Using CVP Analysis Example
Suppose the management anticipates
selling 3,200 pairs of pants.
Management is considering an advertising
campaign that would cost $10,000.
It is anticipated that the advertising will
increase sales to 4,000 units.
Should the business advertise?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3-1
Using CVP Analysis Example
3,200 pairs of pants sold with no advertising:
Contribution margin
$89,600
Fixed costs
84,000
Operating income
$ 5,600
4,000 pairs of pants sold with advertising:
Contribution margin
Fixed costs
Operating income
$112,000
94,000
$ 18,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3-2
Using CVP Analysis Example
Instead of advertising, management is
considering reducing the selling price
to $61 per pair of pants.
It is anticipated that this will increase
sales to 4,500 units.
Should management decrease the selling
price per pair of pants to $61?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3-3
Using CVP Analysis Example
3,200 pairs of pants sold with no change
in the selling price:
Operating income = $5,600
4,500 pairs of pants sold at a reduced selling price:
Contribution margin: (4,500 × $19)
Fixed costs
Operating income
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
$85,500
84,000
$ 1,500
3-4
Sensitivity Analysis and
Uncertainty Example
Assume that the Pants Shop can sell
4,000 pairs of pants.
Fixed costs are $84,000.
Contribution margin ratio is 40%.
At the present time the business cannot
handle more than 3,500 pairs of pants.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3-5
Sensitivity Analysis and
Uncertainty Example
To satisfy a demand for 4,000 pairs, management
must acquire additional space for $6,000.
Should the additional space be acquired?
Revenues at breakeven with existing space are
$84,000 ÷ .40 = $210,000.
Revenues at breakeven with additional space are
$90,000 ÷ .40 = $225,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3-6
Sensitivity Analysis and
Uncertainty Example
Operating income at $245,000 revenues with
existing space = ($245,000 × .40)
– $84,000 = $14,000.
(3,500 pairs of pants × $28) – $84,000 = $14,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3-7
Sensitivity Analysis and
Uncertainty Example
Operating income at $280,000 revenues with
additional space = ($280,000 × .40) – $90,000
= $22,000.
(4,000 pairs of pants × $28 contribution margin)
– $90,000 = $22,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3-8
Learning Objective 6
Apply CVP analysis to a company
producing different products.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3-9
Effects of Sales Mix on Income
Pants Shop Example
Management expects to sell 2 shirts at $20 each
for every pair of pants it sells.
This will not require any additional fixed costs.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3 - 10
Effects of Sales Mix on Income
Contribution margin per shirt: $20 – $9 = $11
What is the contribution margin of the mix?
$28 + (2 × $11) = $28 + $22 = $50
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3 - 11
Effects of Sales Mix on Income
$84,000 fixed costs ÷ $50 = 1,680 packages
1,680 × 2 = 3,360 shirts
1,680 × 1 = 1,680 pairs of pants
Total units = 5,040
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3 - 12
Effects of Sales Mix on Income
What is the breakeven in dollars?
3,360 shirts × $20
= $ 67,200
1,680 pairs of pants × $70 = 117,600
$184,800
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3 - 13
Effects of Sales Mix on Income
What is the weighted-average budgeted
contribution margin?
Pants: 1 × $28 + Shirts: 2 × $11
= $50 ÷ 3 = $16.667
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3 - 14
Effects of Sales Mix on Income
The breakeven point for the two products is:
$84,000 ÷ $16.667 = 5,040 units
5,040 × 1/3 = 1,680 pairs of pants
5,040 × 2/3 = 3,360 shirts
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3 - 15
Effects of Sales Mix on Income
Sales mix can be stated in sales dollars:
Sales price
Variable costs
Contribution margin
Contribution margin ratio
Pants Shirts
$70
$40
42
18
$28
$22
40%
55%
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3 - 16
Effects of Sales Mix on Income
Assume the sales mix in dollars
is 63.6% pants and 36.4% shirts.
Weighted contribution would be:
40% × 63.6% = 25.44% pants
55% × 36.4% = 20.02% shirts
45.46%
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3 - 17
Effects of Sales Mix on Income
Breakeven sales dollars is $84,000
÷ 45.46% = $184,778 (rounding).
$184,778 × 63.6% = $117,519 pants sales
$184,778 × 36.4% = $ 67,259 shirt sales
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3 - 18
Learning Objective 7
Adapt CVP analysis to situations
in which a product has more
than one cost driver.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3 - 19
Multiple Cost Drivers Example
Suppose that the business will incur an additional
cost of $10 for preparing documents associated
with the sale of pants to various customers.
Assume that the business sells 3,500
pants to 100 different customers.
What is the operating income from this sale?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3 - 20
Multiple Cost Drivers Example
Revenues: 3,500 × $70
Variable costs:
Pants: 3,500 × $42
Documents: 100 × $10
Total
Contribution margin
Fixed costs
Operating income
$245,000
147,000
1,000
148,000
97,000
84,000
$ 13,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3 - 21
Multiple Cost Drivers
Would the operating income of the Pants Shop
be lower or higher if the business sells pants
to more customers?
The cost structure depends on two cost drivers:
1. Number of units
2. Number of customers
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3 - 22
Learning Objective 8
Distinguish between
contribution margin
and gross margin.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3 - 23
Contribution Margin versus
Gross Margin
Contribution income statement emphasizes
contribution margin.
Financial accounting income statement
emphasizes gross margin.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3 - 24
End of Chapter 3
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
3 - 25