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Lecture Accounting (6th edition): Chapter 19 - Kimmel, Weygandt, Kieso

Chapter 19 - Cost-volume-profit analysis: Additional issues. In this chapter students will be able to: Apply basic CVP concepts, explain the term sales mix and its effects on break-even sales, Explain how fixed, variable, and semivariable costs respond to changes in the volume of business activity; explain how economies of scale can reduce unit costs; prepare a cost-volume-profit graph; compute contribution margin and explain its usefulness. | Cost-Volume-Profit Analysis: Additional Issues Kimmel ● Weygandt ● Kieso Accounting, Sixth Edition 19 Explain the term sales mix and its effects on break-even sales. CHAPTER OUTLINE Apply basic CVP concepts. 1 2 LEARNING OBJECTIVES Explain the term sales mix and its effects on break-even sales. 3 Explain the term sales mix and its effects on break-even sales. 4 CVP analysis is: The study of the effects of changes in costs and volume on a company’s profit. Important to profit planning. Critical in management decisions such as: determining product mix, maximizing use of production facilities, setting selling prices. LO 1 LEARNING OBJECTIVE Apply basic CVP concepts. 1 Management often wants the information reported in a special format income statement. CVP income statement is for internal use only: Costs and expenses classified as fixed or variable. Reports contribution margin as a total amount and on a per unit basis. BASIC CONCEPTS LO 1 ILLUSTRATION 19-1 Basic CVP income statement LO 1 BASIC CONCEPTS ILLUSTRATION 19-2 Detailed CVP income statement LO 1 BASIC CONCEPTS Illustration: Vargo Video’s CVP income statement (Ill. 6-2) shows that total contribution margin is $320,000, and the company’s contribution margin per unit is $200. Contribution margin can also be expressed in the form of the contribution margin ratio which in the case of Vargo is 40% ($200 ÷ $500). ILLUSTRATION 19-4 Break-even point in dollars BASIC COMPUTATIONS Break-Even Analysis LO 1 ILLUSTRATION 19-3 Break-even point in units Once a company achieves break-even sales, a sales goal can be set that will result in a target net income Illustration: Assuming Vargo’s target net income is $250,000, required sales in units and dollars to achieve this are: ILLUSTRATION 19-5 Target net income in units Target Net Income (Fixed Costs + Target Net Income) Unit Contribution Margin Required Sales in Units ÷ = ($200,000 + $250,000) $200 2,250 units ÷ = LO 1 BASIC COMPUTATIONS Once a company achieves break-even . | Cost-Volume-Profit Analysis: Additional Issues Kimmel ● Weygandt ● Kieso Accounting, Sixth Edition 19 Explain the term sales mix and its effects on break-even sales. CHAPTER OUTLINE Apply basic CVP concepts. 1 2 LEARNING OBJECTIVES Explain the term sales mix and its effects on break-even sales. 3 Explain the term sales mix and its effects on break-even sales. 4 CVP analysis is: The study of the effects of changes in costs and volume on a company’s profit. Important to profit planning. Critical in management decisions such as: determining product mix, maximizing use of production facilities, setting selling prices. LO 1 LEARNING OBJECTIVE Apply basic CVP concepts. 1 Management often wants the information reported in a special format income statement. CVP income statement is for internal use only: Costs and expenses classified as fixed or variable. Reports contribution margin as a total amount and on a per unit basis. BASIC CONCEPTS LO 1 ILLUSTRATION 19-1 Basic CVP income statement LO 1