Cost Volume Profit Essay

Some things we knowThe objective of all business is to make money ( hit) for the owners lucre = revenues ExpensesRevenues = gross revenue = Quantity sold x price per wholeExpenses = the costs related tothe specific revenue (COGS)or the specific accounting periodMatching ruleRole of Management isPlanning, control and performance measurement, and decision-makingDecision-making relates to future events and involves riskFull costing (full-absorption costing) is a dear(p) historical tool but may notBe the best indicator of future employment because it is based on past events. embody BehaviorVariable personifys total dollars change with muckle, Cost per social unit is constant obdurate Costs total dollars are constant, cost per unit changes with volume entangled Costs include some variable costs and some fixed costsTotal Cost = Fixed Costs + Volume(variable cost per unit)Fixed Component Variable ComponentPurely Fixed $25,000$ 0Purely Variable 0 5.00 per unit mix Costs 10,000 2 .00 per unitTotal Costs $35,000$7.00 per unitGraphing Total CostsX axis (horizontal/across) = volumeY axis (vertical/up & down) = dollarsEstimating the Composition of Mixed CostsAccount AnalysisScattergraph Visual inspection of plotted pointsHigh-Low EstimationTheory The change in total costs between the high volume point andThe low volume point, must be purely variable costsLinear Regression (computer assisted scattergraph) plowshare Margin Income StatementIgnores the division of the expensesFocus is on cost behavior (fixed and variable)Used extensively in forecasting future electric potential outcomes (planning & decision making)BecauseProfit = Revenue Expenses(Costs)WhereRevenue = Volume x price per unitAndTotal Costs = Fixed Cost + (Volume x Variable cost per unit)ThereforeVolume x price per unit little Volume x variable cost per unitless(prenominal) Fixed costsProfitRevenueLess Variable CostsCONTRIBUTION MARGINLess Fixed CostsPretax Profit realize THIS FORMULA FRONTWARDS AN D BACKWARDSMargin of Safety = the difference between the expected level of volume and the break-even point (normally using sales dollars but could also use units sold).When comparing cardinal or much alternatives it may be helpful to look at the Margin of Safety as a contribution of sales. component part Margin Ratio = CM per unit / Selling Price per unitOrContribution Margin / SalesOperating Leverage = Fixed Costs / Contribution MarginOrContribution Margin/Pretax ProfitCost-Volume-Profit (CVP) AnalysisBreak-Even Point = the point at which profit = zero (i.e. we break even)= The point at which Contribution Margin = Fixed CostsOnce we know the break-even point, we can begin to plan for target profitTarget Pre revenue enhancement Profit versus Target After Tax ProfitPretax Profit$100Less Tax Expense 40After Tax or Net Profit$ 60 efficacious Tax Rate = Tax Expense / Pretax Profit(40% above)Tax Expense = Pretax Profit x Effective Tax RateNet Income = Pretax Profit x (1- in effect(p ) tax rate)Pretax Profit = Net Profit / (1- effective tax rate)Multiple output CVP AnalysisWeighted-Average Contribution Margin (also referred to as blended average) return integrate IS CRITICAL yield 1Product 2TotalUnits Sold10020Selling Price$10.00$50.00Variable Costs 5.00$30.00Sales$1,000$1,000$2,000Contribution Margin five hundred$ cd 900CM Ratio 50% 40% 45%SO LONG AS THE PRODUCT MIX REMAINS AT 51 THE PROJECTEDCM RATIO WILL appease AT 45%. Therefore if sales are expected to be $20,000, AND WE SELL 5 of Product 1 for every 1 unit of Product 2, Contribution Margin should be $9,000 ($20,000 x 45%)However if sales of Product 1 are only $1,000 and the remaining $19,000 are sales of Product 2 the Contribution margin is only $8,100 and the CM Ratio drops to 40.5%.$ 1,000 x 50% = $ 500 sum total$19,000 x 40% = $7,600$20,000 $8,100 = 40.5% of salesor (1/20 x .50) + (19/20 x .40).025 + .38 = 40.5%When computing the Weighted-Average Contribution Margin USE SALES DOLLARS as the weighin g factor (NOT UNITS).Constraint = a limitation of resourcesTo increase profits given a limited resource, maintain the product that generates the highest contribution margin per limited resource. This may not be the product with the highest contribution margin ratio.Illustration A attach to manufactured two types of beer, grant and regular. Both types of beer are brewed in the same kettles. A regular batch brews for 15 long time and yields 12,000 bottles. A premium batch brews for 30 days and yields 12,000 bottles. Regular beer sells for $1.00 per bottle and has variable costs of $0.40 per bottle. The premium sell for $1.50 per bottle and has variable costs of $0.50 per bottle. Assuming unlimited demand of both products, which product should the company brew?PremiumRegularPer BatchSales$15,000$12,000CM$12,000$ 7,200CM % 66.67% 60.00%CM per Limited Resource (Days)CM$12,000$ 7,200dual-lane by days 30 15CM per day of limitedResource use $400 $480Regular beer has a higher CM per lim ited resource.Therefore, given unlimited demand of both types, produce only regular.Proof In 30 days we can make one batch of premium, which allow for yield $12,000 in CM. In the same 30 days we can make 2 batches of regular, which forget yield $14,400 in CM.We are in business to make money for the owners, not percentages. You cant deposit percentages in the bank