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Cost
Click Behaviour
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and Cost-
Volume-Profit
Analysis
Accounting: A Malaysian Perspective, 4th ed
(Adapted from Accounting 22nd ed)
Warren, Reeve and Duchac
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After studying this chapter, you should be able to:

1. Classify costs by their behavior as variable costs,


fixed costs, or mixed costs.

2. Compute the contribution margin, the contribution


margin ratio, and the unit contribution margin, and
explain how they may be useful to managers.

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After studying this chapter, you should be able to:

3. Use the unit contribution margin, determine the


break-even point and the volume necessary to
achieve a target profit.

4. Use a cost-volume-profit chart and a profit-


volume chart, determine the break-even point
and the volume necessary to achieve a target
profit.
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After studying this chapter, you should be able to:

5. Compute the margin of safety and the operating


leverage, and explain how managers use these
concepts
6. List the assumptions underlying cost-volume-
profit analysis.

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8-1
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Objective 1
Classify costs by their
behavior as variable
costs, fixed costs, or
mixed costs.
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Cost Behavior 8-1


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Cost behavior refers to the manner in
which a cost changes as a related
activity changes. Such activities are
called activity base (or activity
drivers). The range of activity over
which the changes in the cost are of
interest is called the relevant range.
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Variable Costs 8-1


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Variable costs are costs that


vary in proportion to changes in
the level of activity.

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Syarikat Tah 8-1


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Syarikat Tah produces stereo sound
systems under the brand name of T-
Sound. The parts for the T-Sound stereos
are purchased from outside suppliers for
RM10 per unit (a variable cost) and
assembled in Syarikat Tah’s Sintok plant.

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Variable Cost Graphs 8-1


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Total Variable Cost Graph
RM300,000
RM250,000
Materials Cost

RM200,000
Total Direct

RM150,000
RM100,000
RM50,000
0 10 20 30
Total Units (Model TS-12)
Produced (thousands) 99
(Continued)
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8-1
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Unit Variable Cost Graph
RM20
Direct Materials

RM15
Cost per Unit

RM10
RM5
0 10 20 30
Total Units (Model TS-
12) Produced (thousands)
10
(Concluded)
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Unit Cost Compared to Total Cost 8-1


Click to edit Master RM20
RM300,000 title style
RM250,000 RM15

Cost per Unit


Total Costs

RM200,000 RM10
RM150,000 RM5
RM100,000 0 10 20 30
RM50,000 Units Produced (000)
0 10 20 30
Units Produced (000)
Number of Direct
Units of Model Materials Cost Total Direct
JS-12 Produced per Unit Materials Cost

5,000 units RM10 RM 50,000


10,000 10 l00,000
15,000 10 150,000
20,000 10 200,000
25,000 10 250,000 11
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30,000 10 300,000
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Fixed Costs 8-1


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Fixed costs are costs that remain


the same in total dollar amount as
the level of activity changes.

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Syarikat Mon’s Jitra Plant 8-1


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The production supervisor for Syarikat Mon’s


Jitra plant is Siti Maimon. She is paid
RM75,000 per year. The plant produces from
50,000 to 300,000 bottles of La Fleur
Perfume.

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Fixed Versus Variable Cost of Siti 8-1


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Maimon’s Salary

Number of Total Salary for Salary per Bottle


Bottles of Perfume Siti Maimon of Perfume
Produced Produced

50,000 bottles RM75,000 RM1.500


100,000 75,000 0.750
150,000 75,000 0.500
200,000 75,000 0.375
250,000 75,000 0.300
300,000 75,000 0.250

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8-1
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RM150,000
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RM1.50
style
RM125,000 RM1.25
Total Costs

RM100,000 RM1.00

Unit Cost
RM75,000 RM.75
RM50,000 RM.50
RM25,000 RM.25
0 100 200 300 0 100 200 300
Bottles Produced (000) Units Produced (000)

Number of Salary per Bottle


Bottles of Perfume Total Salary of Perfume
Produced for Siti Maimon Produced

50,000 bottles RM75,000 RM1.500


100,000 75,000 0.750
150,000 75,000 0.500
15
200,000 75,000 0.375
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Mixed Costs 8-1


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A mixed cost (sometimes called semivariable or
semifixed costs) has characteristics of both a
variable and a fixed cost. Over one range of
activity, the total mixed cost may remain the same.
Over another range of activity, the mixed cost may
change in proportion to changes in level of
activity.

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Syarikat Syed Example 8-1


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Syarikat Syed manufactures sails using


rented equipment. The rental charges are
RM15,000 per year, plus RM1 for each
machine hour used over 10,000 hours.

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Mixed Cost Graph for Syarikat Syed 8-1


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Equipment Rental Charges

RM45,000
RM40,000 Mixed costs are
RM35,000 usually separated into
RM30,000
RM25,000
their fixed and
Total Costs

RM20,000 variable components


RM15,000
for management
RM10,000
RM5,000 analysis.
0 10 20 30 40
Total Machine Hours (000)

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High-Low Method 8-1


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The high-low method is a


simple cost estimate technique
that may be used for separating
mixed costs into their fixed and
variable components.

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Estimating Variable Cost Using High-Low 8-1


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Production Total
(Units) Cost Actual costs incurred

June 1,000 RM45,550


First, select the
July 1,500 52,000 highest and lowest
August 2,100 61,500 levels of activity.
September 1,800 57,500
October 750 41,250

Difference in Total cost


Variable Cost per Unit =
Difference in Production
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Estimating Variable Cost Using High-Low 8-1


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Production Total
(Units) Cost
June 1,000 RM45,550 Then, fill in the
July 1,500 52,000 formula.
August 2,100 61,500
September 1,800 57,500 RM61,500
October 750 41,250 41,250
RM20,250

RM20,250
Variable Cost per Unit =
Difference in Production
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Estimating Variable Cost Using High-Low 8-1


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Production Total
(Units) Cost
June 1,000 RM45,550 Then, fill in the
July 1,500 52,000 formula.
August 2,100 61,500
September 1,800 57,500 2,100
750
October 750 41,250
1,350

RM20,250
Variable Cost per Unit =
1,350
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Estimating Variable Cost Using High-Low 8-1


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Production Total
(Units) Cost
June 1,000 RM45,550 Variable cost per
July 1,500 52,000 unit is RM15
August 2,100 61,500
September 1,800 57,500
October 750 41,250

RM20,250
Variable Cost per Unit = = RM15
1,350
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Estimating Fixed Cost Using High-Low 8-1


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Production Total
(Units) Cost
June 1,000 RM45,550 Next, insert the
July 1,500 52,000 variable cost of RM15
August 2,100 61,500
into the formula.
September 1,800 57,500
October 750 41,250

Total Cost = (Variable Cost per Unit x Units of Production)


+ Fixed cost
Total cost = (RM15 x Units of Production) + Fixed cost
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Estimating Fixed Cost Using High-Low 8-1


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Production Total
(Units) Cost Using the highest
June 1,000 RM45,550 level of production,
July 1,500 52,000 we insert the total cost
August 2,100 61,500
and units produced in
September 1,800 57,500
October 750 41,250 the formula.

Total Cost = (Variable Cost per Unit x Units of Production)


+ Fixed cost
Total cost = (RM15 x 2,100 Units) + Fixed Cost
RM61,500
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Estimating Fixed Cost Using High-Low 8-1


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RM61,500 = (RM15 x 2,100 units) + Fixed cost
RM61,500 = RM31,500 + Fixed cost
RM61,500 – RM31,500 = Fixed cost
RM30,000 = Fixed cost

If the lowest level had been chosen, the results of the


formula would provide the same fixed cost of RM30,000

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8-1

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Example Exercise 8-1
The manufacturing cost of Perusahaan Alisa for
the first three months of the year are provided
below:
Total Cost Production
January RM80,000 1,000 units
February RM125,000 2,500
March RM100,000 1,800
Using the high-low method, determine the
(a) variable cost per unit, and (b) the total fixed
cost. 27
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8-1

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Follow My Example 8-1

= RM125,000 – RM80,000
a. Variable cost per unit
(2,500 – 1,000)
= RM30

b. RM125,000 = (RM30 x 2,500) + Fixed cost


RM125,000 – RM75,000 = Fixed cost
Fixed cost = RM50,000 28
For Practice: PE8-1
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Summary of Cost Behavior Concepts 8-1


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Total costs
Total increase and
Variable decrease
Total Costs
Costs proportionately
with activity level.
Total Units Produced

Unit Unit costs remain


Per Unit Cost

Variable the same per unit


Costs regardless of
activity.
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Total Units Produced
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Summary of Cost Behavior Concepts 8-1


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Unit costs remain
Total

Total Costs
the same
Fixed Costs
regardless of
activity.
Total Units Produced

Total costs
Unit increase and
Fixed Costs decrease with
Per Unit Cost

activity level.
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Total Units Produced
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8-2
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Objective 2
Compute the contribution
margin, the contribution margin
ratio, and the unit contribution
margin, and explain how they
may be useful to managers.
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Cost-Volume-Profit Relationships 8-2


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Cost-volume-profit analysis is the systematic


examination of the relationships among
selling prices, sales and production volume,
costs, expenses, and profits.

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8-2
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The contribution margin is the excess of
sales revenues over variable costs. It
contributes first toward covering fixed
costs, then contributes to profit.

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4 Contribution Margin 8-2


ClickIncome
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Statement

Sales (50,000 units) RM 1,000,000


Variable costs 600,000
Contribution margin RM 400,000
Fixed costs 300,000
Income from operations RM 100,000

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Contribution Margin Ratio 8-2


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Sales (50,000 units) RM1,000,000 100%
Variable costs 600,000 60%
Contribution margin RM 400,000 40%
Fixed costs 300,000 30%
Income from operations RM 100,000 10%

Sales – Variable Costs X 100


Contribution Margin Ratio =
Sales
RM1,000,000 – RM600,000 X 100
Contribution Margin Ratio =
RM1,000,000
Contribution Margin Ratio = 40%
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Unit Contribution Margin 8-2


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The unit contribution margin is also useful for


analyzing the profit potential of proposed projects.
The unit contribution margin is the sales price less
the variable cost per unit.

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Using Contribution Margin per 8-2


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Unit as a Shortcut
50,000 65,000
units units
Sales (RM20) RM 1,000,000 RM 1,300,000
Variable costs (RM12) 600,000 780,000
Contribution margin (RM8) RM 400,000 RM 520,000
Fixed costs 300,000 300,000
Income from operations RM 100,000 RM 220,000

The increase in income from operations of RM120,000


could have been determined quickly by multiplying the
increase in unit sales (15,000) by the contribution margin per
unit (RM8). 37
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8-2
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RM
Sales (50,000 units) RM1,000,000 100% 20
Variable costs 600,000 60% 12
Contribution margin RM 400,000 40% RM
Fixed costs 300,000 30% 8
Income from operations RM 100,000 10%

Unit contribution margin


analyses can provide useful
information for managers. 38
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Review 8-2
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RM2
Sales (50,000 units) RM1,000,000 100% 0
Variable costs 600,000 60% 12
Contribution margin RM 400,000 40% RM
Fixed costs 300,000 30% 8
Income from operations RM 100,000 10%

The contribution margin can be expressed three ways:


1. Total contribution margin in dollars.
2. Contribution margin ratio (percentage).
3. Unit contribution margin (dollars per unit).
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8-2

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Example Exercise 8-2

Syarikat Molly sells 20,000 units at RM12 per


unit. Variable costs are RM9 per unit, and
fixed costs are RM25,000. Determine the (a)
contribution margin ratio, (b) unit contribution
margin, and (c) income from operations.

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8-2

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Follow My Example 8-2
a. Contribution margin ratio = (20,000units X RM12) - (20,000units X RM9)
(20,000 units X RM12) X 10
= 25%
b. Unit contribution margin = RM12 – RM9
= RM3 per unit

c. Sales (20,000 x RM12) RM 240,000


Variable costs (20,000 x RM9) 180,000
Contribution margin[20,000 x (RM12 –RM9)] RM 60,000
Fixed costs 25,000
Income from operations RM 35,000 41
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For Practice: PE 8-2
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8-3
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Objective 3
Using the unit contribution
margin, determine the break-even
point and the volume necessary to
achieve a target profit.

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Break-Even Point 8-3


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The break-even point is the level of


operations at which a business’s revenues
and expired costs are exactly equal.

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8-3
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Syarikat Bakar fixed costs are estimated to
be RM90,000. The unit contribution margin
is calculated as follows:

Unit selling price RM 25


Unit variable cost 15
Unit contribution margin RM 10

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8-3
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The break-even point is calculated using the
following equation:
Fixed Costs
Break-Even Sales (units) =
Unit Contribution Margin

RM90,000
Break-Even Sales (units) =
RM10

Break-Even Sales (units) = 9,000 units

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Proof of the Preceding 8-3


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Computation

Sales (RM25 x 9,000) RM 225,000


Variable costs (RM15 x 9,000) 135,000
Contribution margin RM 90,000
Fixed costs 90,000
Income from operations RM 0

Income from operations is zero when 9,000 units


are sold—hence, break-even is 9,000 units.

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Effect of Changes in Fixed Costs 8-3


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Fixed Break-
If Costs
Then Even

Fixed Break-
If Then
Costs Even

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Increasing Fixed Costs 8-3


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Syarikat Lazer is evaluating a proposal to


budget an additional RM100,000 for
advertising. Fixed costs before the additional
advertising are estimated at RM600,000, and
the unit contribution margin is RM20.

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8-3
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Without additional advertising:
Fixed Costs
Break-Even in Sales (units) =
Unit Contribution Margin
RM600,000 30,000 units
Break-Even in Sales (units) = =
RM20
With additional advertising:
RM700,000 35,000 units
Break-Even in Sales (units) = =
RM20

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Effect of Changes in Unit 8-3


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Variable Costs

Unit
If Then Break-
Variable
Even
Cost

Unit
If Then Break-
Variable Even
Costs

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8-3
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Syarikat Antah. is evaluating a proposal to pay an
additional 2% commission on sales to its salespeople (a
variable cost) as an incentive to increase sales. Fixed
costs are estimated at RM840,000. The unit
contribution margin before the additional 2%
commission is determined as follows:

Unit selling price RM 250


Unit variable cost 145
Unit contribution margin RM 105
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8-3
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Without additional 2% commission:
Fixed Costs
Break-Even in Sales (units) =
Unit Contribution Margin
RM840,000 8,000
Break-Even in Sales (units) = =
RM105 units
With additional 2% commission:
RM840,000 8,400
Break-Even in Sales (units) = =
RM100 units

RM250 – [RM145 + (RM250 x 2%)] 52


= RM100
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Effect of Changes in the Unit 8-3


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Selling Price

Break-
Unit Even
If Selling Then
Price

Unit Then
If
Selling
Price Break-
Even
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8-3
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Syarikat Jendi is evaluating a proposal to increase the
unit selling price of a product from RM50 to RM60.
The following data have been gathered:
Current Proposed
Unit selling price RM 50 RM 60
Unit variable cost 30 30
Unit contribution margin RM 20 RM 30
Total fixed costs RM600,000 RM600,000

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8-3
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Without price increase:
Fixed Costs
Break-Even in Sales (units) =
Unit Contribution Margin
RM600,000 30,000
Break-Even in Sales (units) = =
RM20 units
With price increase:
RM600,000 20,000
Break-Even in Sales (units) = =
RM30 units

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Summary of Effects of Changes 8-3


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on Break-Even Point

Effect of Change
Direction of on Break-Even
Type of Change Change Sales (Units)
Fixed cost Increase Increase
Decrease Decrease
Variable cost per unit Increase Increase
Decrease Decrease
Unit sales price Increase Decrease
Decrease Increase

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8-3

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Example Exercise 8-3
Nik Enterprise sells a product for RM60 per unit. The variable cost
is RM35 per unit, while fixed costs are RM80,000. Determine the
(a) break-even point in sales units, and (b) break-even point if the
selling price were increased to RM67 per unit.
Follow My Example 8-3
a. BEP sales units = RM80,000/(RM60 – RM35)
= 3,200 units

b. (New) BEP sales units = RM80,000/(RM67 – RM35)


= 2,500 units
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For Practice: PE 8-3
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Target Profit 8-3


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The sales volume required to earn a target profit is
determined by modifying the break-even equation.

Fixed Costs + Target Profit


Sales (units) =
Unit Contribution Margin

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Units Required for Target Profit 8-3


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Fixed costs are estimated at RM200,000, and
the desired profit is RM100,000. Unit
contribution margin is RM30.
Unit selling price RM 75
Unit variable cost 45
Unit contribution margin RM 30
RM200,000 + RM100,000
Sales (units) =
RM30
Sales (units) = 10,000 units 59
60

8-3
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Sales (10,000 units x RM75) RM 750,000
Variable costs (10,000 x RM45) 450,000
Contribution margin (10,000 x RM30) RM 300,000
Fixed costs 200,000
Income from operations RM 100,000

Proof that sales of 10,000 units will provide a


profit of RM100,000.

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8-3

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Example Exercise 8-4
Syarikat Fika sells a product for RM140 per unit. The variable
cost is RM60 per unit, and fixed costs are RM240,000. Determine
the (a) break-even point in sales units, and (b) break-even point in
sales units if the company desires a target profit of RM50,000.
Follow My Example 8-4
a. BEP sales units = RM240,000/(RM140 – RM60)
= 3,000 units

b. (New) BEP sales units


= (RM240,000 + RM50,000)/(RM140 – RM60)
= 3,625 units 61
For Practice: PE 8-4
62

8-4
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Objective 4
Using a cost-volume-profit chart
and a profit-volume chart,
determine the break-even point
and the volume necessary to
achieve a target profit.
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Cost-Volume-Profit (Break- 8-4


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Even) Chart

A cost-volume-profit chart, sometimes called a


break-even chart, may assist management in
understanding relationships among costs, sales,
and operating profit or loss.

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8-4
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The cost-volume-profit chart in Exhibit 5 (Slide 65) is
based on the following data:

Unit selling price RM 50


Unit variable cost 30
Unit contribution margin RM 20
Total fixed costs RM 100,000

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65

Cost-Volume-Profit 8-4
Click to edit Master title style Chart

RM500
Sales and Costs (in thousands) RM450
Dollar RM400
amounts RM350
are RM300
indicated RM250
along the RM200
vertical RM150
axis. RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)

65
Volume is (Continued)
shown on the horizontal axis.
66

Cost-Volume-Profit 8-4
Click to edit Master title style Chart (Continued)

RM500 Point A
Sales and Costs (in thousands) RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)
At sales of RM500,000 and knowing that each unit sells for RM50, we
66
can find the values of the two axis. Where the horizontal sales and
costs line intersects the vertical 10,000 unit of sales line is Point A.
67

Cost-Volume-Profit 8-4
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Chart (Continued)

RM500 Point A

Sales and Costs (in thousands)


RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)
Now, beginning at zero on the left corner of the graph, connect
67
a straight line to the dot (Point A). Note: Point A could have
been plotted at any sales level because linearity is assumed.
68

Cost-Volume-Profit 8-4
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Chart (Continued)

RM500
Sales and Costs (in thousands) RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)

Fixed cost of RM100,000 is a horizontal line. 68


69

Cost-Volume-Profit 8-4
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Chart (Continued)

RM500
Sales and Costs (in thousands) RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)

Similar to the sales line, a point is determined on the cost 69


line (10,000 x RM30) + RM100,000 = RM400,000
70

Cost-Volume-Profit 8-4
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Chart (Continued)

RM500
Sales and Costs (in thousands) RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)

Beginning with the total fixed cost at the vertical axis 70


(RM100,000), draw a line to the red dot. This is the total cost
line.
71

Cost-Volume-Profit 8-4
Click to edit Master title style Chart (Continued)

RM500
Sales and Costs (in thousands)
RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)
Horizontal and vertical lines are drawn at the
71
intersection point of the sales line and the costs line,
which is the break-even point.
72

Cost-Volume-Profit 8-4
Click to edit Master title style Chart (Continued)

RM500
Sales and Costs (in thousands) RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)

Break-even is sales of 5,000 units or RM250,000. 72


73

Cost-Volume-Profit 8-4
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Chart (Concluded)

RM500
Sales and Costs (in thousands) RM450
RM400
RM350
RM300
RM250
RM200 Profit area
RM150
RM100
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)

73
74

Revised Cost-Volume-Profit Chart 8-4


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Using the data in Slide 73, assume that a


proposal to reduce fixed cost by RM20,000 is
to be evaluated. A cost-volume-profit chart
can be created to assist in this evaluation.

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Revised Cost-Volume- 8-4


Click to edit Master title style Profit Chart

RM500
Sales and Costs (in thousands)

RM450
RM400
RM350
RM300
RM250
RM200
RM150
RM100 RM80,000
RM 50
0 1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)
If fixed costs can be reduced to RM80,000, the new break- 75
even point is sales of RM200,000, or 4,000 units.
76

Profit-Volume Chart 8-4


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Another graphic approach to cost-volume-
profit analysis, the profit-volume chart,
plots only the difference between total
sales and total costs (or profits). Again, the
data from Exhibit 5 will be used.
Unit selling price RM 50
Unit variable cost 30
Unit contribution margin RM 20
Total fixed costs RM100,000
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77

8-4
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The maximum operating loss is equal to the
fixed costs of RM100,000. Assuming that the
maximum unit sales within the relevant range is
10,000 units, the maximum operating profit is
RM100,000, computed as follows:
Sales (10,000 units x RM50) RM500,000
Variable costs (10,000 units x RM30) 300,000
Contribution margin (10,000 units x RM20) 200,000
Fixed costs 100,000
Operating profit RM100,000

77
Maximum profit
78

Profit-Volume Chart 8-4


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RM100,000
Operating Profit (Loss)

RM75,000 Profit Line


RM50,000 Operating
RM25,000 profit
RM 0
RM(25,000) Operating
RM(50,000) loss Break-Even Point
RM(75,000)
RM(100,000)
1 2 3 4 5 6 7 8 9 10
Units of Sales (in thousands)

Maximum loss is
RM100,000, the fixed costs.
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79

8-2
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Objective 5
Compute the margin of safety and
the operating leverage, and
explain how managers use these
concepts.

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Operating Leverage 8-5


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The relative mix of a business’s variable costs
and fixed costs is measured by the operating
leverage. It is computed as follows:

Contribution Margin
Operating Leverage = Income from Operations

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Operating Leverage Example 8-5


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Syarikat Salam Syarikat Sinar
Sales RM400,000 RM400,000
Variable costs 300,000 300,000
Contribution margin RM100,000 RM100,000
Fixed costs 80,000 50,000
Income from operations RM 20,000 RM 50,000
Operating leverage ? ?
Both companies have the same
contribution margin.
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8-5
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Syarikat Salam Syarikat Sinar
Sales RM400,000 RM400,000
Variable costs 300,000 300,000
Contribution margin RM100,000 RM100,000
Fixed costs 80,000 50,000
Income from operations RM 20,000 RM 50,000
Operating leverage 5 ?

Syarikat Salam =
RM100,000 =5
RM20,000
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8-5
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Syarikat Salam Syarikat Sinar
Sales RM400,000 RM400,000
Variable costs 300,000 300,000
Contribution margin RM100,000 RM100,000
Fixed costs 80,000 50,000
Income from operations RM 20,000 RM 50,000
Operating leverage 5 2

RM100,000
Syarikat Sinar = =2
RM50,000
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High Versus Low Operating Leverage 8-5


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8-5

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Example Exercise 8-5
Syarikat Tariq reports the following data:
Sales RM750,000
Variable costs RM500,000
Fixed costs RM187,500
Determine Syarikat Tariq’s operating leverage.

Follow My Example 8-5


Operating leverage = 750,000 – 500,000
750,000 – 500,000 – 187,500
= 250,000
62,500
= 4 85
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For Practice: PE8-5
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Margin of Safety 8-5


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The difference between the current sales revenue


and the sales revenue at the break-even point is
called the margin of safety.

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8-5
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If sales are RM250,000, the unit selling price is RM25,
and the sales at the break-even point are RM200,000, the
margin of safety is 20%, computed as follows:

Sales – Sales at Break-Even Point


Margin of Safety =
Sales
RM250,000 – RM200,000
Margin of Safety =
RM250,000
Margin of Safety = 20%

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8-5
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The margin of safety may also be stated in terms of
units.
In this illustration, for example:
the margin of safety of 20% is equivalent to RM50,000
in sales (RM250,000 x 20%).
In units, the margin of safety is 2,000 units
(RM50,000/RM25).

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8-5

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Example Exercise 8-6

Syarikat Rafiq has sales of RM400,000, and the break-


even point in sales dollars is RM300,000. Determine
the company’s margin of safety.

Follow My Example 8-6

Margin of safety = RM400,000 – RM300,000


RM400,000
= 25%
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For Practice: PE8-6
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8-2
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Objective 6
List the assumptions underlying
cost-volume-profit analysis.

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Assumptions of Cost-Volume-Profit 8-6


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Analysis

The primary assumptions are:


1. Total sales and total costs can be represented by a
straight line.
2. Within the relevant range of operating activity, the
efficiency of operations does not change.
3. Costs can be accurately divided into fixed and
variable components.
4. The sales mix is constant.
5. There is no change in the inventory quantities during
the period.
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