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Chapter
13
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Cost-VolumeProfit Analysis
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A useful management tool that helps managers in planning for profit by way of a systematic analysis of the interrelationship among costs, volume (activity level) and profit.
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Note: In multi-product companies, a change in SALES MIX may also affect company profit.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2005
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Cost Behavior
Unless indicated otherwise, unit selling price is constant even if sales volume changes.
Labor productivity, production technology and market conditions remain constant and stable.
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CVP-related terminologies
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Contribution margin
CM ratio:
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Exercise:
Where-have-you-been Company manufactures and sells a single product. The Companys sales and expenses for a recent month follows:
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Sales (15,000 units) Less: Variable costs Contribution margin Less: Fixed Costs Profit
Determine the ff: 1. Selling price per unit 2. Variable cost per unit 3. CM ratio 4. CM per unit
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Exercise: continuation.
Where-have-you-been Company manufactures and sells a single product. The Companys sales and expenses for a recent month follows:
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Sales (15,000 units) Less: Variable costs Contribution margin Less: Fixed Costs Profit
What is the monthly break-even point in units sold and in sales pesos?
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Margin of Safety
- the difference between actual sales and break-even sales. It indicates the maximum amount by which sales could decline without incurring a loss.
Margin of Safety = Sales Break-even sales Margin of Safety ratio = Margin of Safety / Sales
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Indifference point
- the level of volume at which two alternatives being analyzed would yield equal amount of total costs or profits.
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Exercise: continuation..
Where-have-you-been Company currently pays its salespeople salaries for a total of P40,000 per month, but no commissions. The sales department is considering a plan whereby the salespeople would receive a 5% commission, but their salaries would fall to a total of P25,000 per month. At what sales level (unit and peso sales) is the company indifferent between the two compensation plans? Selling price is P30 per unit.
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Exercise:
Rock Company sells its only product at P32 per unit. Variable costs are P24 per unit and fixed costs amounted to P100,000 per month. Required: 1. If rock can sell 15,000 units in a particular month, what will be its profit? 2. What is the break-even point in units? In peso sales? 3. What unit sales are required to earn P40,000 for the month? 4. What peso sales are required to earn an after-tax profit of P32,000? Tax rate is 20% 5. If Rock is selling 20,000 units per month at P32, what is the margin of safety?
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Sales mix
- the relative combination of quantities of sales of various products that make up the total sales of a company.
Over-all BEP units = FC / weighted average CM per unit Over-all BEP peso sales = FC / weighted average CM ratio
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% sales x DOL =
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End of presentation .
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