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8/10/2019 PPT CH 16 B.INDO
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Cost-Volume-
Profit
Analysis: A
Managerial
Planning Tool
CHAPTER
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1. Determine the number of units that must be
sold to break even or earn a target profit.2. Calculate the amount of revenue required to
break even or to earn a targeted profit.
3. Apply cost-volume-profit analysis in amultiple-product setting.
4. Prepare a profit-volume graph and a cost-
volume-profit graph, and explain the meaning
of each.
Objectives
After studying this chapter, you should be ableto:
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Break-Even Point in Units
The break-even point is the point where total
revenue equals total cost, the point of zero profit.
The firms initial decision in implementing a units-
sold approach to CVP analysis is thedetermination of just what a unit is.
A second decision centers on the separation of
costs into fixed and variable components. CVPanalysis focuses on the factors that effect a
change in the components of profits.
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Using Operating Income in CVP Analysis
Narrative Equation
Sales revenue
Variable expenses
Fixed expenses
= Operating income
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Using Operating Income in CVP Analysis
Sales (1,000 units @ $400) $400,000
Less: Variable expenses 325,000
Contribution margin $ 75,000
Less: Fixed expenses 45,000
Operating income $ 30,000
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Using Operating Income in CVP Analysis
Break Even in Units
0 = ($400 x Units) ($325 x Units) $45,000
0 = ($75 x Units)
$45,000$75 x Units = $45,000
Units = 600Proof
Sales (600 units) $240,000
Less: Variable exp. 195,000
Contribution margin $ 45,000
Less: Fixed expenses 45,000
Operating income $ 0
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Shortcut to Calculating Break-Even Units
Number of units = Fixed cost/Unit contribution margin
To calculate the break-even number of units forWhitter Company, use the fundamental break-even
equation as follows :
Number of units = $45,000/($400-$325)
= $45,000/$75= 600
Of course, the answer is identical to that computed
using the income statement,
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Achieving a Targeted Profit
Desired Operating Income of $60,000
$60,000 = ($400 x Units) ($325 x Units) $45,000
$105,000 = $75 x UnitsUnits = 1,400
Proof
Sales (1,400 units) $560,000
Less: Variable exp. 455,000
Contribution margin $105,000
Less: Fixed expenses 45,000
Operating income $ 60,000
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Desired Operating Income of
15% of Sales Revenue
0.15($400)(Units) = ($400 x Units) ($325 x Units) $45,000
$60 x Units = ($400 x Units) $325 x Units) $45,000
Units = 3,000
Targeted Income as a Percent of Sales Revenue
$60 x Units = ($75 x Units) $45,000
$15 x Units = $45,000
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Net income = Operating income Income taxes
= Operating income (Tax rate x Operating income)
After-Tax Profit Targets
= Operating income (1 Tax rate)
Or
Operating income = Net income(1 Tax rate)
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$48,750 = Operating income (0.35 x Operating income)
$48,750 = 0.65 (Operating income)
After-Tax Profit Targets
$75,000 = Operating income
If the tax rate is 35 percent and a firm wants
to achieve a profit of $48,750. How much is
the necessary operating income?
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After-Tax Profit Targets
How many units would have to be sold to
earn an operating income of $48,750?
Units = ($45,000 + $75,000)/$75
Units = $120,000/$75
Units = 1,600Proof
Sales (1,600 units) $640,000
Less: Variable exp. 520,000
Contribution margin $120,000
Less: Fixed expenses 45,000
Operating income $ 75,000
Less: Income tax (35%) 26,250
Net income $ 48,750
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Break-Even Point in Sales Dollars
EXHIBIT 16.1
Contribution
margin
Variablecost
Revenue6
$10
0 10 Unit
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Break-Even Point in Sales Dollars
First, the contribution margin
ratio must be calculated.
Sales $400,000 100.00%
Less: Variable
expenses 325,000 81.25%
Contributionmargin $ 75,000 18.75%
Less: Fixed exp. 45,000
Operating income $ 30,000
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Break-Even Point in Sales Dollars
Given a contribution margin ratio of 18.75%, how
much sales revenue is required to break even?
Operating income = Sales Variable costs Fixed costs
$0 = Sales (Variable costs ratio x Sales)$45,000
Sales = $240,000
$0 = Sales (1 0.8125) $45,000
Sales (0.1875) = $45,000
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Relationships Among Contribution
Margin, Fixed Cost, and Profit
Contribution Margin
Total Variable Cost
Revenue
Fixed Cost
Fixed Cost = Contribution Margin
EXHIBIT 16.2
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Relationships Among Contribution
Margin, Fixed Cost, and Profit
Contribution Margin
Total Variable Cost
Revenue
Fixed Cost
Fixed Cost > Contribution Margin
Loss
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Profit Targets and Sales Revenue
How much sales revenue must a firm generate to
earn a before-tax profit of $60,000. Recall that
fixed costs total $45,000 and the contribution
margin ratio is .1875.Sales = ($45,000 + $60,000)/0.1875
= $105,000/0.1875
= $560,000