Chapter 5: Cost-Volume-Profit RelationshipsCost-Volume-Profit (CVP) AnalysisContribution MarginBreak-Even PointBreak-Even in Unit SalesBreak-Even in Sales DollarsCVP Relationships in Equation FormContribution Format Income StatementCompany with a Single ProductCVP Relationships in Graphic FormPreparing the CVP GraphContribution Margin RatioCompany with a Single ProductRelationship Between Profit and CM RatioEffects of the CM RatioEffect on Contribution MarginEffect on Net Operation IncomeTarget Profit AnalysisFormula Method (Dollar Sales)Break-Even AnalysisFormula Method (Unit Sales)Formula Method (Dollar Sales)Margin of SafetyMargin of Safety in DollarsMargin of Safety PercentageOperating LeverageMultiproduct Break-Even AnalysisSales MixAssumptions of CVP AnalysisChapter 6: Variable Costing and Segment Reporting: Tools for ManagementDifferences in Variable Costing and Absorption CostingAbsorption CostingVariable CostingCalculating Unit Product Costs for EachComparative Income EffectsSegmented Income StatementsTraceable Fixed CostsCommon Fixed CostsSegment MarginIdentifying CostsExternal ReportingChapter 8: Profit PlanningDefinitionsAdvantages of BudgetingClassifications of BudgetsCGS2100Test 2 Study GuideChapters 5,6,8Chapter 5: Cost-Volume-Profit RelationshipsCost-Volume-Profit (CVP) AnalysisCVP analysis is concerned with the effects on net operating income of:- Selling Prices- Sales Volume- Unit Variable Costs- Total Fixed Costs- The Mix of Products SoldContribution MarginThe contribution margin is the amount remaining from sales revenue after variable expenses have been deducted.- It is the amount of sales that contributes toward covering fixed expenses and then toward profits.- The unit contribution margin remains constant so long as the selling price and the unit variable cost do not change.Break-Even PointThe break-even point is:- The point where total sales revenue equals total expenses (variable and fixed).- The point where total contribution margins equals total fixed expenses.Each additional unit sold increases net operating income by the amount of the unit contribution margin.1CGS2100Break-Even in Unit SalesUnit Sales to Break Even = Fixed ExpensesUnit CMBreak-Even in Sales DollarsD o llar Sales to Break Even = Fixed ExpensesCM RatioCVP Relationships in Equation FormContribution Format Income StatementProfit = (Sales – Variable Expenses) – Fixed ExpensesCompany with a Single ProductPro fit = (P × Q) - (V × Q ) – Fixed ExpensesorProfit = Unit CM × Q - Fixed ExpensesCVP Relationships in Graphic FormThe CVP graph illustrates the relationship among revenue, cost, profit, and volume.- Unit volume is represented on the X axis- Dollars are represented on the Y axisPreparing the CVP Graph1. Draw a line parallel to the volume axis to represent totalfixed expenses.2. Choose some volume of unit sales and plot the point representing total expense (fixed & variable) at the sales volume you have selected.After the point has been plotted, draw a line through it back to the point where the fixed expense line intersects the dollar axis.2$200$100$300Dollars (000)Number of bikes200 400 60050025023080Step 1 (Fixed Expenses)Step 3 (Total Sales)Step 2 (Total Expenses)CGS21003. Again choose some sales volume and plot the point representing total sales dollars at the activity level youhave selected.Contribution Margin RatioThe contribution margin (CM) ratio is the ratio of contribution margin tototal sales.CM Ratio = Contribution MarginTotal SalesCompany with a Single ProductCM Ratio = Unit Contribution MarginUnit Selling PriceRelationship Between Profit and CM RatioProfit = CM Ratio × Sales - Fixed ExpensesEffects of the CM RatioThe CM Ratio shows how the contribution margin will be affected by a given change in total sales..$200$100$300Dollars (000)Number of bikes200 400 60080Break-even point:400 bikes or$200,000 in salesTotalSalesTotalExpensesProfit areaLoss area3CGS2100Effect on Contribution MarginIncrease in Contribution Margin = Increase in Sales × CM RatioEffect on Net Operation IncomeIf fixed expenses do not change, the net operating income for the month will also increase by the same Increase in Contribution Margin. Target Profit AnalysisIn, Target Profit Analysis we estimate what sales we estimate what sales volume is needed to achieve a specific target profit.Formula Method (Unit Sales)Unit Sales to Attain a Target Profit = Target Profit + Fixed ExpenseUnit CMFormula Method (Dollar Sales)Dollar Sales to Break Even = Target Profit + Fixed ExpenseCM RatioBreak-Even AnalysisFormula Method (Unit Sales)Unit Sales to Break-Even = Fixed ExpenseUnit CMFormula Method (Dollar Sales)Dollar Sales to Break-Even = Fixed ExpenseCM RatioMargin of SafetyMargin of Safety in DollarsTotal Sales – Breakeven Sales4CGS2100Margin of Safety PercentageMargin of Safety in DollarsTotal SalesOperating LeverageOperating leverage measures how a given percentage change in sales affects net operating income.Degree of Operating Leverage = Contribution MarginNet Operating IncomeThe degree of operating leverage is not constant—it changes with the level of sales.Multiproduct Break-Even AnalysisWhen a company has multiple products, the overall contribution margin (CM) ratio is used in break-even analysis.Overall CM Ratio = Total Contribution MarginTotal Sales DollarsBreakeven Sales = Fixed ExpensesOverall CM RatioSales MixThe relative proportions in which the products are sold is called thesales mix. If the sales mix changes, the overall contribution marginratio will change.Assumptions of CVP Analysis1. Selling price is constant. The price does not change as volume changes.2. Costs are linear and can be accurately split into fixed and variable elements. The total fixed cost is constant and the variable cost per unit is constant.3. The sales mix is constant in multi-product companies.4. In manufacturing companies, inventories do not change. The number of units produced equals the number of units sold.5CGS2100Chapter 6: Variable Costing and Segment Reporting: Tools for ManagementDifferences in Variable Costing and Absorption CostingAbsorption Costing Variable Costing- Absorption costing was used in earlier chapters and is generally considered to be required for external financial reports.- Under absorption costing, product costs include ALL manufacturing costs:o Direct Materialso Direct Laboro Variable Manufacturing Overheado Fixed Manufacturing Overhead- Under absorption