Chapter 20 - Cost-volume-profit analysis: Additional issues. This chapter’s objectives are to: Describe different types of cost behavior in relation to production and sales volume, describe several applications of costvolume-profit analysis, compute the contribution margin and describe what it reveals about a company's cost structure, analyze changes in sales using the degree of operating leverage. | Cost-Volume-Profit Analysis: Additional Issues 20 Learning Objectives Apply basic CVP concepts. 1 Explain the term sales mix and its effects on break-even sales. 2 Determine sales mix when a company has limited resources. 3 Indicate how operating leverage affects profitability. 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. LEARNING OBJECTIVE Apply basic CVP concepts. 1 LO 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 20-1 Basic CVP income statement Basic Concepts LO 1 Basic Concepts Illustration 20-2 Detailed CVP income statement LO 1 Illustration: Vargo Video’s CVP income statement (Ill. 20-2) 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 20-4 Basic Computations BREAK-EVEN ANALYSIS LO 1 Illustration 20-3 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 20-5 Target net income in units Basic Computations 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 Once a company achieves break-even sales, a sales goal can be set that will result in a target net income Illustration: The contribution margin ratio is used to compute . | Cost-Volume-Profit Analysis: Additional Issues 20 Learning Objectives Apply basic CVP concepts. 1 Explain the term sales mix and its effects on break-even sales. 2 Determine sales mix when a company has limited resources. 3 Indicate how operating leverage affects profitability. 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. LEARNING OBJECTIVE Apply basic CVP concepts. 1 LO 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 20-1 Basic CVP income statement Basic Concepts LO 1 Basic Concepts Illustration 20-2 Detailed CVP income statement LO 1
