Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 42Slide 43Slide 44Slide 45Slide 46Slide 47Slide 48Slide 49Slide 50Slide 51Slide 52Slide 53Slide 54Slide 55Slide 56Slide 57Slide 58Slide 59Slide 60Slide 61Slide 62Slide 63CopyrightPage 6-1Page 6-2Cost-Volume-Profit Cost-Volume-Profit Analysis: Additional IssuesAnalysis: Additional IssuesCost-Volume-Profit Cost-Volume-Profit Analysis: Additional IssuesAnalysis: Additional IssuesManagerial AccountingFifth EditionWeygandt Kimmel KiesoPage 6-3study objectives1. Describe the essential features of a cost-volume-profit income statement. 2. Apply basic CVP concepts.3. Explain the term sales mix and its effects on break-even sales.4. Determine sales mix when a company has limited resources.5. Understand how operating leverage affects profitability.Page 6-4preview of chapter 6Page 6-5CVP analysis is:The study of the effects of changes in costs and volume on a company’s profit.Important to profit planning.Critical in management decisions such as:determining product mix,maximizing use of production facilities,setting selling prices.SO 1 Describe the essential features of a cost-volume-profit income statement.Cost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewPage 6-6Management often wants the information reported in a special format income statement.The CVP income statement is for internal use only:Costs and expenses classified as fixed or variable.Reports contribution margin as a total amount and on a per unit basis.SO 1 Describe the essential features of a cost-volume-profit income statement.Cost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewBasic ConceptsPage 6-7SO 1 Describe the essential features of a cost-volume-profit income statement.Cost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewBasic ConceptsBasic CVP income statementIllustration 6-1Page 6-8SO 1 Describe the essential features of a cost-volume-profit income statement.Cost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewBasic ConceptsDetailed CVP income statementIllustration 6-2Page 6-9K Christel, Inc. sold 20,000 units and recorded sales of $800,000 for the first quarter of 2011. In making the sales, the company incurred the following costs and expenses.(a) Prepare a CVP income statement for the quarter ended March 31, 2011.(b) Compute the contribution margin per unit.(c) Compute the contribution margin ratio.SO 1 Describe the essential features of a cost-volume-profit income statement.Cost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewPage 6-10(a) Prepare a CVP income statement for the quarter ended March 31, 2011.Solution on notes pageSO 1Cost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewPage 6-11/ 20,000 = $40.00/ 20,000 = $21.60 $18.40(b) Compute the contribution margin per unit.SO 1Cost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewPer unitPage 6-12 / 800,000 = 46%(c) Compute the contribution margin ratio.SO 1Also, $18.40 / $40 = 46%Cost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewPage 6-13SO 2 Apply basic CVP concepts.Cost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewBasic Computations – Break-even AnalysisIllustration: Vargo Video’s CVP income statement (Ill. 6-2) shows that total contribution margin is $320,000, and the company’s contribution margin per unit is $200. Contribution margin can also be expressed in the form of the contribution margin ratio which in the case of Vargo is 40% ($200 / $500).Illustration 6-3Solution on notes pagePage 6-14SO 2 Apply basic CVP concepts.Cost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewBasic Computations – Target Net IncomeOnce a company achieves break-even sales, a sales goal can be set that will result in a target net income Illustration: Assuming Vargo’s target net income is $250,000, required sales in units and dollars to achieve this are:Illustration 6-4Solution on notes pagePage 6-15SO 2 Apply basic CVP concepts.Cost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewBasic Computations – Margin of SafetyMargin of safetytells us how far sales can drop before the company will operate at a loss. can be expressed in dollars or as a ratio.Illustration: Assume Vargo’s sales are $800,000:Illustration 6-5Solution on notes pagePage 6-16SO 2 Apply basic CVP concepts.Cost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCVP and Changes in the Business EnvironmentIllustration: Original DVD player sales and cost data for Vargo Video:Illustration 6-6Page 6-17SO 2 Apply basic CVP concepts.Cost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCVP and Changes in the Business EnvironmentCase I: A competitor is offering a 10% discount on the selling price of its DVD players. Management must decide whether to offer a similar discount.Question: What effect will a 10% discount on selling price ($500 x 10% = $50) have on the breakeven point?Illustration 6-7Solution on notes pagePage 6-18Illustration 6-8SO 2 Apply basic CVP concepts.Cost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCost-Volume-Profit (CVP) ReviewCVP and Changes in the Business EnvironmentCase II: Management invests in new robotic equipment that will lower the amount of direct labor required to make DVD players. Estimates are that total fixed costs will increase 30% and that variable