English For Professional

Cost-Volume-Profit
Analysis
L 11
Chapter 20
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall
20-1
Learning Objectives
1. Determine how changes in
volume affect costs
2. Calculate operating income
using contribution margin and
contribution margin ratio
3. Use cost-volume-profit (CVP)
analysis for profit planning
20-2
Learning Objective 1
Determine how
changes in volume
affect costs
20-3
Types of costs
Variable costs
Fixed costs
Mixed costs
20-4
Variable Costs
Batteries in Tablets
Number of
Tablets Produced
Variable Cost
per Tablet
Total
Variable Cost
0 tablets
$55
25 tablets
55
1,375
50 tablets
55
2,750
75 tablets
55
4,125
100 tablets
55
5,500
20-5
Total Variable Costs
20-6
Total Fixed Costs
20-7
Fixed Costs
Total
Fixed Costs
Number of
Tablets Produced
Fixed Cost
per Tablet
$12,000
25 tablets
$480
12,000
50 tablets
240
12,000
75 tablets
160
12,000
100 tablets
120
20-8
Characteristics of
Variable and Fixed Costs
20-9
Mixed Costs
Cell Phone
$100 per month plus $0.10 for each minute of use
Number of
Minutes Used
Total Fixed
Cost
Total Variable
Cost
100 minutes
$100
$10
$110
200 minutes
100
20
120
300 minutes
100
30
130
400 minutes
100
40
140
500 minutes
100
50
150
Total Cost
20-10
Mixed Costs
20-11
Manufacturing Equipment
Maintenance Costs
Number of
Tablets Produced
Total
Maintenance
Cost
1st Quarter
360 tablets
$1,720
2nd Quarter
415 tablets
1,830
3rd Quarter
480 tablets
1,960
Highest Volume
4th Quarter
240 tablets
1,480
Lowest Volume
20-12
High-Low Method
Step 1
Step 1: Identify the highest and lowest levels of
activity, and calculate the variable cost per unit.
Variable cost per unit = Change in total cost / Change in volume of activity
= (Highest cost Lowest cost) / (Highest volume Lowest volume)
20-13
High-Low Method
Step 1
Step 1: Identify the highest and lowest levels of
activity, and calculate the variable cost per unit.
Variable cost per unit = Change in total cost / Change in volume of activity
= (Highest cost Lowest cost) / (Highest volume Lowest volume)
= ($1,960 $1,480) / (480 tablets 240 tablets)
= $480 / 240 tablets
= $2 per tablet
20-14
High-Low Method
Step 2
Step 2: Calculate the total fixed cost.
Total fixed cost = Total mixed cost Total variable cost
= Total mixed cost (Variable cost per unit Number of units)
20-15
High-Low Method
Step 2
Step 2: Calculate the total fixed cost.
Total fixed cost = Total mixed cost Total variable cost
= Total mixed cost (Variable cost per unit Number of units)
= $1,960 ($2 per tablet 480 tablets)
= $1,960 $960
= $1,000
20-16
High-Low Method
Step 3
Step 3: Create and use an equation to show the
behavior of a mixed cost.
Total mixed cost = (Variable cost per unit Number of units) + Total fixed cost
20-17
High-Low Method
Step 3
Step 3: Create and use an equation to show the
behavior of a mixed cost.
Total mixed cost = (Variable cost per unit Number of units) + Total fixed cost
Total manufacturing maintenance cost = ($2 per tablet Number of tablets) + $1,000
20-18
Estimated manufacturing equipment

maintenance cost at 400 tablets
20-19
Estimated manufacturing equipment

maintenance cost at 400 tablets
= ($2 per tablet 400 tablets) + $1,000
= $1,800
20-20
Relevant Range
20-21
Following is a list of costs for a furniture

manufacturer that specializes in wood tables.
Classify each cost as variable, fixed, or mixed
relative to tables produced and sold.
1. Wood used to build tables
20-22

1. Wood used to build tables
Variable
20-23

2. Depreciation
on
saws
and
other
manufacturing equipment
20-24

2. Depreciation
on
saws
and
other
manufacturing equipment
Fixed
20-25

3. Compensation for sales representatives paid
on a salary plus commission basis
20-26

3. Compensation for sales representatives paid
on a salary plus commission basis
Mixed
20-27

4. Supervisors salary
20-28

4. Supervisors salary
Fixed
20-29

5. Wages of production workers
20-30

5. Wages of production workers
Variable
20-31
Calculate operating
income using
contribution margin
and contribution
margin ratio
20-32
Contribution Margin
If Smart Touch Learning sells 200 tablets for $500
each that incur variable costs of $275 each, then
the contribution margin is:
Contribution margin = Net sales revenue Variable costs
20-33
Contribution Margin
the contribution margin is:
Contribution margin = Net sales revenue Variable costs
= ($500 per tablet 200 tablets) ($275 per tablet 200 tablets)
= $100,000 $55,000
= $45,000
20-34
Unit Contribution Margin

the unit contribution margin is:
Unit contribution margin = Net sales revenue per unit Variable costs per unit
20-35
Unit Contribution Margin

the unit contribution margin is:
Unit contribution margin = Net sales revenue per unit Variable costs per unit
= $500 per tablet $275 per tablet
= $225 per tablet
20-36
Contribution Margin Ratio

the contribution margin ratio is:
Contribution margin ratio = Contribution margin / Net sales revenue
20-37
Contribution Margin Ratio

the contribution margin ratio is:
Contribution margin ratio = Contribution margin / Net sales revenue
= $45,000 / $100,000
= 45%
= $225 per tablet / $500 per tablet
= 45%
20-38
Traditional Income
Statement Format
Net sales revenue

Cost of goods sold
Gross profit
Selling and administrative expenses
Operating income
Product cost (some variable, some fixed)
Period costs (some variable, some fixed)
20-39
Contribution Margin
Income Statement Format
Net sales revenue

Variable costs
Contribution margin
Fixed Costs
Operating income
Some product, some period
Some product, some period
20-40
A furniture manufacturer specializes in wood

tables. The tables sell for $100 and incur $40 in
variable costs. The company has $6,000 in fixed
costs per month.
6. Prepare a contribution margin income statement
for one month if the company sells 200 tables.
7. What is the total contribution margin for the month
when the company sells 200 tables?
20-41
6. Sales revenue
(200 tables $100 per table) $ 20,000
Variable costs
(200 tables $40 per table)
8,000
Contribution margin (200 tables $60 per table)
12,000
Fixed costs
6,000
Operating income
$ 6,000
7. Contribution margin = $12,000
20-42

costs per month.
8. What is the unit contribution margin?
9. What is the contribution margin ratio?
20-43

costs per month.
Unit contribution margin = $100 per table $40 per table = $60 per table
20-44

costs per month.
Unit contribution margin = $100 per table $40 per table = $60 per table

Contribution margin ratio = $60 per table / $100 per table = 60%
20-45
Use cost-volume-profit
(CVP) analysis for
profit planning
20-46
Cost-Volume-Profit Analysis
Assumes the Following:
The price per unit does not change as volume
changes.
Managers can classify each cost as variable,
fixed, or mixed.
The only factor that affects total costs is change
in volume, which increases variable and mixed
costs.
Fixed costs do not change.
There are no changes in inventory levels.
20-47
Target ProfitThree Approaches

Equation approach
Contribution margin approach
Contribution margin ratio approach
20-48
Equation Approach
Net sales revenue
Total costs
= Operating income
20-49
Equation Approach
Net sales revenue
Total costs
= Operating income
Net sales revenue Variable costs Fixed costs = Operating income
20-50
Equation Approach
Smart Touch Learning sells tablets for $500 each,
variable costs are $275 each, and fixed costs are
$12,000 per month. If the company desires to earn
$6,000 in profits each month, how many tablets
must it sell?
Net sales revenue Variable costs Fixed costs = Target profit
20-51
Equation Approach
must it sell?
Net sales revenue Variable costs Fixed costs =
($500 per unit Units sold) ($275 per unit Units sold) - $12,000 =
[($500 $275 per unit) Units sold] - $12,000 =
$225 per unit Units sold =
Units sold =
Units sold =
Target profit
$ 6,000
$ 6,000
$12,000 + $6,000
$18,000
$18,000 / $225 per unit
80 units
20-52
Equation Approach
Check Your Calculation
20-53
Equation Approach
($500 per unit 80 units) ($275 per unit 80 units) $12,000 = $6,000
$40,000 -- $22,000 $12,000 = $6,000
20-54
Contribution Margin Approach

must it sell?
Required sales in units =
Fixed costs + Target profit

Contribution margin per unit
20-55

must it sell?
=
$12,000 + $6,000
$225 per unit
80 units

20-56

Net sales revenue

Variable costs
Contribution margin
Fixed costs
Operating income
20-57

Net sales revenue ($500 per unit 80 units) $ 40,000

Variable costs
($275 per unit 80 units)
22,000
Contribution margin ($225 per unit 80 units)
18,000
Fixed costs
12,000
Operating income
$ 6,000
20-58
Contribution Margin Ratio Approach

must it sell?
Required sales in dollars = Fixed costs + Target profit
Contribution margin ratio
20-59

must it sell?
=
$12,000 + $6,000
45%
$40,000
20-60
Breakeven Point Calculations

for Smart Touch Learning
20-61

Exhibit 21-6 Breakeven Point Calculations for Smart Touch Learning
Equation approach
Net sales revenue
Variable costs
($500 per unit Units sold)
[($500$275 per unit) Units sold]
Fixed Costs
$12,000
= $
$12,000
= $
$225 per unit Units sold
Target Profit
= $ 12,000
Units sold
= $ 12,000/$225 per unit
Units sold
= 54 units*
*Actual result of 53.3333 rounded up to the next full unit as it is not possible to sell partial tablets.
20-62

Equation approach
Net sales revenue
Variable costs
Fixed Costs
$12,000
= $
$12,000
= $
Target Profit
= $ 12,000
Units sold
= $ 12,000/$225 per unit
Units sold
= 54 units*

Required sales in units
Fixed Costs + Target profit

$12,000 + $0
$225 per unit
54 units*
20-63

Equation approach
Net sales revenue
Variable costs
Fixed Costs
$12,000
= $
$12,000
= $
Target Profit
= $ 12,000
Units sold
= $ 12,000/$225 per unit
Units sold
= 54 units*

Required sales in units

$12,000 + $0
$225 per unit
54 units*

Required sales in dollars =

$12,000 + $0
45%
$26,667**
**Actual result of $26,666.6667 rounded up to next full dollar.
20-64
Cost-Volume-Profit Graph
20-65

variable costs. The company has $6,000 in
fixed costs per month. The company desires to
earn an operating profit of $12,000 per month.
20-66
10. Calculate the required sales in units to earn the

target profit using the equation method.
20-67

target profit using the equation method.
Net sales revenue Variable costs Fixed costs =
($100 per unit Units sold) ($40 per unit Units sold) $6,000 =
[($100 $40 per unit) Units sold] $6,000 =
Units sold =
Units sold =
Target profit
$12,000
$12,000
$ 6,000 + $12,000
$18,000
$18,000 / $60 per unit
300 units
20-68

target profit using the contribution margin
method.
20-69

target profit using the contribution margin
method.

$6,000 + $12,000
$100 per unit $40 per unit
= 300 units
20-70
12. Calculate the required sales in dollars to earn

the target profit using the contribution margin
ratio method.
20-71
12. Calculate the required sales in dollars to earn

the target profit using the contribution margin
ratio method.
Contribution margin ratio = $60 per table / $100 per table = 60%
= $6,000 + $12,000
60%
= $30,000
20-72
13. Calculate the required sales in units to

breakeven using the contribution margin
method.
20-73
13. Calculate the required sales in units to

breakeven using the contribution margin
method.

$6,000 + $0
= 100 units
20-74
Change in the Selling Price

Smart Touch Learning believes it must cut the
selling price to $475 per tablet. Variable costs
remain at $275 per tablet. Fixed costs stay at
$12,000. How many tablets must be sold to break
even?

20-75
Change in the Selling Price

Smart Touch Learning believes it must cut the
selling price to $475 per tablet. Variable costs
remain at $275 per tablet. Fixed costs stay at
$12,000. How many tablets must be sold to break
even?

$12,000 + $0
60 units
20-76
Change in the Variable Costs

Smart Touch Learnings selling price remains at
$500 per tablet. Variable costs increase to $285 per
tablet. Fixed costs stay at $12,000. How many
tablets must be sold to break even?

20-77
Change in the Variable Costs

$500 per tablet. Variable costs increase to $285 per
tablet. Fixed costs stay at $12,000. How many
Required sales in units = Fixed costs + Target profit
$12,000 + $0
= 56 units*
* Rounded up to next full unit
20-78
Change in the Fixed Costs

$500 per tablet. Variable costs stay at $275 per
tablet. Fixed costs increase to $15,000. How many

20-79
Change in the Fixed Costs

$500 per tablet. Variable costs stay at $275 per
tablet. Fixed costs increase to $15,000. How many
Required sales in units = Fixed costs + Target profit
$15,000 + $0
= 67 units*
* Rounded up to the next full unit
20-80
Effects of Changes in Selling Price,

Variable Costs, and Fixed Costs
Exhibit 20-8 Effects of Changes in Selling Price, Variable Costs,
and Fixed Costs
Cause
Change
Effect
Contribution Margin per Unit
Result
Breakeven point
Selling price per unit increases
Increases
Decreases
Selling price per unit decreases
Decreases
Increases
Variable cost per unit increases
Decreases
Increases
Variable cost per unit decreases
Increases
Decreases
Total fixed cost increases
No effect
Increases
Total fixed cost decreases
No effect
Decreases
20-81

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Cost-Volume-Profit

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Total Variable Costs

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Total Fixed Costs

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Estimated manufacturing equipment

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Estimated manufacturing equipment

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Following is a list of costs for a furniture

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Following is a list of costs for a furniture

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Following is a list of costs for a furniture

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Following is a list of costs for a furniture

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Following is a list of costs for a furniture

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Following is a list of costs for a furniture

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Following is a list of costs for a furniture

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Following is a list of costs for a furniture

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Following is a list of costs for a furniture

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Following is a list of costs for a furniture

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Unit Contribution Margin

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Unit Contribution Margin

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Contribution Margin Ratio

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Contribution Margin Ratio

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Net sales revenue

Product cost (some variable, some fixed)

Period costs (some variable, some fixed)

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Net sales revenue

Some product, some period

Some product, some period

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall