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Chapter 18

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Variable Fixed

Mixed

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Total variable costs change in direct proportion tochanges in the volume of activity If activity increases, so does the cost

Unit variable cost remains constant


Unitsproduced

Directmaterials

cost per unit

Total directmaterials

cost

100 $25 $2,500

200 $25 5,000

300 $25 7,500

400 $25 10,000

500 $25 12,500

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Do not change over wide ranges in volume

Examples: Straight-line depreciation

Salaries

Fixed cost per unit is inversely proportional toactivity The more activity, the less the fixed cost per unit


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Have both a fixed and variable component

Example: Utilities that charge a set fee per month, plus a charge for

usage


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$0

$500

$1,000

$1,500

$2,000$2,500

$3,000

$3,500

$4,000$4,500

$0 $10,000 $20,000 $30,000 $40,000

Total Sales

SalesCompen

sation

8

Variable

Fixed

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Method to separate mixed costs into variable andfixed components

Select the highest level and the lowest level ofactivity over a period of time

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Calculatevariable cost

per unit

Calculate totalfixed costs

Createequation toshow costbehavior

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Change in total cost

Change in activity

Total mixed cost

Total variable cost

Variable costper unit

Total fixed

costs

minus #2

#1

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Number ofunits


Total mixedcost

Total fixed costs

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Change in total cost

Change in activity

$4,400 - $4,000

1,400 - 900



$0.80 perinspection

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Total fixedcosts

Total mixed costminus

Total variable cost

$4,000

minus

900 inspections x $0.80

Total fixedcosts

$3,280Total fixed

costs

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Number ofinspections

$0.80 perinspection

Total mixedcost

$3,280

$0.80 perinspection

1,000inspections

$3,280

$4,080

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Band of volume: Where total fixed costs remain constant and variable cost

per unit remains constant

Outside the relevant range, costs can differ


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Costs can be classified as fixedor variable.

Volume is only factor that affectscosts. Fixed costs dont change.


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Sales level at which operating income is zero Sales above breakeven result in a profit

Sales below breakeven result in a loss

Two methods: Income statement approach

Contribution margin approach


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20

Sales Variable costs Fixed costs = Operating income

Selling priceper unit xunits sold

Variablecost per unitx units sold

Fixedcosts

Operatingincome

Set to

zero

Solve forunits sold

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Salesrevenueper unit

Variablecosts per

unit

Contributionmargin per

unit

Fixed costs

Contribution margin per unit

Breakeven

point in units

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Salesrevenue

Contributionmargin ratio

Contributionmargin

Fixed costs

Contribution margin ratio

Breakevenpoint in

sales dollars

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Fixed costs + Desired operating income

Contribution margin ratio

Target sales in dollars

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$0

$5,000

$10,000

$15,000

$20,000

0 500 1,000 1,500

Volume of Units

Dollar

s

Revenues

24


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$0

$5,000

$10,000

$15,000

$20,000

0 500 1,000 1,500

Volume of Units

Dollar

s

Revenues

Fixed costs


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26

$0

$5,000

$10,000

$15,000

$20,000

0 500 1,000 1,500

Volume of Units

Dollars Revenues

Fixed costs

Total cost


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$0

$5,000

$10,000

$15,000

$20,000

0 500 1,000 1,500

Volume of Units

Dolla

rs

27

Breakeven point

Profit

Loss


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Management tool to predict how changes in saleprices, cost or volume affects profits

What-if? analysis


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Changeselling price

Change invariable

costs

Change in

fixed costs

All would impact

breakeven point

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Cause Effect Result

Change Contributionmargin

Breakevenpoint

Selling price increases Increase Decrease

Selling price decreases Decrease Increase

Variable cost per unit increases Decrease Increase

Variable cost per unit decreases Increase Decrease

Fixed costs increase No effect Increase

Fixed costs decrease No effect Decrease

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Excess of expected sales over breakeven sales Cushion company can absorb without incurring a

loss


Expected salesin units

Breakevensales in units Margin ofsafety in units

Expected salesin dollars

Breakevensales in dollars

Margin of

safety indollars

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Sales priceper unit Variablecosts per unit Contributionmargin per unit

Fixed costs

Contribution marginper unit

Breakevenpoint inunits

$230 $70 $160

$112,000

$160

700students

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Decreased

Sales priceper unit

Variablecosts per unit

DecreasedContribution

margin per unit

Fixed costs


NewBreakeven

point inunits

$200 $70 $130

$112,000

$130

862students

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Sales priceper unit

Decreased

variablecosts per unit

Increased

Contributionmargin per unit

Fixed costs


NewBreakeven

point inunits

$50 $180

$112,000

$180

623students

$230

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Sales priceper unit Variablecosts per unit Contributionmargin per unit

Decreased fixed costs


Breakevenpoint inunits

$230 $70 $160

$102,000

$160

638students

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Selling prices and variable costs differ for eachproduct Different contribution to profits

Weighted-average contribution margin computed

Sales mix provides weights Combination of products that make up total sales


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Calculate weighted average contribution marginper unit


Product A Product B TotalSales price per unit $100 $150

Variable cost per unit 58 60

Contribution margin per unit 42 90

Sales mix per unit 5 3 8Contribution margin 210 270 480

Weighted average contribution margin $60

A company has two products with the sales pricesand variable costs per unit indicated in the table

The sales mix weight ismultiplied by the products

contribution margin

Last year, the companysold 5,000 units of A and

3,000 units of B. Thisresults in a sale mix of 5:3

The sales mix weights areadded as well as theproducts contribution

margins

$480 divided by 8 results ina weighted average

contribution margin of $60

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Calculate breakeven point for the package ofproducts


Fixed costs

Weighted average contributionmargin per unit

$600,000

$60

10,000units

assumed

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Calculate the breakeven point for each productline Multiply the package breakeven point by each product

lines proportion of the sales mix


Breakeven pointProduct A

10,000 x 5/8 6,250 units

Breakeven point

Product B

10,000 x 3/8 3,750 units

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