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Cost
Click Behaviour
to edit Master title style 8
and Cost-
Volume-Profit
Analysis
Accounting: A Malaysian Perspective, 4th ed
(Adapted from Accounting 22nd ed)
Warren, Reeve and Duchac
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8-1
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Objective 1
Classify costs by their
behavior as variable
costs, fixed costs, or
mixed costs.
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RM200,000
Total Direct
RM150,000
RM100,000
RM50,000
0 10 20 30
Total Units (Model TS-12)
Produced (thousands) 99
(Continued)
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8-1
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Unit Variable Cost Graph
RM20
Direct Materials
RM15
Cost per Unit
RM10
RM5
0 10 20 30
Total Units (Model TS-
12) Produced (thousands)
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(Concluded)
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RM200,000 RM10
RM150,000 RM5
RM100,000 0 10 20 30
RM50,000 Units Produced (000)
0 10 20 30
Units Produced (000)
Number of Direct
Units of Model Materials Cost Total Direct
JS-12 Produced per Unit Materials Cost
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8-1
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RM150,000
to edit Master title
RM1.50
style
RM125,000 RM1.25
Total Costs
RM100,000 RM1.00
Unit Cost
RM75,000 RM.75
RM50,000 RM.50
RM25,000 RM.25
0 100 200 300 0 100 200 300
Bottles Produced (000) Units Produced (000)
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RM45,000
RM40,000 Mixed costs are
RM35,000 usually separated into
RM30,000
RM25,000
their fixed and
Total Costs
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RM20,250
Variable Cost per Unit =
Difference in Production
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RM20,250
Variable Cost per Unit =
1,350
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RM20,250
Variable Cost per Unit = = RM15
1,350
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8-1
8-1
= RM125,000 – RM80,000
a. Variable cost per unit
(2,500 – 1,000)
= RM30
Total Costs
the same
Fixed Costs
regardless of
activity.
Total Units Produced
Total costs
Unit increase and
Fixed Costs decrease with
Per Unit Cost
activity level.
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Total Units Produced
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8-2
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Objective 2
Compute the contribution
margin, the contribution margin
ratio, and the unit contribution
margin, and explain how they
may be useful to managers.
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8-2
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The contribution margin is the excess of
sales revenues over variable costs. It
contributes first toward covering fixed
costs, then contributes to profit.
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8-2
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RM
Sales (50,000 units) RM1,000,000 100% 20
Variable costs 600,000 60% 12
Contribution margin RM 400,000 40% RM
Fixed costs 300,000 30% 8
Income from operations RM 100,000 10%
Review 8-2
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RM2
Sales (50,000 units) RM1,000,000 100% 0
Variable costs 600,000 60% 12
Contribution margin RM 400,000 40% RM
Fixed costs 300,000 30% 8
Income from operations RM 100,000 10%
8-2
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8-2
8-3
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Objective 3
Using the unit contribution
margin, determine the break-even
point and the volume necessary to
achieve a target profit.
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8-3
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Syarikat Bakar fixed costs are estimated to
be RM90,000. The unit contribution margin
is calculated as follows:
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8-3
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The break-even point is calculated using the
following equation:
Fixed Costs
Break-Even Sales (units) =
Unit Contribution Margin
RM90,000
Break-Even Sales (units) =
RM10
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Fixed Break-
If Costs
Then Even
Fixed Break-
If Then
Costs Even
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8-3
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Without additional advertising:
Fixed Costs
Break-Even in Sales (units) =
Unit Contribution Margin
RM600,000 30,000 units
Break-Even in Sales (units) = =
RM20
With additional advertising:
RM700,000 35,000 units
Break-Even in Sales (units) = =
RM20
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Unit
If Then Break-
Variable
Even
Cost
Unit
If Then Break-
Variable Even
Costs
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8-3
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Syarikat Antah. is evaluating a proposal to pay an
additional 2% commission on sales to its salespeople (a
variable cost) as an incentive to increase sales. Fixed
costs are estimated at RM840,000. The unit
contribution margin before the additional 2%
commission is determined as follows:
8-3
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Without additional 2% commission:
Fixed Costs
Break-Even in Sales (units) =
Unit Contribution Margin
RM840,000 8,000
Break-Even in Sales (units) = =
RM105 units
With additional 2% commission:
RM840,000 8,400
Break-Even in Sales (units) = =
RM100 units
Break-
Unit Even
If Selling Then
Price
Unit Then
If
Selling
Price Break-
Even
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8-3
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Syarikat Jendi is evaluating a proposal to increase the
unit selling price of a product from RM50 to RM60.
The following data have been gathered:
Current Proposed
Unit selling price RM 50 RM 60
Unit variable cost 30 30
Unit contribution margin RM 20 RM 30
Total fixed costs RM600,000 RM600,000
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8-3
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Without price increase:
Fixed Costs
Break-Even in Sales (units) =
Unit Contribution Margin
RM600,000 30,000
Break-Even in Sales (units) = =
RM20 units
With price increase:
RM600,000 20,000
Break-Even in Sales (units) = =
RM30 units
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Effect of Change
Direction of on Break-Even
Type of Change Change Sales (Units)
Fixed cost Increase Increase
Decrease Decrease
Variable cost per unit Increase Increase
Decrease Decrease
Unit sales price Increase Decrease
Decrease Increase
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8-3
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8-3
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Sales (10,000 units x RM75) RM 750,000
Variable costs (10,000 x RM45) 450,000
Contribution margin (10,000 x RM30) RM 300,000
Fixed costs 200,000
Income from operations RM 100,000
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8-3
8-4
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Objective 4
Using a cost-volume-profit chart
and a profit-volume chart,
determine the break-even point
and the volume necessary to
achieve a target profit.
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8-4
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The cost-volume-profit chart in Exhibit 5 (Slide 65) is
based on the following data:
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Cost-Volume-Profit 8-4
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RM500
Sales and Costs (in thousands) RM450
Dollar RM400
amounts RM350
are RM300
indicated RM250
along the RM200
vertical RM150
axis. RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)
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Volume is (Continued)
shown on the horizontal axis.
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Cost-Volume-Profit 8-4
Click to edit Master title style Chart (Continued)
RM500 Point A
Sales and Costs (in thousands) RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)
At sales of RM500,000 and knowing that each unit sells for RM50, we
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can find the values of the two axis. Where the horizontal sales and
costs line intersects the vertical 10,000 unit of sales line is Point A.
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Cost-Volume-Profit 8-4
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Chart (Continued)
RM500 Point A
Cost-Volume-Profit 8-4
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Chart (Continued)
RM500
Sales and Costs (in thousands) RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)
Cost-Volume-Profit 8-4
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Chart (Continued)
RM500
Sales and Costs (in thousands) RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)
Cost-Volume-Profit 8-4
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Chart (Continued)
RM500
Sales and Costs (in thousands) RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)
Cost-Volume-Profit 8-4
Click to edit Master title style Chart (Continued)
RM500
Sales and Costs (in thousands)
RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)
Horizontal and vertical lines are drawn at the
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intersection point of the sales line and the costs line,
which is the break-even point.
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Cost-Volume-Profit 8-4
Click to edit Master title style Chart (Continued)
RM500
Sales and Costs (in thousands) RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)
Cost-Volume-Profit 8-4
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Chart (Concluded)
RM500
Sales and Costs (in thousands) RM450
RM400
RM350
RM300
RM250
RM200 Profit area
RM150
RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)
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RM500
Sales and Costs (in thousands)
RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100 RM80,000
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)
If fixed costs can be reduced to RM80,000, the new break- 75
even point is sales of RM200,000, or 4,000 units.
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8-4
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The maximum operating loss is equal to the
fixed costs of RM100,000. Assuming that the
maximum unit sales within the relevant range is
10,000 units, the maximum operating profit is
RM100,000, computed as follows:
Sales (10,000 units x RM50) RM500,000
Variable costs (10,000 units x RM30) 300,000
Contribution margin (10,000 units x RM20) 200,000
Fixed costs 100,000
Operating profit RM100,000
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Maximum profit
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Maximum loss is
RM100,000, the fixed costs.
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8-2
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Objective 5
Compute the margin of safety and
the operating leverage, and
explain how managers use these
concepts.
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Contribution Margin
Operating Leverage = Income from Operations
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8-5
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Syarikat Salam Syarikat Sinar
Sales RM400,000 RM400,000
Variable costs 300,000 300,000
Contribution margin RM100,000 RM100,000
Fixed costs 80,000 50,000
Income from operations RM 20,000 RM 50,000
Operating leverage 5 ?
Syarikat Salam =
RM100,000 =5
RM20,000
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8-5
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Syarikat Salam Syarikat Sinar
Sales RM400,000 RM400,000
Variable costs 300,000 300,000
Contribution margin RM100,000 RM100,000
Fixed costs 80,000 50,000
Income from operations RM 20,000 RM 50,000
Operating leverage 5 2
RM100,000
Syarikat Sinar = =2
RM50,000
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8-5
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8-5
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If sales are RM250,000, the unit selling price is RM25,
and the sales at the break-even point are RM200,000, the
margin of safety is 20%, computed as follows:
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8-5
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The margin of safety may also be stated in terms of
units.
In this illustration, for example:
the margin of safety of 20% is equivalent to RM50,000
in sales (RM250,000 x 20%).
In units, the margin of safety is 2,000 units
(RM50,000/RM25).
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8-5
8-2
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Objective 6
List the assumptions underlying
cost-volume-profit analysis.
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