Chapter 05
Chapter 05
Chapter 05
Cost-Volume-Profit Relationships
5-2
Cost-Volume-Profit Analysis
What is Cost-Volume-Profit (CVP) Analysis?
• Sales price
• Sales volume
• Unit variable costs
• Total fixed costs
• Product mix
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5-3
Cost-Volume-Profit Analysis
Why use CVP?
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Cost-Volume-Profit Analysis
Key assumptions used in CVP analysis:
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Expense Line:
Y = $35,000+$150/unit(# units)
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Slope of the
revenue line
changes
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What happens if we
change sales volume?
Where we are on
the original lines
changes
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What happens if we
change unit variable
costs?
Slope of the
expense line
changes
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What happens if we
change fixed expenses?
The Y-intercept of
the expense line
changes
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5-21
Note:
CM ratio = 1 – Var. Exp. Ratio
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Quick Check 1
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is $1.49
and the average variable expense per cup is $0.36. The
average fixed expense per month is $1,300. An average of
2,100 cups are sold each month. What is the CM Ratio for
Coffee Klatch?
a. 1.319
b. 0.758
c. 0.242
d. 4.139
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Quick Check 1a
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is
$1.49 and the average variable expense per cup is $0.36.
The average fixed expense per month is $1,300. An
average of 2,100 cups are sold each month. What is the
CM Ratio for Coffee Klatch? Unit contribution margin
CM Ratio =
a. 1.319 Unit selling price
b. 0.758 ($1.49 - $0.36)
=
c. 0.242 $1.49
d. 4.139 $1.13
= = 0.758
$1.49
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5-24
Practice Problem #1
Smooth-Eaze is a smoothie retailer open for breakfast and lunch. The
average selling price of a smoothie is $5.50 and the average variable
expense per cup is $3.00. The average fixed expense per month is
$1,200. An average of 3,500 smoothies are sold each month.
What is the CM Ratio for Smooth-Eaze?
5-25
Unit contribution margin = Selling price per unit – Variable expenses per unit
Practice Problem #2
What is the profit impact if Acoustic can increase unit sales from 400 to
520 by increasing the monthly advertising budget by $10,000?
5-27
Practice Problem #3
A Company provides the following data:
• Sales: 3,000 units
• Sales price: $70/unit
• Variable cost: $50/unit
• Fixed cost: $25,000
If the sales volume decreases by 25%, the variable cost per unit
increases by 15%, and all other factors remain constant, what is the
impact to net operating income?
5-28
$35,000
𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑡𝑡𝑡𝑡 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 = = 350 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢
$100
$35,000
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑡𝑡𝑡𝑡 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 = = $87,500
0.40
5-30
Quick Check 2
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is
$1.49 and the average variable expense per cup is
$0.36. The average fixed expense per month is $1,300.
An average of 2,100 cups are sold each month. What is
the break-even sales dollars?
a. $1,300
b. $1,715
c. $1,788
d. $3,129
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5-31
Quick Check 2a
Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup of
coffee is $1.49 and the average variable expense per
cup is $0.36. The average fixed expense per month is
$1,300. An average of 2,100 cups are sold each
month. What is the break-even sales dollars?
a. $1,300 Break-even Fixed expenses
=
b. $1,715 sales CM Ratio
c. $1,788 = $1,300
d. $3,129 0.758
= $1,715
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5-32
Quick Check 3
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is $1.49
and the average variable expense per cup is $0.36. The
average fixed expense per month is $1,300. An average of
2,100 cups are sold each month. What is the break-even
sales in units?
a. 872 cups
b. 3,611 cups
c. 1,200 cups
d. 1,150 cups
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5-33
Quick Check 3a
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is
$1.49 and the average variable expense per cup is
$0.36. The average fixed expense perFixed
month is $1,300.
expenses
An average of 2,100 cupsBreak-even
are sold eachCMmonth. What is
per Unit
the break-even sales in units? $1,300
a. 872 cups =
$1.49/cup - $0.36/cup
b. 3,611 cups $1,300
c. 1,200 cups =
$1.13/cup
d. 1,150 cups
= 1,150 cups
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5-34
Practice Problem #4
Frog Inc. produces springs. During the period:
• Sales price per unit: $210.00
• Variable expenses per unit: $98.70
• Fixed expenses for the period: $357,273
The break-even point in units sold is…
5-35
Practice Problem #5
Giraffe Corp. produces and sells ladders. During the period:
• Sales price per unit: $200
• Variable expenses per unit: $78
• Fixed expenses for the period: $396,500
The break-even point in monthly sales is…
5-36
Practice Problem #6
Coyote Company sells a single product for $20 per unit. If variable
expenses are 60% of sales and fixed expenses total $9,600, the break-
even point (in dollar sales) will be:
5-37
Quick Check 4
Coffee Klatch is an espresso stand in a downtown office building.
The average selling price of a cup of coffee is $1.49 and the average
variable expense per cup is $0.36. The average fixed expense per
month is $1,300. Determine how many cups of coffee would have
to be sold to attain target profits of $2,500 per month.
a. 3,363 cups
b. 2,212 cups
c. 1,150 cups
d. 4,200 cups
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5-39
Quick Check 4a
Coffee Klatch is an espresso stand in a downtown office building.
The average selling price of a cup of coffee is $1.49 and the average
variable expense per cup is $0.36. The average fixed expense per
month is $1,300.Unit
Determine
sales how many cups of coffee would have
Target
to be sold to attain target profits of profit
$2,500 + Fixed expenses
per month.
to attain =
a. 3,363 cups Unit CM
target profit
b. 2,212 cups
$2,500 + $1,300
c. 1,150 cups = $1.49 - $0.36
d. 4,200 cups
$3,800
=
$1.13
= 3,363 cups
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5-40
Quick Check 5
Coffee Klatch is an espresso stand in a downtown office building.
The average selling price of a cup of coffee is $1.49 and the average
variable expense per cup is $0.36. The average fixed expense per
month is $1,300. Determine the sales dollars that must be
generated to attain target profits of $2,500 per month.
a. $2,550
b. $5,013
c. $8,458
d. $10,555
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Quick Check 5a
Coffee Klatch is an espresso stand in a downtown office building.
The average selling price of a cup of coffee is $1.49 and the average
variable expense per cup is $0.36. The average fixed expense per
month is $1,300. Determine the sales dollars that must be
Sales
generated to attain $ profitsTarget
target profit
of $2,500 per+month.
Fixed expenses
to attain = CM ratio
a. $2,550
target profit
b. $5,013
$2,500 + $1,300
c. $8,458 = ($1.49 – 0.36) ÷ $1.49
d. $10,555
$3,800
=
0.758
= $5,013
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5-42
Practice Problem #7
Lone Wolf International Corporation's only product sells for $230.00 per
unit and its variable expense is $80.50. The company's monthly fixed
expense is $821,635 per month. The unit sales to attain the company's
monthly target profit of $35,000 is closest to:
5-43
Practice Problem #8
Elephant Technologies produces and sells a single product whose
contribution margin ratio is 63%. The company's monthly fixed expense is
$46,050 and the company's monthly target profit is $19,000. The dollar
sales to attain that target profit is closest to:
5-44
Margin of safety in
dollars
= =total budget or actual sales – break even sales
Quick Check 6
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is $1.49 and
the average variable expense per cup is $0.36. The average fixed
expense per month is $1,300. An average of 2,100 cups are sold
each month. What is the margin of safety expressed in cups?
a. 3,250 cups
b. 950 cups
c. 1,150 cups
d. 2,100 cups
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Quick Check 6a
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is $1.49 and
the average variable expense per cup is $0.36. The average fixed
expense per month is $1,300. An average of 2,100 cups are sold
each month. What is the margin of safety expressed in cups?
a. 3,250 cups
b. 950 cups
c. 1,150 cups
d. 2,100 cups
Margin of safety = Total sales – Break-even sales
= 2,100 cups – 1,150 cups
= 950 cups
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5-47
$40,000
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑜𝑜𝑜𝑜 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 = =8
$5,000
5-50
Original Increased
Sales $100,000 $110,000
Variable Expenses $60,000 $66,000
Contribution Margin $40,000 $44,000
Fixed Expenses $35,000 $35,000
Net Op. Income $5,000 $9,000
Quick Check 7
Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup of
coffee is $1.49 and the average variable expense per
cup is $0.36. The average fixed expense per month is
$1,300. An average of 2,100 cups are sold each month.
What is the operating leverage?
a. 2.21
b. 0.45
c. 0.34
d. 2.92
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Quick Check 7a
Actual sales
Coffee Klatch is an espresso stand in a downtown 2,100 cups
office building. The average selling price of a cup$ of 3,129
Sales
coffee is $1.49 and the average variableexpenses
Less: Variable expense per 756
cup is $0.36. The averageContribution
fixed expense per month is2,373
margin
$1,300. An average of 2,100Less:cups are
Fixed sold each month.
expenses 1,300
What is the operating leverage?
Net operating income $ 1,073
a. 2.21
b. 0.45 Operating Contribution margin
c. 0.34 leverage = Net operating income
d. 2.92 $2,373
= $1,073 = 2.21
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Quick Check 8
At Coffee Klatch the average selling price of a cup of
coffee is $1.49, the average variable expense per cup
is $0.36, the average fixed expense per month is
$1,300, and an average of 2,100 cups are sold each
month.
If sales increase by 20%, by how much should net
operating income increase?
a. 30.0%
b. 20.0%
c. 22.1%
d. 44.2%
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Quick Check 8a
At Coffee Klatch the average selling price of a cup of
coffee is $1.49, the average variable expense per cup
is $0.36, the average fixed expense per month is
$1,300, and an average of 2,100 cups are sold each
month.
If sales increase by 20%, by how much should net
operating income increase?
a. 30.0%
b. 20.0% Percent increase in sales 20.0%
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