Lecture Fundamentals of cost accounting (4th edition): Chapter 3 - Lanen, Anderson, Maher

(BQ) Chapter 3: Fundamentals of cost-volume-profit analysis. In order to be a well prepared leader and manager, one must have a systematic method of analyzing the ever changing environment. Chapter 3 focuses on how decision-makers analyze changes in the volume of sales.
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Lecture Fundamentals of cost accounting (4th edition): Chapter 3 - Lanen, Anderson, Maher© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in anymanner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Fundamentalsof CostVolumeProfitAnalysis Chapter3 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPAMcGrawHill/Irwin Copyright©2014byTheMcGrawHillCompanies,Inc.Allrightsreserved.LearningObjectivesLO 3-1 Use cost-volume-profit (CVP) analysis to analyze decisions.LO 3-2 Understand the effect of cost structure on decisions.LO 3-3 Use Microsoft Excel to perform CVP analysis.LO 3-4 Incorporate taxes, multiple products, and alternative cost structures into the CVP analysis.LO 3-5 Understand the assumptions and limitations of CVP analysis. 33LO3-1 CostVolumeProfitAnalysis LO 3-1 Use cost-volume-profit (CVP) analysis to analyze decisions. CVP analysis explores the relationship between revenue, cost, and volume and their effect on profits. 34LO3-1 ProfitEquation The Income Statement Total revenues – Total costs = Operating profit The Income Statement written horizontally Operating profit = Total revenues – Total costs Profit = TR – TC 35LO3-1 ProfitEquation Total revenue (TR) Average selling price per unit (P) × Units of output produced and sold (X) TR = PX Total cost (TC) [Variable cost per unit (V) × Units of output (X)] + Fixed costs (F) TC = VX + F 36LO3-1 ProfitEquation Profit = Total revenue – Total costs = TR – TC TC = VX + F Therefore, Profit = PX – (VX + F) Profit = (Price – Variable costs) × Units of output – Fixed costs = X(P – V) – F 37LO3-1 ContributionMargin This is the difference between price and variable cost. It is what is leftover to cover fixed costs and then add to operating profit. Contribution margin = Price per unit – Variable cost per unit P–V 38LO3-1 CVPExample Contribution margin = $2,880 ÷ 12,000 = $0.24 39LO3-1 BreakEvenVolumeinUnits This is the volume level at which profits equal zero. Profit 0 = X(P – V) – F If profit = 0, then X = F ÷ (P – V) Fixed costs Break-even volume (in units) = Unit contribution margin = $1,500 ÷ $0.24 = 6,250 prints 310LO3-1 BreakEvenVolumeinSalesDollars Contribution margin percentage (contribution margin ratio) is the contribution margin as a percentage of sales revenue. Contribution Margin Percentage $0.24 ÷ $0.60 = 0.40 (or 40%) Break-even in Sales Dollars $1,500 ÷ 0.40 = $3,750 311LO3-1 TargetVolume Assume that management wants to have a profit of $1,800. How many prints must be sold? What is the target dollar sales? Target Volume in Units ($1,500 + $1,800) ÷ $.24 = 13,750 Target Volume in Sales Dollars ($1,500 + $1,800) ÷ 0.40 = $8,250 312LO3-1 CVPSummary:BreakEven Break-even volume ...