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Cost-Volume-Profit
(CVP)
Analysis
Cost-Volume-Profit Analysis
Cost-volume-profit (CVP) analysis examines
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Learning Objective 1
Understand the assumptions
underlying CVP analysis.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Cost-Volume-Profit Assumptions
and Terminology
1. Changes in the level of revenues and costs arise
only because of changes in the number of product
(or service) units produced and sold.
2. Total costs can be divided into a fixed component
and a component that is variable with respect to
the level of output.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Cost-Volume-Profit Assumptions
and Terminology
3. When graphed, the behavior of total revenues
and total costs is linear (straight-line) in relation
to output units within the relevant range
(and time period).
4. The unit selling price, unit variable costs, and
fixed costs are known and constant.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Cost-Volume-Profit Assumptions
and Terminology
5. The analysis either covers a single product or
assumes that the sales mix when multiple
products are sold will remain constant as the
level of total units sold changes.
6. All revenues and costs can be added and
compared without taking into account the time
value of money.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Basic Formulae
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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CVP
CVP Income
Income Statement
Statement -- Example
Example
Vargo Video Company produces DVD players.
Relevant data for June 2008:
Unit selling price of DVD player
Unit variable costs
Total monthly fixed costs
Units sold
$500
$300
$200,000
1,600
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Learning Objective 2
Explain the features
of CVP analysis.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Essentials of Cost-Volume-Profit
(CVP) Analysis Example
Assume that the Mary can purchase software packages
for $120 from a computer software wholesaler with a
privilege of returning all unsold packages and receiving
a full $120 refund per package within one year.
The average selling price per package is $200 and total
fixed costs amount to $2,000.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Essentials of Cost-Volume-Profit
(CVP) Analysis Example
Case1:How much revenue will the business receive if 5
units are sold?
5 $200 = $1,000
How much variable costs will the business incur?
5 $120 = $600
Operating income: $1,000 600 2,000 = ($1,600)
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Essentials of Cost-Volume-Profit
(CVP) Analysis Example
Case2:How much revenue will the business receive if
40 units are sold?
40 $200 = $8,000
How much variable costs will the business incur?
40 $120 = $4,800
Operating income: $8,000 4,800 2,000 = $1,200
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Essentials of Cost-Volume-Profit
(CVP) Analysis Example
Compare Case1 and Case2:
The only numbers that change from selling
different quantities are total revenues and total
variable costs.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Essentials of Cost-Volume-Profit
(CVP) Analysis Example
Case 1:
Contribution margin=1,000 600=400
Contribution margin per unit=400 / 5=80
Case 2:
Contribution margin=8,0004,800 =3,200
Contribution margin per unit=3,200 /40 =80
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Essentials of Cost-Volume-Profit
(CVP) Analysis Example
Contribution margin percentage (contribution margin
ratio) is the contribution margin per unit divided by
the selling price (or, contribution margin divided by
revenues).
Case 1: 400/1,000=40%
Case 2: 3,200/8,000=40%
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Essentials of Cost-Volume-Profit
(CVP) Analysis Example
Contribution margin
= Contribution margin per unit Number of units sold
= Contribution margin percentage Revenues
If the business sells 50 packages,
revenues will be $10,000 and
contribution margin would equal 40% $10,000 = $4,000
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Learning Objective 3
Determine the breakeven point
and output level needed to achieve
a target operating income using
the equation, contribution margin,
and graph methods.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Breakeven Point
Breakeven point (BEP): quantity of output
sold at which total revenues equal total costs,
i.e. operating income is $0.
Total revenues = Total costs
Sales
Variable
costs
Fixed
costs
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
3-19
Breakeven Analysis
Breakeven analysis: Process to find the breakeven point
Breakeven point can be expressed either in
sales units or in sales dollars
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Abbreviations
SP = Selling price
VCU = Variable cost per unit
CMU = Contribution margin per unit
CMR = Contribution margin percentage
FC = Fixed costs
Q = Quantity of output units sold
(and manufactured)
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Contribution Margin
Contribution Margin equals sales less
variable costs
CM = S VC
CMU = SP VCU
or CMU=CM / Q
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Contribution Margin
Contribution Margin also equals contribution
CM = CMU x Q
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Abbreviations
OI = Operating income
TOI = Target operating income
TNI = Target net income
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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BEQ = FC CMU
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Sales VC FC = OI
(SP x Q) (VCU x Q) FC = OI
Q (SP VCU) FC = OI
Q (CMU) FC = OI
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Total
revenues
line
Operating
income
Operating
income area
Total
costs
line
Breakeven
point
= 25 units
Total
costs
line
Operating
loss area
Operating
loss area
Variable
costs
Fixed
costs
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Review
Gossen Company is planning to sell 200,000 pliers
for $4 per unit. The contribution margin ratio is
25%. If Gossen will break even at this level of
sales, what are the fixed costs?
a. $100,000.
b. $160,000.
c. $200,000.
d. $300,000.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Learning Objective 4
Understand how income
taxes affect CVP analysis.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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OI = I I
NI
I
(1-Tax Rate)
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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$9,000
5,400
$3,600
2,000
1,600
640
$ 960
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
3-39
Review
The mathematical equation for computing
required sales to obtain target net income is:
Required sales =
a. Variable costs + Target net income.
b. Variable costs + Fixed costs + Target net income.
c. Fixed costs + Target net income.
d. No correct answer is given.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
3-40
Learning Objective 5
Explain CVP analysis
in decision making and
how sensitivity analysis helps
managers cope with uncertainty.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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$3,200
2,000
$ 1,200
$3,520
2,500
$ 1,020
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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$3,000
2,000
$ 1,000
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Sensitivity Analysis
A what-if technique that managers use to
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Margin of Safety
Margin of safety: the amount by which budgeted
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
3-48
Review
Marshall Company had actual sales of $600,000
when break-even sales were $420,000. What
is the margin of safety ratio?
a. 25%.
b. 30%.
c. 33 1/3%.
d. 45%.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Learning Objective 6
Use CVP analysis to plan
fixed and variable costs.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
3-50
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Operating Leverage
Operating leverage describes the effects that
fixed costs have on changes in operating
income as changes occur in units sold.
Degree of operating leverage
= Contribution margin Operating income
Organizations with a high proportion of fixed
costs have high operating leverage.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
3-57
Learning Objective 7
Apply CVP analysis to a company
producing different products.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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1
2
$200 $100
120
70
$80
$30
40% 30%
60
40
$4,500
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Learning Objective 8
Adapt CVP analysis to situations
in which a product has more
than one cost driver.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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$8,000
4,800
150
4,950
3,050
2,000
$ 1,050
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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$8,000
4,800
400
5,200
2,800
2,000
$ 800
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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Learning Objective 9
Distinguish between
contribution margin
and gross margin.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.
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