000 50% $ 45,000 45% Fixed Expenses $ 27,000 Net Operating Income $ 18,000 = = $27, =$60,000 Sales at BEP $12,000 $48,000 $60,000 Le Louvre Le Vin Total Sales $ 12, % $ 48, % $ 60, % Variable Expenses $ 9,000 75% $ 24,000 50% $ 33,000 55% Contribution Margin $ 3,000 25% $ 24,000 50% $ 27,000 45% Fixed Expenses $ 27,000 Net Operating Income $ 0 9

10 Simpler Method Weighted Average Unit CM In Dollars? %=1 =1 $18,000 $45,000 =60% =60% $100,000 =$60,000 = ( ) = $ $ =$75 = = $27,000 $75 =360 Le Louvre DVD = 120 unit Le Louvre DVD = 240 unit Asumsi CVP Analysis Harga Konstan Dalam perusahaan multiproduct, sales mix konstan Cost linear Dalam perusahaan manufaktur, inventory tidak berubah Problems Basics of CVP Analysis 1. Compute the company s CM Ratio and its break-even point in both units and dollars 2. The president believes that a $16,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $80,000 increase in monthly sales. If the president is right, what will the effect on the company s monthly net operating income or loss? 10

11 3. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $60,000 in the monthly advertising budget, will cause unit sales to double. What will the new contribution format income statement look like if these changes are adopted? 4. The marketing department thinks that a fancy new package for the laptop computer battery would help sales. The new package would increase packaging costs by 75 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $9,750? 5. Refer to the original data. By automating certain operations, the company could reduce variable costs by $3 per unit. However, fixed costs would increase by $72,000 each month. a. Compute the new CM Ratio and BEP b. Assume the company expects to sell 26,000 units next month. Prepare 2 contribution format income statement 1 assuming that operations are not automated, and 1 assuming that they are. c. Would you recommend the company automate it s operations? 11