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Chapter 7 - Cost-volume-profit analysis. After completing this chapter, you should be able to: Compute a break-even point using the contribution-margin approach and the equation approach; compute the contribution-margin ratio and use it to find the break-even point in sales dollars; prepare a cost-volume-profit (CVP) graph and explain how it is used. | Chapter 7 Cost-Volume-Profit Analysis The Break-Even Point The break-even point is the point in the volume of activity where the organization’s revenues and expenses are equal. Leaning Objective 1 Equation Approach Sales revenue – Variable expenses – Fixed expenses = Profit Unit sales price Sales volume in units × Unit variable expense Sales volume in units × ($500 × X) ($300 × X) – – $80,000 = $0 ($200X) – $80,000 = $0 X = 400 surf boards Contribution-Margin Approach For each additional surf board sold, Curl generates $200 in contribution margin. Consider the following information developed by the accountant at Curl, Inc.: Learning Objective 2 Contribution-Margin Approach Fixed expenses Unit contribution margin = Break-even point (in units) $80,000 $200 = 400 surf boards Contribution-Margin Approach Here is the proof! 400 × $500 = $200,000 400 × $300 = $120,000 Contribution Margin Ratio Calculate the break-even point in sales dollars rather than units by using the contribution margin ratio. Contribution margin Sales = CM Ratio Fixed expense CM Ratio Break-even point (in sales dollars) = Contribution Margin Ratio $80,000 40% $200,000 sales = Graphing Cost-Volume-Profit Relationships Viewing CVP relationships in a graph gives managers a perspective that can be obtained in no other way. Consider the following information for Curl, Inc.: Learning Objective 3 Cost-Volume-Profit Graph Fixed expenses Total expenses Total sales Break-even point Profit area Loss area Target Net Profit We can determine the number of surfboards that Curl must sell to earn a profit of $100,000 using the contribution margin approach. Fixed expenses + Target profit Unit contribution margin = Units sold to earn the target profit $80,000 + $100,000 $200 = 900 surf boards See the Equation Approach example in text book (LO1) Learning Objective 4 Applying CVP Analysis Safety Margin The difference between budgeted sales revenue and break-even sales revenue. The amount by which sales can drop before losses begin to be incurred. See example the Safety Margin example in text book (LO4) What would happen to BREAK EVEN POINT if there is a: Changes in Fixed Costs: See example in text book (LO4) Changes in Unit Contribution Margin: See example in text book (LO4) for: Unit Variable expenses Sale prices Predicting Profit Given Expected Volume Fixed expenses Unit contribution margin Target net profit Find: {req’d sales volume} Given: Fixed expenses Unit contribution margin Expected sales volume Find: {expected profit} Given: See the example in text book (LO4) CVP Analysis with Multiple Products For a company with more than one product, sales mix is the relative combination in which a company’s products are sold. Different products have different selling prices, cost structures, and contribution margins. See the example in text book (LO5) Learning Objective 5 Learning Objectives 6-11 can be found in the Text Book
