Download Cost-Volume-Profit Analysis: Break-Even Point, Operating Profit, and Margin of Safety - Pr and more Study notes Cost Accounting in PDF only on Docsity! 1 1 CHAPTER 6 2 Cost-Volume-Profit Analysis 3 • Firms study relationship between their C-V-P levels • Part of planning process – Answers common questions 2 4 • “How many units does Firm have to produce & sell in order to BE?” • “Can Firm obtain this level of production & sales?” 5 • “How many units does Firm have to sell to produce a target income?” • “If Firm increases its sales volume by 50%, what will be the impact on my OP?” 6 Break-Even Point 5 13 • This is common sense • Firm makes $80 every time it sells a unit. x = $2,000 = 25 units 80 14 x = _F__ (Formula “A”) (P-V) Px = F x P (P-V) ` Px = __F__ (FORMULA "B")(P-V) P 15 • Denominator called CMR: Px = __F__ (FORMULA "B") CMR • What is CMR? 6 16 • CMR gives % of Sales Price that goes to pay off FC & generates profits (after you pay VC): (P-V)/P P/P - V/P 1 - V/P (1 – part of price that pays VC) 17 Px = __2,000__ (200 - 120) 200 Px = 2,000 .40 Px = $5,000 Px = F/((P-V)/P) 18 • Why do we need Formula B? 7 19 Revenue: $100K (Px) Less VCs: -30K (Vx) CM: $ 70K (Px – Vx) Less FCs: -50K (F) OP: $ 20K (Px - Vx – F) • E.g., What is BE Point for Co.? 20 • What is BE? –We do not know the # of units sold –We do not know P or VC per unit –We cannot use Formula “A” 21 • We can calculate the CMR – So we can use Formula “B” CM = Px - Vx Revenue Px = (P-V)x = (P-V) Px P 10 28x = (F + OP) (P - V) Px = (F + OP)P (P - V) Px = _(F + OP)_ Modified Formula “B” (P - V) P Px = (F + OP) CMR 29• Same E.g. • Assume Co wants Target OP of $40K x = (2,000 + 40,000) (200 - 120) x = 42,000 80 x = 525 units 30 • Again, this is common sense • Firm makes $80 for every unit –Needs to sell 25 units to BE (2,000/80) –Needs to sell 500 units to generate OP of $40K (40,000/80) –Needs to sell 525 units ($42,000/80) 11 31 • OP do not include tax expense • OP – Tax Expense = NI • What if given Targeted NI? 32 • E.g., Given target NI (after-tax) of $50K & tax rate of 40% • Convert $50K NI into OP: OP - Taxes = NI OP - .4 (OP) = 50,000 .6 (OP) = 50,000 OP = 50,000/ .6 OP = 83,334 33 • You can check this: OP: $83,334 Taxes (40%): -33,334 NI: $50,000 12 34 What if Target OP is given as % of Revenue? Px = (F+OP)/((P-V)/P) Px = (2,000 + .1 Px) / [(200 - 120)/200] Px = (2,000+.1Px) / .40 .4 Px = 2,000 + .1Px .3 Px = 2,000 Px = 2,000/.3 Px = $6,667 35 Revenue: $6,667 Less VCs (60%): -4,000 CM: $2,667 Less FCs: -2,000 OP: $ 667 36 Multiple Products 15 43 • Now, plug CMB into BE formula • Gives you BE Point in Baskets: Baskets = F/CMB Baskets = 2,000/ 5 Baskets = 400 Baskets 44 Bananas: 3 x 400 Baskets = 1200 Oranges: 1 x 400 Baskets = 400 45 • Weighted Average Method CMWA = .75 CMban + .25 CMor CMWA = .75 (1) + .25 (2) CMWA = .75 + .5 = $1.25 16 46 x = F/CMWA x = 2,000/ 1.25 x = 1600 units • The BE Point in units is: 47 Bananas: .75 (1600) = 1200 Oranges: .25 (1600) = 400 48 Margin of Safety 17 49 • Margin Of Safety Amount that actual sales (dollars or units) exceed BE Point –If BE Point is 25 units (or $5,000) & Co actually sells 40 units ($8,000) –Margin Of Safety is 15 units (or $3,000) 50 Operating Leverage 51 • Operating Leverage (OL) –Divide CM by OP • OL is a multiplier • If you multiply Co’s OL by % increase in Co’s Sales –You get % increase in Co’s OP
