Cost-Volume- Profit Relationships. Academic Achievement Center

Transcription

1 Cost-Volume- Profit Relationships Academic Achievement Center

2 Content CVP Analysis Contribution Margin Ratio Target Profit Analysis Break Even Point Margin of Safety

3 Cost-Volume- Profit (CVP) Analysis Helps managers understand the relationships among costs, volume, and profit Looks at how profits are affected by selling prices, sales volume, unit variable costs, total fixed costs, and mix of products sold

4 3 Types of costs Variable: Vary directly proportional with changes in activity Ex. Direct Labor, Direct Materials Fixed: Remain the same regardless of the level of activity Ex. Rent, Property Tax Mixed: Have a variable & a fixed element (Change in total but not proportionally Ex. Utility bill

5 Contribution Margin CM = Sales - Variable cost CM ratio = Contribution Margin/ Sales

6 CM ratio Example Total Per Unit Percent of Sales Sales (200 toasters) $80,000 $ % Variable expenses $35,00 $175???? Contribution margin???? Fixed expenses $20,000 Net operating income

7 CM ratio Example Total Per Unit Percent of Sales Sales (200 toasters) $80,000 $ % Variable expenses $35,00 $175 43% Contribution margin $45,000 $225 57% Fixed expenses $20,000 Net operating income $25,000

8 Target Profit Analysis Is used to estimate what sales volume is needed to achieve a specific target profit For example: Gary s Guitars wants to know how many guitars they have to sell in order to have a profit of $20,000 per month.

9 Target Profit Dollar amount: Target profit = Fixed cost + Target profit / CM% Total Units: Target profit = Fixed cost + Target profit / CM per unit

10 Target Profit Example Gary s Guitars wants to know how many guitars they have to sell in order to have a profit of $20,000 per month.fixed expenses are $10,000 and has a unit contribution margin of $200. What's the target profit in units?

11 Target Profit Example Unit sales to attain the target profit = Target profit+fixed expenses/ Unit CM Unit sales to attain the target profit = $20,000 +$10,000/ 200 Unit sales to attain the target profit = 150

12 Target Profit Example Same example and the Contribution ratio is 35%. What s the Target Profit in dollars?

13 Target Profit Example Dollar sales to attain a target profit= Target profit+fixed expenses/cm ratio Dollar sales to attain a target profit= $20,000 +$10,000/35% Dollar sales to attain a target profit= $85,714.28

14 Break Even Point The level of sales at which the company s profit is zero Since to target profit except the target profit is zero You can find the break even point in units or in dollars

15 Break Even Point in Units Unit sales to break even = Fixed expenses/ Unit CM

16 Break Even Example Gary s Guitars wants to know how many guitars they have to sell in order to break even. Fixed expenses are $10,000 and has a unit contribution margin of $200. What is the break even point in units?

17 Break Even Example Unit sales to break even = Fixed expenses/ Unit CM Unit sales to break even = $10,000/ $200 Unit sales to break even = 50

18 Break Even Point in Dollars Dollar sales to break even =Fixed expenses/ CM ratio

19 Break Even Example Gary s Guitars wants to know how many guitars they have to sell in order to break even. Fixed expenses are $10,000 and has a contribution margin ratio of 35%.What is the break even point in dollars?

20 Break Even Example Dollar sales to break even =Fixed expenses/ CM ratio Dollar sales to break even =$10,000/.35 Dollar sales to break even =$28,571.43

21 Margin of Safety Is the excess of budgeted or actual sales dollars over the break-even volume of sales dollars

22 Margin of Safety Margin of safety in dollars= Total budgeted (or actual) sales - break-even sales Margin of safety percentage= Margin of safety in dollars/ Total budgeted (or actual) sales in dollars

23 Margin of Safety Sales (at the current volume of 75 guitars) (X) Break-even sales (50 guitars) Margin of safety in dollars (Y)??? $28,571.43??? Margin of Safety, (Y)/(X)???

24 Margin of Safety Sales (at the current volume of 75 guitars) (X) Break-even sales (50 guitars) Margin of safety in dollars (Y) $42, $28, $14, Margin of Safety, (Y)/(X) 33.33%

25 Overview

26 Catie s Couches Examples Catie s Couches makes and sells expensive couches. Below is the company s contribution format income statement for the most recent year. Total Per Unit Percent of Sales Sales (50,000 units) $35,000,000 $ % Variable expenses 15,000, ? Contribution Margin 20,000, ? Fixed expenses 15,000,000 Net operating income 5,000,000

27 Catie s Couches Example Compute the company s CM ratio Compute the break-even point in units and dollars Compute the target profit of $7 million in units and dollars Compute the margin of safety in dollars and units

28 Compute the company s CM ratio Total Per Unit Percent of Sales Sales (50,000 units) $35,000,000 $ % Variable expenses 15,000, ? Contribution Margin 20,000, ? Fixed expenses 15,000,000 Net operating income 5,000,000

29 Compute the company s CM ratio Total Per Unit Percent of Sales Sales (50,000 units) $35,000,000 $ % Variable expenses 15,000, ? Contribution Margin 20,000, ? Fixed expenses 15,000,000 Net operating income 5,000,000 CM ratio = 400/700 = 57% Variable expenses ratio = Variable expense/sales = 300/700= 43%

30 Compute the break-even point in units and dollars Unit sales to break even = Fixed expenses/ Unit CM Dollar sales to break even =Fixed expenses/ CM ratio

31 Compute the break-even point in units and dollars Unit sales to break even = $15,000,000/ $400 =37,500 units Dollar sales to break even =$15,000,000/.57 =$26,315,789.47

32 Compute the target profit of $7 million in units and dollars Unit sales to attain the target profit = Target profit+fixed expenses/ Unit CM Dollar sales to attain a target profit= Target profit+fixed expenses/cm ratio

33 Compute the target profit of $7 million in units and dollars Unit sales to attain the target profit = $7,000,000+$15,000,000/ 400 =55,000 units Dollar sales to attain a target profit= $7,000,000 +$15,000,000/.57 =$38,596,491.22

34 Compute the margin of safety in dollars and units Sales (at the current volume of 50,000 units) (X) $ Break-even sales (37,500 units) Margin of safety in dollars (Y) $ $ Margin of Safety, (Y)/(X) %

35 Compute the margin of safety in dollars and units Sales (at the current volume of 50,000 units) (X) $35,000,000 Break-even sales (37,500 units) Margin of safety in dollars (Y) $26,315, $8,684, Margin of Safety, (Y)/(X) 25%