Cornerstones of Managerial Accounting, 3Rd Edition

Cornerstones of Managerial Accounting, 3rd edition

Mowen/Hansen/Heitger

Chapter 4

Learning Objectives

LO1.Determine the break-even point in number of units and in total sales dollars.

•At break even, total costs (variable and fixed) equal total sales revenue.

•Break-even units equal total fixed costs divided by the contribution margin(price minus variable cost per unit).

•Break-even revenue equals total fixed costs divided by the contribution margin ratio.

LO2.Determine the number of units that must be sold, and the amount of revenue required, to earn a targeted profit.

•To earn a target (desired) profit, total costs (variable and fixed) plus theamount of target profit must equal total sales revenue.

•Units to earn target profit equal total fixed costs plus target profit divided bythe contribution margin.

•Sales revenue to earn target profit equals total fixed costs plus target profit divided by the contribution margin ratio.

LO3.Prepare a profit-volume graph and a cost-volume-profit graph, and explain the meaning of each.

•CVP assumes linear revenue and cost functions, no finished goods endinginventories, constant sales mix, and that selling prices and fixed and variablecosts are known with certainty.

•Profit-volumegraphsplottherelationshipbetweenprofit(operatingincome) and units sold. Break-even units are shown where the profit linecrosses the horizontal axis.

•CVP graphs plot a line for total costs and a line for total sales revenue. Theintersection of these two lines is the break-even point in units.

LO4.Apply cost-volume-profit analysis in a multiple-product setting.

•Multiple-product analysis requires the expected sales mix.

•Break-even units for each product will change as the sales mix changes.

•Increased sales of high contribution margin products decrease the break-evenpoint.

•Increased sales of low contribution margin products increase the break-evenpoint.

LO5.Explain the impact of risk, uncertainty, and changing variables on cost-volume-profit analysis.

•Uncertainty regarding costs, prices, and sales mix affect the break-evenpoint.

•Sensitivity analysis allows managers to vary costs, prices, and sales mix toshow various possible break-even points.

•Margin of safety shows how far the company's actual sales and/or units areabove or below the break-even point.

•Operating leverage is the use of fixed costs to increase the percentagechanges in profits as sales activity changes.