Cost Volume Profit AnalysisChapter 6.ppt

Cost Volume Profit AnalysisChapter 6 The Profit Equation The Profit Equation The Profit Equation The Profit Equation The Profit Equation The Profit Equation Example Here is the information from the Hap Bikes: Example Finding Target Volumes The formula to find a volume expressed in units for a target profit is . . . Finding Target Volumes Proof If Hap sells 900 bikes, its operating profit would be . . . Finding the Break-Even Point The Break-Even Point is the volume level where profits equal zero. To find the break-even point in units, we use the target volume in units equation and set the profit to zero. To find the break-even point in sales dollars, we use the target volume in sales dollars equation and set the profit to zero. Break-Even in Units Let’s use the Hap Bikes information again. Break-Even in Units Break-Even in Sales Dollars Target Volume in Sales Dollars We can calculate the target volume in sales dollars using the contribution margin ratio. Target Volume in Sales Dollars The equation for finding the target volume in sales dollars is . . . Graphic Presentation Consider the following information for Hap Bikes: Graphic Presentation Graphic Presentation Using CVP to Analyze Different Cost Structures Cost structure - The proportion of fixed and variable to total costs of an organization. Operating leverage - The extent to which an organization’s costs structure is made up of fixed costs. Using CVP to Analyze Different Cost Structures Using CVP to Analyze Different Cost Structures Using CVP to Analyze Different Cost Structures Margin of Safety Excess of projected (or actual) sales over the break-even volume. The amount by which sales can fall before the company is in the loss area of the break-even graph. Margin of Safety Hap is currently selling 500 bikes, and we calculated the break-even to be 400 units ($80,000 fixed costs ÷ $200 contribution margin). 6 Slide * INTRODUCTION The Profit Function Breakeven Analysis Differential Cost Analysis Operating