Learning

Objective
1

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 The Break-Even Point
The break-even point is the point in the
volume of activity where the organization’s
revenues and expenses are equal.

Sales $ 250,000
Less: variable expenses 150,000
Contribution margin 100,000
Less: fixed expenses 100,000
Net income $ -

7-2
 Equation Approach
Sales revenue – Variable expenses – Fixed expenses = Profit

Unit Sales Unit Sales

sales × volume variable × volume
price in units expense in units

($500 × X) – ($300 × X) – $80,000 = $0

($200X) – $80,000 = $0
X = 400 surf boards
7-3
 Learning
Objective
2

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Contribution-Margin Approach
Consider the following information
developed by the accountant at Curl, Inc.:
For each additional surf board sold,
Curl generates $200 in contribution
margin.

Total Per Unit Percent

Sales (500 surf boards) $250,000 $ 500 100%
Less: variable expenses 150,000 300 60%
Contribution margin $100,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ 20,000

7-5
 Contribution-Margin Approach

Fixed expenses Break-even point

=
Unit contribution margin (in units)

Total Per Unit Percent

Sales (500 surf boards) $250,000 $ 500 100%
Less: variable expenses 150,000 300 60%
Contribution margin $100,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ 20,000

$80,000
= 400 surf boards
$200
7-6
 Contribution-Margin Approach

Here is the proof!

Total Per Unit Percent

Sales (400 surf boards) $200,000 $ 500 100%
Less: variable expenses 120,000 300 60%
Contribution margin $ 80,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ -

400 × $500 = $200,000 400 × $300 = $120,000

7-7
 Contribution Margin Ratio

Calculate the break-even point in sales dollars

rather than units by using the contribution margin
ratio.
Contribution margin
= CM
Sales
Ratio
Fixed expense Break-even point
=
CM Ratio (in sales dollars)

7-8
 Contribution Margin Ratio

Total Per Unit Percent

Sales (400 surf boards) $200,000 $ 500 100%
Less: variable expenses 120,000 300 60%
Contribution margin $ 80,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ -

$80,000
= $200,000 sales
40%
7-9
 Learning
Objective
3

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Graphing Cost-Volume-Profit
Relationships
Viewing CVP relationships in a graph gives
managers a perspective that can be obtained in
no other way.
Consider the following information for Curl, Inc.:
300 units 400 units 500 units
Sales 150,000.00 200,000.00 250,000.00
Less: variable expenses 90,000.00 120,000.00 150,000.00
Contribution margin 60,000.00 80,000.00 100,000.00
Less: fixed expenses 80,000.00 80,000.00 80,000.00
Net income (loss) - 20,000.00 - 20,000.00

7-11
 Cost-Volume-Profit Graph
450,000

400,000

350,000

300,000
Amount

250,000

200,000

150,000
Fixed expenses
100,000

50,000

100 200 300 400 500 600 700 800

Units

7-12
 Cost-Volume-Profit Graph
450,000

400,000

350,000

300,000
Dollars

250,000

200,000

150,000

100,000
Fixed expenses

50,000

100 200 300 400 500 600 700 800

Units

7-13
 Cost-Volume-Profit Graph
450,000

400,000

350,000

300,000
Dollars

250,000

200,000

150,000

100,000
Fixed expenses

50,000

100 200 300 400 500 600 700 800

Units

7-14
 Cost-Volume-Profit Graph
450,000

400,000

350,000

300,000
Dollars

250,000

200,000

150,000

100,000
Fixed expenses

50,000

100 200 300 400 500 600 700 800

Units

7-15
 Cost-Volume-Profit Graph
450,000

400,000

350,000
Break-even
300,000
point
Dollars

250,000

200,000

150,000

100,000
Fixed expenses

50,000

100 200 300 400 500 600 700 800

Units

7-16
 Profit-Volume Graph
Some managers like the profit-volume
graph because it focuses on profits and volume.

100,000

80,000

60,000
Break-even
40,000 point
20,000
Profit

0 `

(20,000) 100 200 300 400 500 600 700

Units
(40,000)

(60,000)

7-17
 Learning
Objective
4

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 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 Units sold to earn

=
Unit contribution margin the target profit

$80,000 + $100,000
= 900 surf boards
$200

7-19
 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.

7-21
 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.

Break-even
sales Actual sales
400 units 500 units
Sales $ 200,000 $ 250,000
Less: variable expenses 120,000 150,000
Contribution margin 80,000 100,000
Less: fixed expenses 80,000 80,000
Net income $ - $ 20,000

7-22
 Changes in Fixed Costs

• Curl is currently selling 500 surfboards per

year.
• The owner believes that an increase of
$10,000 in the annual advertising budget,
would increase sales to 540 units.

Should the company increase the advertising

budget?
7-23
 Changes in Fixed Costs

Current Proposed
Sales Sales
(500 Boards) (540 Boards)
Sales $ 250,000 $ 270,000
Less: variable expenses 150,000 162,000
Contribution margin $ 100,000 $ 108,000
Less: fixed expenses 80,000 90,000
Net income $ 20,000 $ 18,000

540 units × $500 per unit = $270,000

$80,000 + $10,000 advertising = $90,000

7-24
 Changes in Fixed Costs
Current Proposed
Sales will increase by
Sales Sales
$20,000, but net income
(500 Boards) (540 Boards)
decreased by $2,000.
Sales $ 250,000 $ 270,000
Less: variable expenses 150,000 162,000
Contribution margin $ 100,000 $ 108,000
Less: fixed expenses 80,000 90,000
Net income $ 20,000 $ 18,000

7-25
 Changes in Unit
Contribution Margin

Because of increases in cost of raw materials,

Curl’s variable cost per unit has increased
from $300 to $310 per surfboard. 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)

7-26
 Changes in Unit
Contribution Margin

Suppose Curl, Inc. increases the price of

each surfboard to $550. With no change
in variable cost per unit, what will be the
new break-even point?

($550 × X) – ($300 × X) – $80,000 = $0

X = 320 units

7-27
 Predicting Profit Given Expected
Volume

Fixed expenses
Given: Unit contribution margin Find: {req’d sales volume}
Target net profit

Fixed expenses
Given: Unit contribution margin Find: {expected profit}
Expected sales volume

7-28
 Predicting Profit Given
Expected 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 increase to $90,000.

Total contribution - Fixed cost = Profit

($190 × 525) – $90,000 = X

X = $99,750 – $90,000
X = $9,750 profit
7-29