UIW 6311 Full CVP PowerPoint adapt for your report Essay

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The Break-Even Point
The break-even point is the point in the volume of activity where the organization’s revenues and expenses are equal.
Sales
$ 250,000
Less: variable expenses 150,000
Contribution margin
100,000
Less: fixed expenses
100,000
Net income
$
-

7-1

Contribution-Margin Approach
Consider the following information developed by the accountant at Curl, Inc.:
For each additional surf board sold,
Curl generates $200 in contribution margin. Sales (500 surf boards)
Less: variable expenses
Contribution margin
Less: fixed expenses
Net income

Total
$250,000
150,000
$100,000
80,000
$ 20,000

Per Unit
$
500
300
$
200

Percent
100%
60%
40%

7-2

Graphing Cost-Volume-Profit
Relationships
Viewing CVP relationships in a graph gives managers a perspective that can be obtained in no other way.
Consider the following information for Curl, Inc.:

7-3

Cost-Volume-Profit Graph

Fixed expenses

7-4

Cost-Volume-Profit Graph

ex l a t To

es s n pe Fixed expenses

7-5

Cost-Volume-Profit Graph

ex l a t To

es s n pe Fixed expenses

7-6

Cost-Volume-Profit Graph a Tot

ex l a t To

les a ls

es s n pe Fixed expenses

7-7

Cost-Volume-Profit Graph

Break-even point ex l a t To

s
Lo

re a s

a

a
Tot

les a ls

rea a fit o r
P

es s n pe Fixed expenses

7-8

Profit-Volume Graph
Some
Some managers managers like like the the profit-volume profit-volume graph graph because because itit focuses focuses on on profits profits and and volume. volume. Break-even point s o L

i f o
Pr

t

a e r a a e r sa 7-9

Applying CVP Analysis
Safety Margin
• The difference between budgeted sales revenue and break-even sales revenue.
• The amount by which sales can drop before losses begin to be incurred.

7-10

Safety Margin
Curl, Inc. has a break-even point of $200,000.
If actual sales are $250,000, the safety margin is
$50,000 or 100 surf boards.

7-11

Changes in Fixed Costs
•• Curl
Curl is is currently currently selling selling 500
500 surfboards surfboards per per year. year. •• The
The owner owner believes believes that that an an increase increase of of $10,000
$10,000 in in the the annual annual advertising advertising budget, budget, would would increase increase sales sales to to 540
540 units. units.  Should
Should the the company company increase increase the the advertising advertising budget? budget? 7-12

Changes in Fixed Costs

540
540 units units ×× $500
$500 per per unit unit == $270,000
$270,000
$80,000
$80,000 ++ $10,000
$10,000 advertising advertising == $90,000
$90,000
7-13

Changes in Fixed Costs
Sales
Sales will will increase increase by by $20,000,
$20,000, but but net net income income decreased decreased by by $2,000.
$2,000.

7-14

CVP Analysis with Multiple
Products
For a company with more than one product, sales mix is the relative combination in which a company’s products are sold.
Different products have different selling prices, cost structures, and contribution margins.

Let’s assume Curl sells surfboards and sail boards and see how we deal with breakeven analysis.
7-15

CVP Analysis with Multiple
Products
Curl provides us with the following information: 7-16

CVP Analysis with Multiple
Products
Weighted-average unit contribution margin

$200 × 62.5%
$550 × 37.5%
7-17

CVP Analysis with Multiple
Products
Break-even point
Break-even
Fixed expenses
=
point
Weighted-average unit contribution margin
Break-even
= point $170,000…