Transcript LO 1 Cost Behavior  Cost behavior is the manner in which a cost changes as a related activity changes. Understanding the behavior of.

LO 1
Cost Behavior
 Cost behavior is the manner in which a cost
changes as a related activity changes.
Understanding the behavior of a cost
depends on:
 Identifying the activities that cause the cost
to change, called activity bases (or activity
drivers).
 Specifying the range of activity over which
the changes in the cost are of interest. This
range of activity is called the relevant range.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Variable Costs
 Variable costs are costs that vary in
proportion to changes in the level of activity.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Variable Costs
Jason Sound
Jason Sound Inc. produces stereo systems. The
parts for the stereo systems are purchased from
suppliers for $10 per unit (a variable cost) and are
assembled by Jason Sound Inc. For Model JS-12,
the direct materials costs for the relevant range of
5,000 to 30,000 units of production are shown on
the next slide.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Variable Costs
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Jason Sound
LO 1
Variable Costs
 As shown in the previous slides, the variable
costs have the following characteristics:
 Cost per unit remains the same regardless of
changes in the activity base.
 Total cost changes in proportion to changes
in the activity base.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
Cost per Unit
Total Direct Materials Cost
Variable Costs
$20
$15
$10
$5
0
10
20
30
Units Produced (000)
0
10
20
30
Units Produced (000)
Number of
Units of Model
JS-12 Produced
5,000 units
10,000
15,000
20,000
25,000
30,000
Direct
Materials Cost
per Unit
$10
10
10
10
10
10
Total Direct
Materials Cost
$ 50,000
l00,000
150,000
200,000
250,000
300,000
Note: Fixed per
unit; variable in
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a total
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Fixed Costs
 Fixed costs are costs that remain the same in total
dollar amount as the activity base changes.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Fixed Costs
Minton Inc. manufactures, bottles, and distributes
perfume. The production supervisor is Jane Sovissi.
She is paid $75,000 per year. The plant produces
from 50,000 to 300,000 bottles of perfume.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Fixed Costs
The more units
produced, the lower
the fixed cost per unit.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Fixed Costs
 Fixed costs have the following
characteristics:
 Cost per unit changes inversely to changes in
the activity base.
 Total cost remains the same regardless of
changes in the activity base.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
$150,000
$125,000
$100,000
$75,000
$50,000
$25,000
Salary per Unit
Total Salary
Fixed Costs
$1.50
$1.25
$1.00
$.75
$.50
$.25
100 200 300
0
Units Produced (000)
0
100 200 300
Units Produced (000)
Number of
Bottles of Perfume
Produced
Total Salary
for Jane
Sovissi
Salary per Bottle
of Perfume
Produced
50,000 bottles
100,000
150,000
200,000
$75,000
75,000
75,000
75,000
$1.500
0.750
0.500
0.375
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Mixed Costs
 Mixed costs have characteristics of both a
variable and a fixed cost. Mixed costs are
sometimes called semivariable or semifixed
costs.
 Over one range of activity, the total mixed
cost may remain the same. Over another
range of activity, the mixed cost may
change in proportion to changes in the
level of activity.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Mixed Costs
Simpson Inc. manufactures sails, using rented
equipment. The rental charges are $15,000 per
year, plus $1 for each machine hour used over
10,000 hours.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Mixed Costs
The rental charges for various hours used within
the relevant range of 8,000 hours to 40,000 hours
are as follows:
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Mixed Costs
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Mixed Costs
 The high-low method is a cost estimation
method that may be used to separate
mixed costs into their fixed and variable
components.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Mixed Costs
The Equipment Maintenance Department of
Kason Inc. incurred the following costs during the
past five months:
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Mixed Costs
The number of units produced is the activity base,
and the relevant range is the units produced
between June and October. The next series of
slides for Kason Inc. illustrate how the high-low
method is used to determine the fixed and variable
costs.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Mixed Costs
Production Total
(Units)
Cost
June
July
August
September
October
1,000
1,500
2,100
1,800
750
$45,550
52,000
61,500
57,500
41,250
Actual costs incurred
First, select the
highest and lowest
levels of activity.
Difference in Total Cost
Variable Cost per Unit =
Difference in Production
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Mixed Costs
Production Total
(Units)
Cost
June
July
August
September
October
1,000
1,500
2,100
1,800
750
$45,550
52,000
61,500
57,500
41,250
Next, fill in the
formula for difference
in total cost.
$61,500
41,250
$20,250
Difference
$20,250
in Total Cost
Variable Cost per Unit =
Difference in Production
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Mixed Costs
Production Total
(Units)
Cost
June
July
August
September
October
1,000
1,500
2,100
1,800
750
$45,550
52,000
61,500
57,500
41,250
Then, fill in the
formula for
difference in
production.
2,100
750
1,350
Difference
$20,250
in Total cost
Variable Cost per Unit =
Difference1,350
in Production
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Mixed Costs
Production Total
(Units)
Cost
June
July
August
September
October
1,000
1,500
2,100
1,800
750
$45,550
52,000
61,500
57,500
41,250
Variable Cost per Unit =
Variable cost
per unit is $15
$20,250
1,350
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
= $15
LO 1
Mixed Costs
The fixed cost is estimated by subtracting the total
variable costs from the total costs for the units
produced as shown below:
Fixed Cost = Total Costs – (Variable Cost per Unit x Units
Produced)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Mixed Costs
The fixed cost is the same at the highest and the
lowest levels of production as shown below for
Kason Inc.
Highest Level
Fixed Cost = Total Costs – (Variable Cost per Unit x Units
Produced)
Fixed Cost = $61,500 – ($15 x 2,100 units)
Fixed Cost = $61,500 – $31,500
Fixed Cost = $30,000
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Mixed Costs
The fixed cost is the same at the highest and the
lowest levels of production as shown below for
Kason Inc.
Lowest Level
Fixed Cost = Total Costs – (Variable Cost per Unit x Units
Produced)
Fixed Cost = $41,250 – ($15 x 750 units)
Fixed Cost = $41,250 – $11,250
Fixed Cost = $30,000
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Mixed Costs
With fixed costs and variable costs estimated at
$30,000 plus $15 per unit, a formula is in place to
estimate production at any level. If the company is
expected to produce 2,000 units in November, the
estimated total cost would be calculated as
follows:
Total Cost = ($15 x Units Produced) + $30,000
Total Cost = ($15 x 2,000) + $30,000
Total Cost = $30,000 + $30,000
Total Cost = $60,000
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 19-1
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Summary of Cost Behavior Concepts
Total Costs
Total
Variable
Costs
Total variable
costs increase
and decrease
proportionately
with activity
level.
Total Units Produced
Per-Unit Cost
Unit
Variable
Costs
Per-unit
variable costs
remain the
same
regardless of
activity level.
Total Units Produced
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Total
Fixed Costs
Total Costs
Summary of Cost Behavior Concepts
Total fixed
costs remain
the same
regardless of
activity level.
Total Units Produced
Per-Unit Cost
Unit Fixed
Costs
Per-unit fixed
costs
decrease as
activity level
increases.
Total Units Produced
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Summary of Cost Behavior Concepts
 Some examples of variable, fixed, and
mixed costs for the activity base units
produced are as follows:
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Summary of Cost Behavior Concepts
 One method of reporting variable and fixed
costs is called variable costing or direct
costing.
 Under variable costing, only the variable
manufacturing costs are included in the
product cost.
 The fixed factory overhead is treated as an
expense of the period in which it is incurred.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 2
Compute the
contribution margin,
the contribution margin
ratio, and the unit
contribution margin.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Cost-Volume-Profit Relationships
 Cost-volume-profit analysis is the
examination of the relationships among
selling prices, sales and production volume,
costs, expenses, and profits.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Cost-Volume-Profit Relationships
 Some of the ways cost-volume-profit
analysis may be used include:
1. Analyzing the effects of changes in selling
prices on profits
2. Analyzing the effects of changes in costs on
profits
(continued)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Cost-Volume-Profit Relationships
3. Analyzing the effects of changes in volume
on profits
4. Setting selling prices
5. Selecting the mix of products to sell
6. Choosing among marketing strategies
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Contribution Margin
 Contribution margin is the excess of sales
over variable costs, as shown in the formula
below.
Contribution Margin = Sales – Variable Costs
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Contribution Margin
Lambert
Assume the following data for Lambert, Inc.:
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Contribution Margin
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Lambert
LO 2
Contribution Margin Ratio
 The contribution margin ratio, sometimes
called the profit-volume ratio, indicates the
percentage of each sales dollar available
to cover fixed costs and to provide income
from operations. It is computed as follows:
Contribution Margin
Contribution Margin Ratio =
Sales
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Contribution Margin Ratio
Lambert
The contribution margin ratio is 40% for Lambert
Inc., computed as follows:
Contribution Margin Ratio =
Contribution Margin
Sales
Contribution Margin Ratio =
$400,000
$1,000,000
Contribution Margin Ratio = 40%
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Contribution Margin Ratio
Lambert
100%
60%
40%
30%
10%
Contribution Margin Ratio =
Sales – Variable Costs
Sales
Contribution Margin Ratio =
$1,000,000 – $600,000
$1,000,000
Contribution Margin Ratio = 40%
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Unit Contribution Margin
 The unit contribution margin is useful for
analyzing the profit potential of proposed
decisions. The unit contribution margin is
computed as follows:
Unit
Contribution = Sales Price – Variable Cost
per Unit
per Unit
Margin
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Unit Contribution Margin
 The unit contribution margin is most useful
when the increase or decrease in sales
volume is measured in sales units
(quantities).
 The change in income from operations can
be determined using the following formula:
Change in
Change in x
=
Income from
Sales Units
Operations
Unit
Contribution
Margin
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Unit Contribution Margin
Lambert
Lambert Inc.’s sales could be increased by 15,000
units, from 50,000 to 65,000 units. Lambert’s income
from operations would increase by $120,000 (15,000 x
$8), as shown below.
Change in
Change in x
Income from =
Sales Units
Operations
Unit
Contribution
Margin
Change in
Income from = 15,000 units x $8 = $120,000
Operations
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Unit Contribution Margin
Lambert
Lambert Inc.’s contribution margin income
statement, shown below, confirms that income
increased to $220,000 when 65,000 units are sold.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Review
Sales (50,000 units)
Variable costs
Contribution margin
Fixed costs
Income from operations
$1,000,000
600,000
$ 400,000
300,000
$ 100,000
100%
60%
40%
30%
10%
Unit contribution margin
analyses can provide useful
information for managers.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
$20
12
$ 8
LO 2
Review
Sales (50,000 units)
Variable costs
Contribution margin
Fixed costs
Income from operations
$1,000,000
600,000
$ 400,000
300,000
$ 100,000
100%
60%
40%
30%
10%
$20
12
$ 8
The contribution margin can be expressed in three ways:
1. Total contribution margin in dollars.
2. Contribution margin ratio (percentage).
3. Unit contribution margin (dollars per unit).
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 19-2
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 3
Determine the breakeven point and sales
necessary to achieve
a target profit.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Break-Even Point
 The break-even point is the level of
operations at which a company’s revenues
and expenses are equal.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Break-Even Point
Assume the following data for Baker Corporation:
Fixed costs
$90,000
Unit selling price
$25
Unit variable cost
15
Unit contribution margin $10
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Break-Even Point
The break-even point (in sales units) is calculated
using the following equation:
Break-Even Sales (units) =
Fixed Costs
Unit Contribution Margin
Break-Even Sales (units) =
$90,000
$10
Break-Even Sales (units) = 9,000 units
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Break-Even Point
Income from operations is zero
when 9,000 units are sold—
hence, the break-even point is
9,000 units.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Break-Even Point
The break-even point (in sales dollars) is calculated
using the following equation:
Break-Even Sales (dollars) =
Fixed Costs
Contribution Margin Ratio
Break-Even Sales (dollars) =
$90,000
.40
Break-Even Sales (dollars) = $225,000
$10
$25
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Effect of Changes in Fixed Costs
If
Fixed
Costs
then
If
Fixed
Costs
then
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
BreakEven
BreakEven
LO 3
Effect of Changes in Fixed Costs
Bishop Co. is evaluating a proposal to budget an additional
$100,000 for advertising. The data for Bishop Co. are as
follows:
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Effect of Changes in Fixed Costs
Fixed Costs
Break-Even Sales (units) =
Unit Contribution Margin
Without additional advertising:
$600,000
Break-Even Sales (units) =
$20
30,000
=
units
With additional advertising:
$700,000
Break-Even Sales (units) =
$20
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
=
35,000
units
LO 3
Effect of Changes in Unit Variable Costs
If
Unit
Variable
Cost
If
Unit
Variable
Costs
then
BreakEven
then
BreakEven
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Effect of Changes in Unit Variable Costs
Park Co. is evaluating a proposal to pay an
additional 2% commission on sales to its
salespeople (a variable cost) as an incentive to
increase sales. Fixed costs are estimated at
$840,000. The other data for Park Co. are as
follows:
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Effect of Changes in Unit Variable Costs
Break-Even Sales (units) =
Fixed Costs
Unit Contribution Margin
Without additional 2% commission:
Break-Even Sales (units) = $840,000 = 8,000 units
$105
With additional 2% commission:
$840,000
= 8,400 units
Break-Even Sales (units) =
$100
$250 – [$145 + ($250 x 2%)] = $100
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Effect of Changes in Unit Selling Price
If
Unit
Selling
Price
then
If
Unit
Selling
Price
then
BreakEven
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
BreakEven
LO 3
Effect of Changes in Unit Selling Price
Graham Co. is evaluating a proposal to increase
the unit selling price of a product from $50 to
$60. The estimated fixed costs are $600,000.
The following additional data have been
gathered:
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Effect of Changes in Unit Selling Price
Break-Even Sales (units) =
Fixed Costs
Unit Contribution Margin
Without price increase:
$600,000
Break-Even Sales (units) =
$20
= 30,000 units
With price increase:
Break-Even Sales (units) =
$600,000
$30
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
= 20,000 units
LO 3
Summary of Effects of Changes on B/E Point
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 19-3
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Target Profit
 The sales volume required to earn a target
profit is determined by modifying the
break-even equation.
Fixed Costs + Target Profit
Sales (units) =
Unit Contribution Margin
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Target Profit
WALTHAM
Assume the following data for Waltham Co.:
What would be the necessary sales to earn the
target profit of $100,000?
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Target Profit
Sales (units) =
WALTHAM
Fixed Costs + Target Profit
Unit Contribution Margin
$200,000 + $100,000
Sales (units) =
$30
Sales (units) = 10,000 units
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Target Profit
WALTHAM
Proof
)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Target Profit
WALTHAM
Unit Contribution Margin
Contribution Margin Ratio =
Unit Selling Price
$30
Contribution Margin Ratio =
$75
From an
earlier slide
Contribution Margin Ratio = 40%
Sales (dollars) =
Sales (dollars) =
Fixed Costs + Target Profit
Contribution Margin Ratio
$200,000 + $100,000
= $750,000
40%
Necessary sales to earn
a $100,000 target profit
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 19-4
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 5
Compute the break-even
point for a company selling
more than one product, the
operating leverage, and the
margin of safety.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Sales Mix Considerations
 Many companies sell more than one
product at different selling prices. In
addition, the products normally have
different unit contribution margins.
 The sales mix is the relative distribution of
sales among the various products sold by a
company.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Sales Mix Considerations
Cascade Company sold Products A and B during
the past year as follows:
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Sales Mix Considerations
It is useful to think of the individual products as
components of one overall enterprise product. For
Cascade Company, the overall enterprise product is
called E. The unit selling price, unit variable cost,
and unit contribution margin for E are computed as
follows:
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Sales Mix Considerations
Break-Even Sales (units) =
Fixed Costs
Unit Contribution
Margin
Break-Even Sales (units) =
$200,000
$25
Break-Even Sales (units) =
8,000 units
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Sales Mix Considerations
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Break-even point
EE 19-5
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Margin of Safety
 The margin of safety indicates the possible
decrease in sales that may occur before an
operating loss results.
 The margin of safety may be expressed in
the following ways:
 Dollars of sales
 Units of sales
 Percent of current sales
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5
Margin of Safety
If sales are $250,000, the unit selling price is $25,
and the sales at the break-even point are
$200,000, the margin of safety is 20%, computed
as follows:
Margin of Safety =
Margin of Safety =
Sales – Sales at Break-Even Point
Sales
$250,000 – $200,000
$250,000
Margin of Safety = 20%
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 19-7
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.