chapter7 CVP analysis.pptVIP

* * * * * * * * * * * * 1 3 4 5 2 6 7 8 Profit Units sold (00s) Profit-Volume Graph Some managers like the profit-volume graph because it focuses on profits and volume. Break-even point Profit area Loss area Target Net Profit We can determine the number of surfboards that Curl must sell to earn a profit of $100,000 using the contribution margin approach. Fixed expenses + Target profit Unit contribution margin = Units sold to earn the target profit $80,000 + $100,000 $200 = 900 surf boards Equation Approach Sales revenue – Variable expenses – Fixed expenses = Profit ($500 × X) ($300 × X) – – $80,000 = $100,000 ($200X) = $180,000 X = 900 surf boards Applying CVP Analysis Safety Margin The difference between budgeted sales revenue and break-even sales revenue. The amount by which sales can drop before losses begin to be incurred. Safety Margin Curl, Inc. has a break-even point of $200,000. If actual sales are $250,000, the safety margin is $50,000 or 100 surf boards. Changes in Fixed Costs Curl is currently selling 500 surf boards per month. The owner believes that an increase of $10,000 in the monthly advertising budget, would increase bike sales to 540 units. Should we authorize the requested increase in the advertising budget? Changes in Fixed Costs $80,000 + $10,000 advertising = $90,000 540 units × $500 per unit = $270,000 Changes in Fixed Costs Sales will increase by $20,000, but net income decreased by $2,000. Changes in UnitContribution Margin Because of increases in cost of raw materials, Curl’s variable cost per unit has increased from $300 to $310 per surf board. With no change in selling price per unit, what will be the new break-even point? ($500 × X) ($310 × X) – – $80,000 = $0 X = 422 units (rounded) Predicting Profit GivenExpected Volume In the coming year, Curl’s owner expects to sell 525 surfboards. The unit contribution margin is expected to be $190, and fixed costs are expected to in