Accounting

Chapter 3 Cost Volume Profit analysis

➔ A Five-Step Decision-Making Process in Planning and Control Revisited. ◆ Identify the problem and uncertainties. تحدید المشكلة والشكوك. ◆ Obtain information. الحصول على المعلومات. ◆ Make predictions about the future. جعل التوقعات حول المستقبل. ◆ Make decisions by choosing between alternatives, using cost-volume-profit (CVP)

analysis.اتخاذ القرارات عن طریق االختیار بین البدائل، وذلك باستخدام تحلیل حجم التكلفة الربح (كفب). ◆ Implement the decision, evaluate performance, and learn تنفیذ القرار، وتقییم األداء، والتعلم

ontribution Margin Revenue V ariable costC = − evenue Selling price nits SoldR = × U ariable cost variable cost per unit nits soldV = × U ontribution Margin Per unit Unit selling price Unit V ariable costC = − ontribution Margin ontribution Margin Per unit Units soldC = C × ontribution Margin PercentageC = Unit selling price

Contribution Margin Per unit ontribution Margin ontribution Margin Percentage evenue C = C × R

➔ Foundational Assumptions in CVP افتراضات اساسیة

◆ Changes in ​production/sales ​volume are the sole ​cause​ for ​cost and revenue changes​. .التغییرات في حجم اإلنتاج / المبیعات هي السبب الوحید للتغیرات في التكالیف واإلیرادات

◆ Total costs​ consist of ​fixed costs​ and ​variable costs.​ ویتألف مجموع التكالیف من التكالیف الثابتة .والتكالیف المتغیرة

◆ Revenue and costs​ behave and can be graphed as a ​linear function (a straight line). .(اإلیرادات والتكالیف تتصرف ویمكن رسم بیاني كدالة خطیة (خط مستقیم

◆ Selling price, variable cost per unit, and fixed costs​ are all ​known and constant​. سعر .البیع، التكلفة المتغیرة لكل وحدة، والتكالیف الثابتة معروفة للجمیع وثابتة

◆ In many cases only a ​single product​ will be analyzed. If multiple products are studied, their relative sales proportions are known and constant. في كثیر من الحاالت سیتم تحلیل منتج واحد .فقط. إذا تم دراسة العدید من المنتجات، ونسب المبیعات النسبیة معروفة وثابتة

◆ The​ time value of money​ (interest) is ​ignored.​ یتم تجاهل قیمة الوقت من المال (الفائدة).

perating income Revenue V ariable Costs Fixed Cost O = − −

➔ Assume that the pants shop can purchase pants for ​$32​ from local factory, other variable costs amount to $10 per unit. The local factory allows the pants shop to return all unsold pants and receive a full $32 refund per pair of pants within one year. The average selling price per pair of pants is​ $70​ and total fixed costs amount to​ $84,000

If The numbers of unit sold 2,500

evenue 2, 00 70 175, 00R = 5 × $ = 0 ariable costs 2, 00 42 105, 00V = 5 × $ = 0

perating income $175, 00 05, 00 4, 00 (14, 00)O = 0 − 1 0 − 8 0 = 0 ontribution Margin $175, 00 $105, 00 $70, 00C = 0 − 0 = 0

ontribution Margin Per Unit $70 2 28C = − 4 = $ ontribution Margin 2, 00 28 $70, 00C = 5 × $ = 0

ontribution Margin Percentage 00 40%C = $70 $28 × 1 =

ontribution Margin $175, 00 0% $70, 00C = 0 × 4 = 0

➔ Break Even Point : calculation

◆ At the breakeven point, a firm​ has no profit or loss ​at the given sales level. evenue ariable Cost Fixed Cost 0R − V − = evenue V ariable costs Fixed CostsR = + evenue Total CostsR =

◆ Equation Method Selling price uantity Sold) (V ariable unit cost x Quantity Sold) Fixed cost( × Q − −

70Q 42Q 84, 00 0$ − $ − $ 0 = 28Q 4, 00$ = 8 0

3, 00 units Q = 28 84,000 = 0

◆ Contribution Margin Method reakeven Units B = Fixed CostsContribution Margin per Unit

3, 00 units$28 $84,000 = 0

reakeven Revenue B = Fixed CostsContribution Margin Percentage

$210, 0040% $84,000 = 0

➔ Profit Planning

◆ The ​break even point formula ​can be modified to ​become a profit planning tool ● ​Profit is now reinstated to the BE formula, changing it to a simple sales volume

equation uantity of units required to be sold Q = Contribution Margin Per Unit

(fixed cost +Target Operating Income )

evenue R = Contribution Margin Percentage (Fixed Costs + Target Operating Income )

● Assume that management wants to have an operating income of $14,000

○ How many pairs of pants must be sold? 3, 000$28

($84,000 + $14,000) = 5 ○ What dollar sales are needed to achieve this income?

$245, 00%40 ($84,000 + $14,000) = 0

○ Proof 500 units 70 selling price $245, 003 × $ = 0

➔ CVP and Income Taxes

◆ After- Tax Profit can be calculated by: et Income Operating Income Income Taxes N = − et Income Operating Income 1 ax Rate)N = × ( − T

◆ Net income can be converted to operating income for use in CVP equation perating Income O = Net Income (1−Tax Rate)

If the Target net income $960 ○ Tax Rate $40 ○ Fixed Cost $2000 ○ Contribution Margin Per Unit $80

perating income 600O = 960(1−40) = 1

nits 45unitsU = 80 ($2000 + 1600) =

➔ Sensitivity Analysis

CVP provides structure to answer a variety of​ “what-if”​ scenarios. ● ​“What” happens to profit “if”:

○ ​Selling price changes. ○ Volume changes. ○ Cost structure changes.

◆ Variable cost per unit changes. ◆ Fixed cost changes

➔ Using CVP Analysis Example ◆ Suppose the management anticipated selling 3,200 pairs of pants, Management is

considering an advertising campaign that would cost $10,000. It is anticipated that the advertising will increase sales to 4,000 units.​ Should the business advertise?

● 3,200 pairs of pants sold ​no advertising

perating income Contribution Margin Fixed Costs O = − 89, 00 $84, 00 $5, 00$ 0 − 0 = 6

● 000 pairs of pants sold with advertising 4 112, 00 94, 00 18, 00 $ 0 − 0 = 0 ⇑⇑

◆ Instead of Advertising, management is considering reducing selling price to $61 per

units of pants. It is anticipated that this will increase sales to 4,500 units. Should management decrease the selling price per pair of pants to $61?

● 3,200 pairs of pants sold with ​no changes ​in the selling prices

Operating income = 5,600 ● 4,500 units of pants sold at a ​reduced selling

ontribution Margin (4, 00 19) 5, 00C : 5 × $ = 8 5 ixed costs 84, 00F = 0

I 1, 00O = 5 ⇓⇓ ● If the target Operating Income $1,2000

○ Fixed Cost $2000 ○ Variable Cost per unit $115 ○ Number of Units Sold 50 units ○ Target Selling Price ?

arget Contribution Margin $1200 $2000 $3200T = + = arget Contribution Margin per unit $64T = 50

$3200 = arget selling price $64 $115 $179T = + =

➔ Margin of Safety

◆ One indicator of risk, the margin of safety (MOS), measures the distance between budgeted sales and breakeven sales:

OS Budgeted Sales – BE revenue M = OS in units Budgeted Sales quantity – BE quantityM =

◆ The MOS ratio removes the firm’s size from the output, and expresses itself in the form of a percentage:

OS Ratio M = MOSBudgeted Sales