mba 6011 cvp highlights for oct 23 2013

8/12/2019 MBA 6011 CVP Highlights for Oct 23 2013

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MBA 6011module 15

COST-VOLUME-PROFIT


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CVP Assumptions

1. All costs are classified as fixed or variable.

2. The total cost function is linear within therelevant range.

3. The total revenue function is linear within therelevant range.

4. The analysis is for a single product, or the salesmix of multiple products is constant.

5. There is only one activity cost driver: unit ordollar sales volume.

Warning: accuracy decreases as the scope

of operations being analyzed increases.


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Using the Profit Formula

To use the profit formula

Separate all the companys costs into variable and

fixed components

Nature of costs

The cost of the primary raw materials convertedinto finished goods

Wages earned by production employees

converting raw materials into finished goods

Variable

Costs

Direct materials

Direct labor


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All other variable costs associated with converting

raw materials into finished goods

All variable costs not directly associated withconverting raw materials into finished goods

All fixed costs associated with converting rawmaterials into finished goods

All fixed costs not directly associated with

converting raw materials into finished goods

Variable and Fixed Components

Fixed

Costs

Variable

Costs

Variable manufacturing overhead

Variable selling and administrative costs

Fixed manufacturing overhead

Fixed selling and administrative costs


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Contribution Income Statement

Example

Sales (6,950 x $1.50) $10,425.Less variable costs:

Direct materials (6,950 x $0.43) $2,988Direct labor (6,950 x $0.32) 2,224Manufacturing overhead (6,950 x $0.20) 1,390

Selling and administrative (6,950 x $0.15) 1,043 (7,645)Contribution margin 2,780.

Less fixed costs:Manufacturing 1,200Selling and administrative 580 (1,780)

Net Operating Profit $1,000.

Rock-N-Roehl Cream Bars

Contribution Income Statement

For a Mon thly Volume of 6,950 Ice Cream Bars


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Analysis Using

Contribution Margin (Unit or Ratio)

Sensitivity analysis

How a model responds to changes in one or more

independent variables Unitcontribution margin

Indicates how sensitive an income model is to a

change in unit sales Contribution margin ratio

The portion of every sales dollar contributed toward

covering fixed costs and earning a profit


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Break-Even Point

Fixed costsSelling price per unit Variable costs per unit

=Fixed costs

Contribution margin per unit

=

Break-even unit sales volume


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Multiple Product

Break-Even Point

Applicable when unit information is not available or

when a company sells more than one product.

=Fixed costs

Contribution margin ratio

=Fixed costs + Desired profit

Contribution margin ratio

Dollar break-even point

Target dollar sales volume


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Operating Leverage

What is operating leverage?A measure of the extent that an organizations costs

are fixed

High degree of operating leverage Signals the existence of a high portion of fixed costs

Degree ofoperatingleverage

Contribution marginIncome before taxes

=


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Operating Leverage

Risk & Opportunity

The higher the degree of operating leverage

The greater the opportunity for profit with increases

in sales, AND

The greater the risk of large losses when sales

decrease

Sales Increase Sales Decrease

High operating leverageHigh opportunity

for profit increasesHigh risk of loss

Low operating leverage Low opportunity forprofit increases

Low risk of loss


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Measuring Expected

Change in ProfitTaco King and Mexi Land are competitors and reported the same salesrevenue and before-tax profit during May:

Taco King Mexi Land

Sales $40,000 $40,000.Variable costs (22,000) (8,000)

Contribution margin 18,000 32,000.Fixed costs (8,000) (22,000)Before-tax profit $10,000. $10,000.

If sales drop by 20% for both, which company suffers more?

Degree ofoperating leverage

Taco King Mexi Land

$18,000

$10,000= 1.8 $32,000

$10,000= 3.2

Decreasein profit

1.820% = 36%Decline in Profit

3.220% = 64%Decline in Profit

Mexi Lands higher operating leverage results in a larger profit decline.


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More group exercises!

mba 6011 cvp highlights for oct 23 2013

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