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Analysis
L 11
Chapter 20
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall
20-1
Learning Objectives
1. Determine how changes in
volume affect costs
2. Calculate operating income
using contribution margin and
contribution margin ratio
3. Use cost-volume-profit (CVP)
analysis for profit planning
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Learning Objective 1
Determine how
changes in volume
affect costs
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Types of costs
Variable costs
Fixed costs
Mixed costs
20-4
Variable Costs
Batteries in Tablets
Number of
Tablets Produced
Variable Cost
per Tablet
Total
Variable Cost
0 tablets
$55
25 tablets
55
1,375
50 tablets
55
2,750
75 tablets
55
4,125
100 tablets
55
5,500
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Fixed Costs
Total
Fixed Costs
Number of
Tablets Produced
Fixed Cost
per Tablet
$12,000
25 tablets
$480
12,000
50 tablets
240
12,000
75 tablets
160
12,000
100 tablets
120
20-8
Characteristics of
Variable and Fixed Costs
20-9
Mixed Costs
Cell Phone
$100 per month plus $0.10 for each minute of use
Number of
Minutes Used
Total Fixed
Cost
Total Variable
Cost
100 minutes
$100
$10
$110
200 minutes
100
20
120
300 minutes
100
30
130
400 minutes
100
40
140
500 minutes
100
50
150
Total Cost
20-10
Mixed Costs
20-11
Manufacturing Equipment
Maintenance Costs
Number of
Tablets Produced
Total
Maintenance
Cost
1st Quarter
360 tablets
$1,720
2nd Quarter
415 tablets
1,830
3rd Quarter
480 tablets
1,960
Highest Volume
4th Quarter
240 tablets
1,480
Lowest Volume
20-12
High-Low Method
Step 1
Step 1: Identify the highest and lowest levels of
activity, and calculate the variable cost per unit.
Variable cost per unit = Change in total cost / Change in volume of activity
= (Highest cost Lowest cost) / (Highest volume Lowest volume)
20-13
High-Low Method
Step 1
Step 1: Identify the highest and lowest levels of
activity, and calculate the variable cost per unit.
Variable cost per unit = Change in total cost / Change in volume of activity
= (Highest cost Lowest cost) / (Highest volume Lowest volume)
= ($1,960 $1,480) / (480 tablets 240 tablets)
= $480 / 240 tablets
= $2 per tablet
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High-Low Method
Step 2
Step 2: Calculate the total fixed cost.
Total fixed cost = Total mixed cost Total variable cost
= Total mixed cost (Variable cost per unit Number of units)
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High-Low Method
Step 2
Step 2: Calculate the total fixed cost.
Total fixed cost = Total mixed cost Total variable cost
= Total mixed cost (Variable cost per unit Number of units)
= $1,960 ($2 per tablet 480 tablets)
= $1,960 $960
= $1,000
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High-Low Method
Step 3
Step 3: Create and use an equation to show the
behavior of a mixed cost.
Total mixed cost = (Variable cost per unit Number of units) + Total fixed cost
20-17
High-Low Method
Step 3
Step 3: Create and use an equation to show the
behavior of a mixed cost.
Total mixed cost = (Variable cost per unit Number of units) + Total fixed cost
Total manufacturing maintenance cost = ($2 per tablet Number of tablets) + $1,000
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Relevant Range
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Learning Objective 2
Calculate operating
income using
contribution margin
and contribution
margin ratio
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Contribution Margin
If Smart Touch Learning sells 200 tablets for $500
each that incur variable costs of $275 each, then
the contribution margin is:
Contribution margin = Net sales revenue Variable costs
20-33
Contribution Margin
If Smart Touch Learning sells 200 tablets for $500
each that incur variable costs of $275 each, then
the contribution margin is:
Contribution margin = Net sales revenue Variable costs
= ($500 per tablet 200 tablets) ($275 per tablet 200 tablets)
= $100,000 $55,000
= $45,000
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Traditional Income
Statement Format
20-39
Contribution Margin
Income Statement Format
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6. Sales revenue
(200 tables $100 per table) $ 20,000
Variable costs
(200 tables $40 per table)
8,000
Contribution margin (200 tables $60 per table)
12,000
Fixed costs
6,000
Operating income
$ 6,000
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Learning Objective 3
Use cost-volume-profit
(CVP) analysis for
profit planning
20-46
Cost-Volume-Profit Analysis
Assumes the Following:
The price per unit does not change as volume
changes.
Managers can classify each cost as variable,
fixed, or mixed.
The only factor that affects total costs is change
in volume, which increases variable and mixed
costs.
Fixed costs do not change.
There are no changes in inventory levels.
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall
20-47
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Equation Approach
Net sales revenue
Total costs
= Operating income
20-49
Equation Approach
Net sales revenue
Total costs
= Operating income
20-50
Equation Approach
Smart Touch Learning sells tablets for $500 each,
variable costs are $275 each, and fixed costs are
$12,000 per month. If the company desires to earn
$6,000 in profits each month, how many tablets
must it sell?
Net sales revenue Variable costs Fixed costs = Target profit
20-51
Equation Approach
Smart Touch Learning sells tablets for $500 each,
variable costs are $275 each, and fixed costs are
$12,000 per month. If the company desires to earn
$6,000 in profits each month, how many tablets
must it sell?
Net sales revenue Variable costs Fixed costs =
($500 per unit Units sold) ($275 per unit Units sold) - $12,000 =
[($500 $275 per unit) Units sold] - $12,000 =
$225 per unit Units sold =
$225 per unit Units sold =
Units sold =
Units sold =
Target profit
$ 6,000
$ 6,000
$12,000 + $6,000
$18,000
$18,000 / $225 per unit
80 units
20-52
Equation Approach
Check Your Calculation
Net sales revenue Variable costs Fixed costs = Operating income
20-53
Equation Approach
Check Your Calculation
Net sales revenue Variable costs Fixed costs = Operating income
($500 per unit 80 units) ($275 per unit 80 units) $12,000 = $6,000
$40,000 -- $22,000 $12,000 = $6,000
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$12,000 + $6,000
$225 per unit
80 units
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$12,000 + $6,000
45%
$40,000
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall
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Variable costs
Fixed Costs
$12,000
= $
$12,000
= $
Target Profit
= $ 12,000
Units sold
Units sold
= 54 units*
*Actual result of 53.3333 rounded up to the next full unit as it is not possible to sell partial tablets.
20-62
Variable costs
Fixed Costs
$12,000
= $
$12,000
= $
Target Profit
= $ 12,000
Units sold
Units sold
= 54 units*
$12,000 + $0
$225 per unit
54 units*
*Actual result of 53.3333 rounded up to the next full unit as it is not possible to sell partial tablets.
20-63
Variable costs
Fixed Costs
$12,000
= $
$12,000
= $
Target Profit
= $ 12,000
Units sold
Units sold
= 54 units*
$12,000 + $0
$225 per unit
54 units*
$12,000 + $0
45%
$26,667**
*Actual result of 53.3333 rounded up to the next full unit as it is not possible to sell partial tablets.
**Actual result of $26,666.6667 rounded up to next full dollar.
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Cost-Volume-Profit Graph
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Target profit
$12,000
$12,000
$ 6,000 + $12,000
$18,000
$18,000 / $60 per unit
300 units
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$6,000 + $12,000
$100 per unit $40 per unit
= 300 units
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$6,000 + $0
$100 per unit $40 per unit
= 100 units
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$12,000 + $0
$475 per unit $275 per unit
60 units
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall
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$12,000 + $0
$500 per unit $285 per unit
= 56 units*
* Rounded up to next full unit
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall
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$15,000 + $0
$500 per unit $275 per unit
= 67 units*
* Rounded up to the next full unit
Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall
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Effect
Contribution Margin per Unit
Result
Breakeven point
Increases
Decreases
Decreases
Increases
Decreases
Increases
Increases
Decreases
No effect
Increases
No effect
Decreases
20-81