Lecture Managerial accounting - Chapter 3: Cost-volume-profit analysis and pricing decisions. After studying this chapter you will be able to understand: Breakeven analysis, C-V-P analysis, multiproduct C-V-P analysis, pricing decisions. | 3 CHAPTER COST-VOLUME-PROFIT ANALYSIS AND PRICING DECISIONS photo: © Tischenko Irina/Shutterstock MARKETING WANTS ANOTHER $50,000 What will they do with it? How will it affect sales volume? What is the impact on our bottom line? 2 © Tomwang112 / iStockphoto BREAKEVEN ANALYSIS Unit 3 1 . Unit Unit Unit WHAT DOES IT MEAN TO “BREAK EVEN” Total revenues = total expenses Profit = $0 There is one sales volume at which this relationship is true This is called the “breakeven point” 4 TO CALCULATE THE BREAKEVEN POINT Use the equation approach Solve for units sold, which equals the breakeven point Why is profit set to $0? Sales Revenue – Variable expenses – Fixed expenses = Operating income (SP×units sold) – (VC×units sold) – FC = $0 [(SP – VC)×(units sold)] – FC = $0 (CM/unit×units sold) – FC = $0 5 $20x - $16x - $168,000 = $0 x = 42,000 jerseys BREAKEVEN POINT FOR UNIVERSAL SPORTS EXCHANGE $4x - $168,000 = $0 BREAKEVEN POINT FOR UNIVERSAL SPORTS EXCHANGE Exhibit 3-1 6 FC . | 3 CHAPTER COST-VOLUME-PROFIT ANALYSIS AND PRICING DECISIONS photo: © Tischenko Irina/Shutterstock MARKETING WANTS ANOTHER $50,000 What will they do with it? How will it affect sales volume? What is the impact on our bottom line? 2 © Tomwang112 / iStockphoto BREAKEVEN ANALYSIS Unit 3 1 . Unit Unit Unit WHAT DOES IT MEAN TO “BREAK EVEN” Total revenues = total expenses Profit = $0 There is one sales volume at which this relationship is true This is called the “breakeven point” 4 TO CALCULATE THE BREAKEVEN POINT Use the equation approach Solve for units sold, which equals the breakeven point Why is profit set to $0? Sales Revenue – Variable expenses – Fixed expenses = Operating income (SP×units sold) – (VC×units sold) – FC = $0 [(SP – VC)×(units sold)] – FC = $0 (CM/unit×units sold) – FC = $0 5 $20x - $16x - $168,000 = $0 x = 42,000 jerseys BREAKEVEN POINT FOR UNIVERSAL SPORTS EXCHANGE $4x - $168,000 = $0 BREAKEVEN POINT FOR UNIVERSAL SPORTS EXCHANGE Exhibit 3-1 6 FC CM/Unit = Breakeven in units SHORTCUTS $168,000 $4 = 42,000 jerseys 7 SHORTCUTS FC CMR = Breakeven in sales $ $168,000 = $840,000 8 LET’S LOOK AT BREAK EVEN GRAPHICALLY $168,000 LET’S LOOK AT BREAKEVEN GRAPHICALLY Exhibit 3-2 9 Current sales – Breakeven sales MARGIN OF SAFETY What does this mean? $1,050,000 – $840,000 = $210,000 52,500 – 42,000 = 10,500 jerseys 10 © Tomwang112 / iStockphoto C-V-P ANALYSIS Unit 3 2 . Unit Unit Unit LET’S REVIEW THE PROFIT EQUATION – VC×(units sold) SP×(units sold) – FC = OI 12 HOW MUCH DO I HAVE TO SELL TO MAKE $X? This is called the “target income” question Use the profit equation Use the breakeven formula and treat your target pretax income as additional fixed costs FC + Target Income CM / unit = required sales volume To find the sales dollars required to attain the target income, use the CMR rather than the CM / unit. (SP×units sold) – (VC×units sold) – FC = $X 13 WHAT ABOUT TARGET NET INCOME? You must adjust net income to pretax .
