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Cost-Volume-Profit

Analysis
L 11
Chapter 20
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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
4. Use CVP analysis to perform
sensitivity analysis
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20-2

Learning Objectives
5. Use CVP analysis to calculate
margin of safety, operating
leverage, and multiproduct
breakeven points

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20-3

Learning Objective 1

Determine how
changes in volume
affect costs

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20-4

Types of costs
Variable costs
Fixed costs
Mixed costs

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20-5

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

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20-6

Total Variable Costs

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20-7

Total Fixed Costs

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20-8

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

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20-9

Characteristics of
Variable and Fixed Costs

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20-10

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

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Total Cost

20-11

Mixed Costs

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20-12

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

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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)

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20-14

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

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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)

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20-16

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

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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

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20-18

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

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20-19

Estimated manufacturing equipment


maintenance cost at 400 tablets
Total manufacturing maintenance cost = ($2 per tablet Number of tablets) + $1,000

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20-20

Estimated manufacturing equipment


maintenance cost at 400 tablets
Total manufacturing maintenance cost = ($2 per tablet Number of tablets) + $1,000
= ($2 per tablet 400 tablets) + $1,000
= $1,800

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20-21

Relevant Range

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20-22

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

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20-23

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
Variable

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20-24

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.
2. Depreciation
on
saws
and
other
manufacturing equipment

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20-25

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.
2. Depreciation
on
saws
and
other
manufacturing equipment
Fixed

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20-26

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

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20-27

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

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20-28

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.
4. Supervisors salary

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20-29

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.
4. Supervisors salary
Fixed

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20-30

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.
5. Wages of production workers

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20-31

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.
5. Wages of production workers
Variable

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20-32

Learning Objective 2

Calculate operating
income using
contribution margin
and contribution
margin ratio

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20-33

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

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20-34

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
= ($500 per tablet 200 tablets) ($275 per tablet 200 tablets)
= $100,000 $55,000

= $45,000

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20-35

Unit Contribution Margin


If Smart Touch Learning sells 200 tablets for $500
each that incur variable costs of $275 each, then
the unit contribution margin is:
Unit contribution margin = Net sales revenue per unit Variable costs per unit

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20-36

Unit Contribution Margin


If Smart Touch Learning sells 200 tablets for $500
each that incur variable costs of $275 each, then
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

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20-37

Contribution Margin Ratio


If Smart Touch Learning sells 200 tablets for $500
each that incur variable costs of $275 each, then
the contribution margin ratio is:
Contribution margin ratio = Contribution margin / Net sales revenue

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20-38

Contribution Margin Ratio


If Smart Touch Learning sells 200 tablets for $500
each that incur variable costs of $275 each, then
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%

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20-39

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)

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20-40

Contribution Margin
Income Statement Format

Net sales revenue


Variable costs
Contribution margin
Fixed Costs
Operating income

Some product, some period


Some product, some period

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20-41

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?

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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

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20-43

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.
8. What is the unit contribution margin?

9. What is the contribution margin ratio?

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20-44

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.
8. What is the unit contribution margin?
Unit contribution margin = $100 per table $40 per table = $60 per table

9. What is the contribution margin ratio?

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20-45

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.
8. What is the unit contribution margin?
Unit contribution margin = $100 per table $40 per table = $60 per table

9. What is the contribution margin ratio?


Contribution margin ratio = $60 per table / $100 per table = 60%

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20-46

Learning Objective 3

Use cost-volume-profit
(CVP) analysis for
profit planning

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20-47

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.
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20-48

Target ProfitThree Approaches


Equation approach
Contribution margin approach
Contribution margin ratio approach

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Equation Approach
Net sales revenue

Total costs

= Operating income

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20-50

Equation Approach
Net sales revenue

Total costs

= Operating income

Net sales revenue Variable costs Fixed costs = Operating income

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20-51

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

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20-52

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 =
($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 =
$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

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20-53

Equation Approach
Check Your Calculation
Net sales revenue Variable costs Fixed costs = Operating income

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20-54

Equation Approach
Check Your Calculation
Net sales revenue Variable costs Fixed costs = Operating income
($500 per unit 80 units) ($275 per unit 80 units) $12,000 = $6,000
$40,000 -- $22,000 $12,000 = $6,000

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20-55

Contribution Margin 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?
Required sales in units = Fixed costs + Target profit
Contribution margin per unit

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20-56

Contribution Margin 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?
Required sales in units = Fixed costs + Target profit
Contribution margin per unit
=

$12,000 + $6,000
$225 per unit

80 units
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20-57

Contribution Margin Approach


Check Your Calculation

Net sales revenue


Variable costs
Contribution margin
Fixed costs
Operating income

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20-58

Contribution Margin Approach


Check Your Calculation

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

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20-59

Contribution Margin Ratio 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?
Required sales in dollars = Fixed costs + Target profit
Contribution margin ratio

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20-60

Contribution Margin Ratio 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?
Required sales in dollars = Fixed costs + Target profit
Contribution margin ratio
=

$12,000 + $6,000
45%

$40,000
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20-61

Breakeven Point Calculations


for Smart Touch Learning

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20-62

Breakeven Point Calculations


for Smart Touch Learning
Exhibit 21-6 Breakeven Point Calculations for Smart Touch Learning
Equation approach
Net sales revenue

Variable costs

($500 per unit Units sold)

($275 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*

Contribution Margin Approach

Contribution Margin Ratio Approach

*Actual result of 53.3333 rounded up to the next full unit as it is not possible to sell partial tablets.

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20-63

Breakeven Point Calculations


for Smart Touch Learning
Exhibit 21-6 Breakeven Point Calculations for Smart Touch Learning
Equation approach
Net sales revenue

Variable costs

($500 per unit Units sold)

($275 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*

Contribution Margin Approach


Required sales in units

Fixed Costs + Target profit


Contribution margin per unit

$12,000 + $0
$225 per unit

54 units*

Contribution Margin Ratio Approach

*Actual result of 53.3333 rounded up to the next full unit as it is not possible to sell partial tablets.

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20-64

Breakeven Point Calculations


for Smart Touch Learning
Exhibit 21-6 Breakeven Point Calculations for Smart Touch Learning
Equation approach
Net sales revenue

Variable costs

($500 per unit Units sold)

($275 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*

Contribution Margin Approach


Required sales in units

Fixed Costs + Target profit


Contribution margin per unit

$12,000 + $0
$225 per unit

54 units*

Contribution Margin Ratio Approach


Required sales in dollars =

Fixed Costs + Target profit


Contribution margin ratio

$12,000 + $0
45%

$26,667**

*Actual result of 53.3333 rounded up to the next full unit as it is not possible to sell partial tablets.
**Actual result of $26,666.6667 rounded up to next full dollar.

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20-65

Cost-Volume-Profit Graph

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20-66

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. The company desires to
earn an operating profit of $12,000 per month.

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20-67

10. Calculate the required sales in units to earn the


target profit using the equation method.

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20-68

10. Calculate the required sales in units to earn the


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 =
$60 per unit Units sold =
$60 per unit Units sold =
Units sold =
Units sold =

Target profit
$12,000
$12,000
$ 6,000 + $12,000
$18,000
$18,000 / $60 per unit
300 units

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20-69

11. Calculate the required sales in units to earn the


target profit using the contribution margin
method.

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20-70

11. Calculate the required sales in units to earn the


target profit using the contribution margin
method.
Required sales in units =

Fixed costs + Target profit


Contribution margin per unit

$6,000 + $12,000
$100 per unit $40 per unit

= 300 units

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20-71

12. Calculate the required sales in dollars to earn


the target profit using the contribution margin
ratio method.

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20-72

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%
Required sales in dollars = Fixed costs + Target profit
Contribution margin ratio
= $6,000 + $12,000
60%
= $30,000
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20-73

13. Calculate the required sales in units to


breakeven using the contribution margin
method.

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20-74

13. Calculate the required sales in units to


breakeven using the contribution margin
method.
Required sales in units =

Fixed costs + Target profit


Contribution margin per unit

$6,000 + $0
$100 per unit $40 per unit

= 100 units

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20-75

Learning Objective 4

Use CVP analysis to


perform sensitivity
analysis

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20-76

Change in the Selling Price


Contribution Margin Approach
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?
Required sales in units =

Fixed costs + Target profit

Contribution margin per unit

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20-77

Change in the Selling Price


Contribution Margin Approach
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?
Required sales in units =

Fixed costs + Target profit

Contribution margin per unit


=

$12,000 + $0
$475 per unit $275 per unit

60 units
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20-78

Change in the Variable Costs


Contribution Margin Approach
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?
Required sales in units =

Fixed costs + Target profit

Contribution margin per unit

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20-79

Change in the Variable Costs


Contribution Margin Approach
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?
Required sales in units = Fixed costs + Target profit
Contribution margin per unit

$12,000 + $0
$500 per unit $285 per unit

= 56 units*
* Rounded up to next full unit
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20-80

Change in the Fixed Costs


Contribution Margin Approach
Smart Touch Learnings selling price remains at
$500 per tablet. Variable costs stay at $275 per
tablet. Fixed costs increase to $15,000. How many
tablets must be sold to break even?
Required sales in units =

Fixed costs + Target profit

Contribution margin per unit

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20-81

Change in the Fixed Costs


Contribution Margin Approach
Smart Touch Learnings selling price remains at
$500 per tablet. Variable costs stay at $275 per
tablet. Fixed costs increase to $15,000. How many
tablets must be sold to break even?
Required sales in units = Fixed costs + Target profit
Contribution margin per unit

$15,000 + $0
$500 per unit $275 per unit

= 67 units*
* Rounded up to the next full unit
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20-82

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

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20-83

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. Calculate the breakeven
point in units under each independent
scenario.

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20-84

14. Variable costs increase by $10 per unit.

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14. Variable costs increase by $10 per unit.


Variable cost = $40 + $10 = $50
Contribution margin per unit = $100 $50 = $50
Required sales in units = Fixed costs + Target profit
Contribution margin per unit

= $6,000 + $0
$50 per unit
= 120 units
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15. Fixed costs decrease by $600.

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20-87

15. Fixed costs decrease by $600.


Fixed costs = $6,000 $600 = $5,400
Contribution margin per unit = $100 $40 = $60
Required sales in units = Fixed costs + Target profit
Contribution margin per unit

= $5,400 + $0
$60 per unit
= 90 units
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20-88

16. Sales price increases by 10%.

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20-89

16. Sales price increases by 10%.


Sales price = $100 1.10 = $110
Contribution margin per unit = $110 $40 = $70
Required sales in units = Fixed costs + Target profit
Contribution margin per unit
= $6,000 + $0
$70 per unit
= 86 units*

* Rounded up to next whole unit


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20-90

Learning Objective 5

Use CVP analysis to


calculate margin of
safety, operating
leverage, and
multiproduct
breakeven points
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20-91

Margin of Safety
Smart Touch Learnings original breakeven
point was 54 tablets. The company expects to
sell 100 tablets.
Expected sales Breakeven sales =

Margin of safety in units

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20-92

Margin of Safety
Smart Touch Learnings original breakeven
point was 54 tablets. The company expects to
sell 100 tablets.
Expected sales Breakeven sales =
100 tablets 54 tablets = 46 tablets

Margin of safety in units

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20-93

Margin of Safety
Smart Touch Learnings original breakeven
point was 54 tablets. The company expects to
sell 100 tablets.
Expected sales Breakeven sales =
100 tablets 54 tablets = 46 tablets

Margin of safety in units

Margin of safety in units Sales price per unit =


safety in dollars

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Margin

of

20-94

Margin of Safety
Smart Touch Learnings original breakeven
point was 54 tablets. The company expects to
sell 100 tablets.
Expected sales Breakeven sales =
100 tablets 54 tablets = 46 tablets

Margin of safety in units

Margin of safety in units Sales price per unit =


safety in dollars
46 tablets $500 per tablet =
$23,000

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

Margin

of

20-95

Margin of Safety
Smart Touch Learnings original breakeven
point was 54 tablets. The company expects to
sell 100 tablets.
Expected sales Breakeven sales =
100 tablets 54 tablets = 46 tablets

Margin of safety in units

Margin of safety in units Sales price per unit =


safety in dollars
46 tablets $500 per tablet =
$23,000

Margin

of

Margin of safety in units / Expected sales in units = Margin


safety ratio

of

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20-96

Margin of Safety
Smart Touch Learnings original breakeven
point was 54 tablets. The company expects to
sell 100 tablets.
Expected sales Breakeven sales =
100 tablets 54 tablets = 46 tablets

Margin of safety in units

Margin of safety in units Sales price per unit =


safety in dollars
46 tablets $500 per tablet =
$23,000

Margin

of

Margin of safety in units / Expected sales in units = Margin


safety ratio
46 tablets / 100 tablets = 46%

of

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20-97

Expected Contribution
Margin Income Statements
Sales Revenue (500 passengers $25 per passenger)

Company A

Company B

$ 12,500

$ 12,500

Variable Cost:
(500 passengers $5 per passenger)

2,500

(500 passengers $15 per passenger)


Contribution Margin
Fixed Costs

Operating Income

7,500
10,000

5,000

6,000

1,000

$ 4,000

$ 4,000

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Actual Contribution
Margin Income Statements
Sales Revenue (400 passengers $25 per passenger)

Company A

Company B

$ 10,000

$ 10,000

Variable Cost:
(400 passengers $5 per passenger)

2,000

(400 passengers $15 per passenger)

6,000

Contribution Margin

8,000

4,000

Fixed Costs

6,000

1,000

$ 2,000

$ 3,000

Operating Income

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Degree of Operating Leverage


Degree of operating leverage = Contribution margin
Operating income

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Degree of Operating Leverage


Degree of operating leverage = Contribution margin
Operating income
Company A

$10,000
$4,000

= 2.50

Company B

$5,000
$4,000

= 1.25

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Degree of Operating Leverage


Predicting Change in Operating Income

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Degree of Operating Leverage


Predicting Change in Operating Income
Estimated sales

Company A

Company B

$ 12,500

$ 12,500

Actual sales

(10,000)

Dollar change

Percent change in sales

($2,500 / $12,500)

Degree of operating leverage


Percent change in operating income

($2,500 / $12,500)

2.50

Actual operating income

$
($2,000 / $4,000)

4,000

4,000
(3,000)

2,000
50%

1.25
25%

(2,000)

Dollar change

2,500

20%

50%

Estimated operating income

Percent change in operating income

2,500

20%

(10,000)

$
($1,000 / $4,000)

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1,000
25%

20-103

Sales Mix
Cool Cat Furniture sold 6,000 cat beds and
4,000 scratching posts. Total fixed costs are
$40,000. The cat beds unit selling price is $44,
and variable cost per bed is $24. The
scratching posts unit selling price is $100 and
variable cost per post is $30. What is the
breakeven point?

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Sales Mix
Cool Cat Furniture sold 6,000 cat beds and
4,000 scratching posts. Total fixed costs are
$40,000. The cat beds unit selling price is $44,
and variable cost per bed is $24. The
scratching posts unit selling price is $100 and
variable cost per post is $30. What is the
breakeven point?
Cat beds
6,000
60%
3

Scratching Posts
4,000
40%
2

Total
10,000
100%
5

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Breakeven Point with Sales Mix:


Step 1
Step 1: Calculate the weighted-average contribution
margin per unit.

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Breakeven Point with Sales Mix:


Step 2
Step 2: Calculate the breakeven point in units for the
package of products.
Required sales in units =

Fixed costs + Target profit

Weighted-average contribution margin per unit

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Breakeven Point with Sales Mix:


Step 2
Step 2: Calculate the breakeven point in units for the
package of products.
Required sales in units =

Fixed costs + Target profit

Weighted-average contribution margin per unit


=

$40,000 + $0
$40 per item

1,000 items

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Breakeven Point with Sales Mix:


Step 3
Step 3: Calculate the breakeven point in units for each
product. Multiply the package breakeven point in
units by each products proportion of the sales mix.

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Breakeven Point with Sales Mix:


Step 3
Step 3: Calculate the breakeven point in units for each
product. Multiply the package breakeven point in
units by each products proportion of the sales mix.
Breakeven sales of cat beds

(1,000 items 3/5) =

600 cat beds

Breakeven sales of scratching posts

(1,000 items 2/5) =

400 scratching posts

In sales dollars:
600 cat beds at $44 selling price each
400 scratching posts at $100 selling price each
Total sales revenue

$26,400
40,000
$66,400

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Breakeven Point with Sales Mix:


Contribution Income Statement
Cat
Beds
Sales Revenue
Cat beds (600 $44)
Scratching posts (400 $100)
Variable Costs
Cat beds (600 $24)
Scratching posts (400 $30)
Contribution Margin
Fixed Costs
Operating Income

Scratching
Posts

Total

$ 40,000

$ 66,400

12,000
$ 28,000

26,400
40,000
40,000
$
0

$ 26,400

14,400
$ 12,000

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Sales Mix with Target Profit


How many units of each product must Cool Cat
sell to earn a target profit of $20,000?

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Sales Mix with Target Profit:


Step 2
Step 2: Calculate the required sales in units for the
package of products.
Required sales in units =

Fixed costs + Target profit

Weighted-average contribution margin per unit

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Sales Mix with Target Profit:


Step 2
Step 2: Calculate the required sales in units for the
package of products.
Required sales in units =

Fixed costs + Target profit

Weighted-average contribution margin per unit


=

$40,000 + $20,000
$40 per item

1,500 items

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Target Profit with Sales Mix:


Step 3
Step 3: Calculate the required sales in units for each
product. Multiply the package required sales in units
by each products proportion of the sales mix.

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Target Profit with Sales Mix:


Step 3
Step 3: Calculate the required sales in units for each
product. Multiply the package required sales in units
by each products proportion of the sales mix.
Required sales of cat beds (1,500 items 3/5) =

900 cat beds

Required sales of scratching posts (1,500 items 2/5) =

600 scratching posts

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Target Profit with Sales Mix:


Contribution Income Statement
Cat
Beds
Sales Revenue
Cat beds (900 $44)
Scratching posts (600 $100)
Variable Costs
Cat beds (900 $24)
Scratching posts (600 $30)
Contribution Margin
Fixed Costs
Operating Income

Scratching
Posts

Total

$ 60,000

$ 99,600

18,000
$ 42,000

39,600
60,000
40,000
$ 20,000

$ 39,600

21,600
$ 18,000

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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. Expected sales are 200
tables per month.

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17. Calculate the margin of safety in units.

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17. Calculate the margin of safety in units.


Breakeven sales in units =
=

Fixed costs + Target profit


Contribution margin per unit
$6,000 + $ 0
$60 per unit

= 100 units
Margin of safety in units = Expected sales Breakeven sales
= 200 tables 100 tables
= 100 tables

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18. Determine the degree of operating leverage.

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20-121

18. Determine the degree of operating leverage.


Sales revenue
(200 tables $100 per table)
Variable costs
(200 tables $40 per table)
Contribution margin (200 tables $60 per table)
Fixed costs
Operating income
Degree of operating leverage

$ 20,000
8,000
12,000
6,000
$ 6,000

= Contribution margin
Operating income
= $12,000
$6,000
= 2.00

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19. The company begins manufacturing wood


chairs to match the tables. Chairs sell for $50
each and have variable costs of $30. The new
production process increases fixed costs to
$7,000 per month. The expected sales mix is
1 table for every 4 chairs. Calculate the
breakeven point.

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20-123

Step 1: Calculate the weighted-average contribution


margin per unit.
Cat
Beds
Sales price per unit

$ 100

Scratching
Posts
$

Total

50

Variable cost per unit

40

30

Contribution margin per unit

60

20

Sales mix in units

Contribution margin

60

80

$ 140

Weighted-average contribution margin per unit


($140 per unit / 5 units)

Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

28

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Step 2: Calculate the breakeven point in units for the


package of products.
Required sales in units =

Fixed costs + Target profit

Weighted-average contribution margin per unit


=

$7,000 + $0
$28 per item

250 items

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Step 3: Calculate the breakeven point in units for each


product. Multiply the package breakeven point in
units by each products proportion of the sales mix.
Breakeven sales of tables
Breakeven sales of chairs

(250 items 1/5) =


50 tables
(250 items 4/5) = 200 chairs

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