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Cost accounting , cost-volume-profit analysis
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1
BREAK EVEN ANALYSIS
Prepared by Prof. Dr. Salah Mobarak
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The Cost-Volume-Profit (CVP) Model
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The Cost-Volume-Profit (CVP) Model
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The Cost-Volume-Profit (CVP) Model
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The Break-Even Point
Using the CVP Model, we can determine the breakeven point for sales units.
Using the CVP Model, we can determine the breakeven point for sales units.
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The Break-Even Point
Using the CVP Model, we can determine the breakeven point for sales units.
Using the CVP Model, we can determine the breakeven point for sales units.
Assume breakeven is where Net Income = zero. Then solve for the desired variable.
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The Break-Even PointContribution-margin Approach
To compute breakeven units using the contribution approach,
we set NI = 0 and then algebraically manipulate the
equation to solve for the breakeven units (X).
To compute breakeven units using the contribution approach,
we set NI = 0 and then algebraically manipulate the
equation to solve for the breakeven units (X).
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The Break-Even PointContribution-margin Approach
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The Break-Even PointContribution-margin Approach
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Contribution-margin Approach Example
Bradley, Inc. sells briefcases for $105.00 each. Variable costs are $45.00 each and fixed cost is
$240,000.
Compute the breakeven sales volume.
A.2,286 units
B4,000 units
C.5,334 units
D.60 units
Bradley, Inc. sells briefcases for $105.00 each. Variable costs are $45.00 each and fixed cost is
$240,000.
Compute the breakeven sales volume.
A.2,286 units
B4,000 units
C.5,334 units
D.60 units
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Contribution-margin Approach Example
Bradley, Inc. sells briefcases for $105.00 each. Variable costs are $45.00 each and fixed cost is
$240,000.
Compute the breakeven sales volume.
A. 2,286 units
B4,000 units
C.5,334 units
D.60 units
Bradley, Inc. sells briefcases for $105.00 each. Variable costs are $45.00 each and fixed cost is
$240,000.
Compute the breakeven sales volume.
A. 2,286 units
B4,000 units
C.5,334 units
D.60 units
You divided Fixed Cost by Sales Price per Unit?
Think about the formula and try again.
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Contribution-margin Approach Example
Bradley, Inc. sells briefcases for $105.00 each. Variable costs are $45.00 each and fixed cost is
$240,000.
Compute the breakeven sales volume.
A.2,286 units
B4,000 units
C. 5,334 units
D.60 units
Bradley, Inc. sells briefcases for $105.00 each. Variable costs are $45.00 each and fixed cost is
$240,000.
Compute the breakeven sales volume.
A.2,286 units
B4,000 units
C. 5,334 units
D.60 units
You divided Fixed Cost by Variable Price per
Unit? Think about the formula and try again.
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Contribution-margin Approach Example
Bradley, Inc. sells briefcases for $105.00 each. Variable costs are $45.00 each and fixed cost is
$240,000.
Compute the breakeven sales volume.
A.2,286 units
B4,000 units
C.5,334 units
D. 60 units
Bradley, Inc. sells briefcases for $105.00 each. Variable costs are $45.00 each and fixed cost is
$240,000.
Compute the breakeven sales volume.
A.2,286 units
B4,000 units
C.5,334 units
D. 60 units
The Contribution Margin is $60. I don’t know how you turned that
into 60 units! Try again.
The Contribution Margin is $60. I don’t know how you turned that
into 60 units! Try again.
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Contribution-margin Approach Example
Bradley, Inc. sells briefcases for $105.00 each. Variable costs are $45.00 each and fixed cost is
$240,000.
Compute the breakeven sales volume.
A.2,286 units
B 4,000 units
C.5,334 units
D.60 units
Bradley, Inc. sells briefcases for $105.00 each. Variable costs are $45.00 each and fixed cost is
$240,000.
Compute the breakeven sales volume.
A.2,286 units
B 4,000 units
C.5,334 units
D.60 units
Congratulations!
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Target Profit
The Target Profit Model is very useful in planning.
In essence, it is just like a Breakeven problem
where Target Profit > $0.
The Target Profit Model is very useful in planning.
In essence, it is just like a Breakeven problem
where Target Profit > $0.
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Operating Leverage
Operating Leverage (OL) is the effect that fixed costs have on changes in operating income as changes occur in units sold, expressed as changes in contribution marginOL = Contribution Margin Operating Income
Notice these two items are identical, except for fixed costs
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The CVP Model and Income Taxes
Because companies must pay taxes on income, Target Income must be set high enough to cover the taxes.
Because companies must pay taxes on income, Target Income must be set high enough to cover the taxes.
Use the Before-tax Target Income in your Target
Income Model
Use the Before-tax Target Income in your Target
Income Model
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The CVP Model and Income Taxes - Example
Soccer Co. sells a line of soccer balls. The balls sell for $12 each. Variable cost
per ball is $5.30. Fixed costs for the company total $360,000.
Soccer Co. must achieve an after-tax profit of $3 million to meet market
expectations. The company is subject to an average tax rate of 30%.
Soccer Co. sells a line of soccer balls. The balls sell for $12 each. Variable cost
per ball is $5.30. Fixed costs for the company total $360,000.
Soccer Co. must achieve an after-tax profit of $3 million to meet market
expectations. The company is subject to an average tax rate of 30%.
Compute Before-Tax Target Income.
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The CVP Model and Income Taxes - Example
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The CVP Model and Income Taxes - Example
Before-tax Target Income is $4,285,714. Fixed Cost is $360,000. Sales price per unit is $12 and variable cost per unit is $5.30. How many soccer
balls must be sold to meet target profit?
A.53,731 units
B.639,659 units
C.693,390 units
D.357,143 units
Before-tax Target Income is $4,285,714. Fixed Cost is $360,000. Sales price per unit is $12 and variable cost per unit is $5.30. How many soccer
balls must be sold to meet target profit?
A.53,731 units
B.639,659 units
C.693,390 units
D.357,143 units
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The CVP Model and Income Taxes - Example
Before-tax Target Income is $4,285,714. Fixed Cost is $360,000. Sales price per unit is $12 and
variable cost per unit is $5.30. How many sail boats must be sold to meet target profit?
A. 53,731 units
B.639,659 units
C.693,390 units
D.357,143 units
Before-tax Target Income is $4,285,714. Fixed Cost is $360,000. Sales price per unit is $12 and
variable cost per unit is $5.30. How many sail boats must be sold to meet target profit?
A. 53,731 units
B.639,659 units
C.693,390 units
D.357,143 units
You have computed
Breakeven Units. Try again.
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The CVP Model and Income Taxes - Example
Before-tax Target Income is $4,285,714. Fixed Cost is $360,000. Sales price per unit is $12 and
variable cost per unit is $5.30. How many sail boats must be sold to meet target profit?
A. 53,731 units
B. 639,659 units
C. 693,390 units
D. 357,143 units
Before-tax Target Income is $4,285,714. Fixed Cost is $360,000. Sales price per unit is $12 and
variable cost per unit is $5.30. How many sail boats must be sold to meet target profit?
A. 53,731 units
B. 639,659 units
C. 693,390 units
D. 357,143 units
Good try, but you divided the wrong
number by CM? Take another look at the
model and try again.
Good try, but you divided the wrong
number by CM? Take another look at the
model and try again.
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The CVP Model and Income Taxes - Example
Before-tax Target Income is $4,285,714. Fixed Cost is $360,000. Sales price per unit is $12 and
variable cost per unit is $5.30. How many sail boats must be sold to meet target profit?
A. 53,731 units
B. 639,659 units
C. 693,390 units
D. 357,143 units
Before-tax Target Income is $4,285,714. Fixed Cost is $360,000. Sales price per unit is $12 and
variable cost per unit is $5.30. How many sail boats must be sold to meet target profit?
A. 53,731 units
B. 639,659 units
C. 693,390 units
D. 357,143 units
Why did you divide Target Income by Sales Price? That isn’t in the model!
Try again.
Why did you divide Target Income by Sales Price? That isn’t in the model!
Try again.
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The CVP Model and Income Taxes - Example
Before-tax Target Income is $4,285,714. Fixed Cost is $360,000. Sales price per unit is $12 and variable cost per unit is $5.30. How many soccer
balls must be sold to meet target profit?
A.53,731 units
B.639,659 units
C. 693,390 units
D.357,143 units
Before-tax Target Income is $4,285,714. Fixed Cost is $360,000. Sales price per unit is $12 and variable cost per unit is $5.30. How many soccer
balls must be sold to meet target profit?
A.53,731 units
B.639,659 units
C. 693,390 units
D.357,143 units
SCORE!
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Target Profit
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Multiple Products and the Sales Mix
?
The previous CVP discussion assumed that the company sold only 1 product.
In most situations, the sales mix includes 2 or more products.
The previous CVP discussion assumed that the company sold only 1 product.
In most situations, the sales mix includes 2 or more products.
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Multiple Products and the Sales Mix
The previous CVP discussion assumed that the company sold only 1 product.
In most situations, the sales mix includes 2 or more products.
The previous CVP discussion assumed that the company sold only 1 product.
In most situations, the sales mix includes 2 or more products.
If the sales mix is not constant, or if the cost
function is curvilinear, CVP analysis is not reliable.
If the sales mix is not constant, or if the cost
function is curvilinear, CVP analysis is not reliable.
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Multiple Products and the Sales Mix
The previous CVP discussion assumed that the company sold only 1 product.
In most situations, the sales mix includes 2 or more products.
The previous CVP discussion assumed that the company sold only 1 product.
In most situations, the sales mix includes 2 or more products.
If the sales mix is not constant, or if the cost
function is curvilinear, CVP analysis is not reliable.
If the sales mix is not constant, or if the cost
function is curvilinear, CVP analysis is not reliable.
When the sales mix is constant, compute a
weighted average unit CM to use with CVP analysis.
When the sales mix is constant, compute a
weighted average unit CM to use with CVP analysis.
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Multiple Products and the Sales Mix - Example
Ayer Planes sells two different planes, a single- engine and a twin-engine. Fixed costs for the
company total $20,000,000.
Ayer Planes must achieve an after-tax profit of $6 million. The company is subject to an
average tax rate of 25%.
Ayer Planes sells two different planes, a single- engine and a twin-engine. Fixed costs for the
company total $20,000,000.
Ayer Planes must achieve an after-tax profit of $6 million. The company is subject to an
average tax rate of 25%.
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Multiple Products and the Sales Mix - Example
Steps for Multiple Product CVP:
Compute Before-tax Target Profit
Compute Weighted Average Unit CM
Compute Target Profit Volume
Steps for Multiple Product CVP:
Compute Before-tax Target Profit
Compute Weighted Average Unit CM
Compute Target Profit Volume
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Multiple Products and the Sales Mix - Example
Click here when you think you have the answer.
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Multiple Products and the Sales Mix - Example
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Multiple Products and the Sales Mix - Example
For each product multiply the CM by the portion of sales accounted for by that product. Then
add the totals together to get a weighted average unit contribution margin (WAUCM).
Click here when you think you know the answer.
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Multiple Products and the Sales Mix - Example
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Multiple Products and the Sales Mix - Example
Click here when you think you know the answer.
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Multiple Products and the Sales Mix - Example
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Alternative Income Statement Formats
End of Chapter 2
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