Break Even Point
Variable Costs
• Variable costs are costs that vary in proportion to
changes in the activity base.
• When the activity base is units produced, direct
materials and direct labor costs are normally
classified as variable costs.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Fixed Costs
• Fixed costs are costs that remain the same in total
dollar amount as the activity base changes.
• When the activity base is units produced, many
factory overhead costs such as straight-line
depreciation are classified as fixed costs.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Mixed Costs
• Mixed costs are costs that have characteristics of both
a variable and a fixed cost. Mixed costs are
sometimes called semivariable or semifixed costs.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost-Volume-Profit Relationships
• Cost-volume-profit analysis is the examination of the
relationships among selling prices, sales and
production volume, costs, expenses, and profits.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Contribution Margin
• Contribution margin is the excess of sales over
variable costs, computed as follows:
Contribution Margin = Sales – Variable Costs
• Contribution margin covers fixed costs. Once the fixed
costs are covered, any additional contribution margin
increases income from operations.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Contribution Margin Ratio
(slide 1 of 2)
• The contribution margin ratio, sometimes called the
profit-volume ratio, indicates the percentage of each
sales dollar available to cover fixed costs and to
provide income from operations.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Contribution Margin Ratio
(slide 2 of 2)
• The contribution margin ratio is most useful when the
increase or decrease in sales volume is measured in
sales dollars. In this case, the change in sales dollars
multiplied by the contribution margin ratio equals the
change in income from operations, computed as
follows:
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Unit Contribution Margin
• The unit contribution margin is useful for analyzing the
profit potential of proposed decisions.
• The unit contribution margin is computed as:
Unit Contribution Margin = Sales Price per Unit – Variable Cost per Unit
• The unit contribution margin is most useful when the
increase or decrease in sales volume is measured in
sales units (quantities). In this case, the change in sales
volume (units) multiplied by the unit contribution
margin equals the change in income from operations,
computed as follows:
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Break-Even Point
(slide 1 of 2)
• The break-even point is the level of operations at
which a company’s revenues and expenses are equal.
• At break-even, a company reports neither income nor
a loss from operations.
• The break even-point in sales units is computed as
follows:
Fixed Costs
Break-Even Sales (units) =
Unit Contribution Margin
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Break-Even Point
(slide 2 of 2)
• The break-even point in sales dollars can be
determined directly as follows:
Fixed Costs
Break-Even Sales (dollars) =
Contribution Margin Ratio
o The contribution margin ratio can be computed using the unit
contribution margin and unit selling price as follows:
Unit Contribution Margin
Contribution Margin Ratio =
Unit Selling Price
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Effect of Changes in Unit Variable Costs
• Unit variable costs do not change with changes in the level of
activity. However, unit variable costs may be affected by other
factors such as changes in the cost per unit of direct materials,
changes in the wage rate for direct labor, or changes in the
sales commission paid to salespeople.
• Changes in unit variable costs affect the break-even point as
follows:
o Increases in unit variable costs increase the break-even point.
o Decreases in unit variable costs decrease the break-even point.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Effect of Changes in Unit Selling Price
• Changes in the unit selling price affect the break-even
point as follows:
o Increases in the unit selling price decrease the break-even
point.
o Decreases in the unit selling price increase the break-even
point.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Target Profit
• The sales required to earn a target or desired amount
of profit is determined by modifying the break-even
equation as follows:
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
