Презентация на тему Chapter 7

cost, volume and profit in an organization.




It focuses on

we start CVP analysis

available to cover fixed expenses and then to provide

Have you noted the sequence?

1

2

If a contribution margin is not sufficient to cover fixed expenses, then a loss occurs for the period.

Ex: Assume that Acoustic Concepts has been able to sell only one speaker, at that point, the company’s contribution income statement would appear as follows:

able to sell during the month, $100 more in

If a second speaker is sold, for example, what will be the total CM to cover fixed expenses?

in CM, then all of the fixed costs will

So, how many speakers should we sell in order to reach the Break Even Point?

Break Even Point – the point where total sales revenue equals total expenses, or – the point where total CM equals total fixed expenses.

income will increase by the unit CM for each

If 351 speakers are sold in a month, on how much will our income increase compared to break-even sales?

If 352 speakers are sold?

So WHAT?

profits will be at various levels of activity without

We just:

Take the number of units to be sold over a break-even point

Unit CM

×

Ex: Assume that Acoustic Concepts is selling 400 speakers per month and plans to increase the sales to 425 speakers per month. What impact will be on profits of the company?

=

Expected Profit

profits will be at various levels of activity without

We just:

Take the number of units to be sold over a break-even point

Unit CM

×

Ex: Assume that Acoustic Concepts is selling 400 speakers per month and plans to increase the sales to 425 speakers per month. What impact will be on profits of the company?

=

Expected Profit

These calculations can be verified as follows:

company loss would be equal its fixed expenses.
Each unit

expressed on a per unit basis, revenues, variable expenses,

Using the CM RATIO, the impact on Net Income of any given dollar change in total sales can be computed in seconds by simply applying the CM ratio to the dollar change.

kind of information can you reveal from your computations?
3.

4. If fixed costs don’t change during the coming months, what will be the change in NI?

kind of information can you reveal from your computations?

3. What will be the increase in CM if Acoustic Concepts plans to increase sales in the next month by $30’000?

$30’000 increased sales × CM Ratio of 40% = $12’000 increase in sales

4. If fixed costs don’t change during the coming months, what will be the change in NI?

Net Income will also increase by $12’000

NI and CM by constructing income statements

NI and CM by constructing income statements

following and other data:
Recall that F. exp. equal $35’000

Acoustic Concepts is currently selling 400 speakers per month (monthly sales of $100’000). The sales manager feels that a $10’000 increase in monthly advertising budget would increase monthly sales by $30’000. Should the advertising budget be increased?

following and other data:
Recall that F. exp. equal $35’000

Acoustic Concepts is currently selling 400 speakers per month (monthly sales of $100’000). The sales manager feels that a $10’000 increase in monthly advertising budget would increase monthly sales by $30’000. Should the advertising budget be increased?

If we don’t know the previous sales, we could come to this solution like this:

following and other data:
Recall that F. exp. equal $35’000

Acoustic Concepts is currently selling 400 speakers per month (monthly sales of $100’000). The sales manager feels that a $10’000 increase in monthly advertising budget would increase monthly sales by $30’000. Should the advertising budget be increased?

If we don’t know the previous sales, we could come to this solution like this:

Here, we used an incremental analysis.
Incremental analysis considers only those items of revenue, cost, and volume that will change if the new program or project is implemented.

Yes, based on the information presented, and assuming that other factors in the company don’t change, the advertising budget should be increased.

has received an advice about higher-quality components, which, as

has received an advice about higher-quality components, which, as

Yes, based on the information above, the higher-quality components should be used.

Sales Volume
The sales manager would like to cut the

Sales Volume
The sales manager would like to cut the

We would obtain the same conclusion if we have constructed income statements using contribution format.

Sales Volume
The sales manager would like to place the

Sales Volume
The sales manager would like to place the

Yes, the changes should be made

We would obtain the same conclusion if we have constructed income statements using contribution format.

an opportunity to make a bulk sale of 150

an opportunity to make a bulk sale of 150

an opportunity to make a bulk sale of 150

profitable combination of variable costs, fixed costs, selling price,

drop before the company begins to lose money?
Two approaches

Change in Regular Sales Price

the excess of budgeted (or actual) sales over the

Formula for margin of safety:

Total Sales – Break-even Sales = Margin of Safety

Margin of safety can also be obtained in a percentage form:

Ex: For Acoustic Concepts, whose sales in units are 400, BE sales are 350 speakers and per unit sales price is $250. Calculate the margin of safety in dollars and as a percentage of sales.

This margin of safety means that at the current level of sales and with the company’s current prices and cost structure, a reduction in sales of $12’500 or 12.5%, would result in just break even.

is the relative proportion of fixed and variable costs

Cost Structure and Profit Stability

Which cost structure is better – high variable costs and low fixed costs, or the opposite?

Ex: Let’s look at two blueberry farms:

Bogside Farm
depends on migrant workers to pick its berries by hand
has higher variable costs

Sterling Farm
has invested in expensive berry-picking machines
has higher fixed costs

increase in sales. Which farm would earn more?
We could

As we would expect, for the same dollar increase in sales, Sterling Farm has experienced a greater increase in NI due to its higher CM ratio.

drop below $100’000 from time to time?
What are

This analysis makes it clear that Bogside Farm is less vulnerable to downturns than Sterling Farm, for two reasons:
Lower fixed expenses → lower BEP → higher margin of safety. It’s sales may drop more than for Sterling before this farm begins to lose money.
Lower CM ratio. When sales fall off, the Bogside will not lose CM as rapidly as Sterling.

Thus, Bogside’s NI will be less volatile, although this is a drawback when sales increase, it provides more protection when sales drop.

future, it is not obvious which cost structure is

the extent to which fixed costs are being used

Formula for the Degree of Operating Leverage:

Calculate the Degree of Operating Leverage for our farms:

Degree of operating leverage is a measure, at a given level of sales, of how a percentage change in in sales volume will affect profits.

These figures tell us that for a given percentage change in sales we can expect a change four times as great in the NI for Bogside Farm and a change seven times as great in the NI of Sterling Farm.

sales levels near the BEP and decreases as sales

Ex: Degree of operating leverage for a Bogside Farm at various sales levels.

Thus, a 10% increase in sales would increase profits by only 15% (10% × 1.5X) if the company were operating at a $225’000 sales level, as compared to the 40% increase we computed earlier at the $100’000 sales level.

The degree of operating leverage will continue to decrease the farther the company moves from its BEP.

can use the degree of operating leverage to quickly

115% of this year’s sales, what percentage increase in

115% of this year’s sales, what percentage increase in