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  • Cost-Volume-Profit

    Analysis

    L 11

    Chapter 20

    20-1 Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

  • Learning Objectives

    1. Determine how changes in

    volume affect costs

    2. Calculate operating income

    using contribution margin and

    contribution margin ratio

    3. Use cost-volume-profit (CVP)

    analysis for profit planning

    20-2 Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

  • Learning Objective 1

    Determine how

    changes in volume

    affect costs

    20-3 Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

  • Types of costs

    Variable costs

    Fixed costs

    Mixed costs

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-4

  • Variable Costs Batteries in Tablets

    Number of

    Tablets Produced

    Variable Cost

    per Tablet

    Total

    Variable Cost

    0 tablets $55 $ 0

    25 tablets 55 1,375

    50 tablets 55 2,750

    75 tablets 55 4,125

    100 tablets 55 5,500

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-5

  • Total Variable Costs

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-6

  • Total Fixed Costs

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-7

  • Fixed Costs

    Total

    Fixed Costs

    Number of

    Tablets Produced

    Fixed Cost

    per Tablet

    $12,000 25 tablets $480

    12,000 50 tablets 240

    12,000 75 tablets 160

    12,000 100 tablets 120

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-8

  • Characteristics of

    Variable and Fixed Costs

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-9

  • Mixed Costs Cell Phone

    $100 per month plus $0.10 for each minute of use

    Number of

    Minutes Used

    Total Fixed

    Cost

    Total Variable

    Cost

    Total Cost

    100 minutes $100 $10 $110

    200 minutes 100 20 120

    300 minutes 100 30 130

    400 minutes 100 40 140

    500 minutes 100 50 150

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-10

  • Mixed Costs

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-11

  • Manufacturing Equipment

    Maintenance Costs

    Number of

    Tablets Produced

    Total

    Maintenance

    Cost

    1st Quarter 360 tablets $1,720

    2nd Quarter 415 tablets 1,830

    3rd Quarter 480 tablets 1,960

    4th Quarter 240 tablets 1,480

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-12

    Highest Volume

    Lowest Volume

  • High-Low Method

    Step 1

    Step 1: Identify the highest and lowest levels of

    activity, and calculate the variable cost per unit.

    Variable cost per unit = Change in total cost / Change in volume of activity

    = (Highest cost Lowest cost) / (Highest volume Lowest volume)

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-13

  • High-Low Method

    Step 1

    Step 1: Identify the highest and lowest levels of

    activity, and calculate the variable cost per unit.

    Variable cost per unit = Change in total cost / Change in volume of activity

    = (Highest cost Lowest cost) / (Highest volume Lowest volume)

    = ($1,960 $1,480) / (480 tablets 240 tablets)

    = $480 / 240 tablets

    = $2 per tablet

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-14

  • High-Low Method

    Step 2

    Step 2: Calculate the total fixed cost.

    Total fixed cost = Total mixed cost Total variable cost

    = Total mixed cost (Variable cost per unit Number of units)

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-15

  • High-Low Method

    Step 2

    Step 2: Calculate the total fixed cost.

    Total fixed cost = Total mixed cost Total variable cost

    = Total mixed cost (Variable cost per unit Number of units)

    = $1,960 ($2 per tablet 480 tablets)

    = $1,960 $960

    = $1,000

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-16

  • High-Low Method

    Step 3

    Step 3: Create and use an equation to show the

    behavior of a mixed cost.

    Total mixed cost = (Variable cost per unit Number of units) + Total fixed cost

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-17

  • High-Low Method

    Step 3

    Step 3: Create and use an equation to show the

    behavior of a mixed cost.

    Total mixed cost = (Variable cost per unit Number of units) + Total fixed cost

    Total manufacturing maintenance cost = ($2 per tablet Number of tablets) + $1,000

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-18

  • Estimated manufacturing equipment

    maintenance cost at 400 tablets

    Total manufacturing maintenance cost = ($2 per tablet Number of tablets) + $1,000

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-19

  • Estimated manufacturing equipment

    maintenance cost at 400 tablets

    Total manufacturing maintenance cost = ($2 per tablet Number of tablets) + $1,000

    = ($2 per tablet 400 tablets) + $1,000

    = $1,800

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-20

  • Relevant Range

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-21

  • Following is a list of costs for a furniture

    manufacturer that specializes in wood tables.

    Classify each cost as variable, fixed, or mixed

    relative to tables produced and sold.

    1. Wood used to build tables

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-22

  • Following is a list of costs for a furniture

    manufacturer that specializes in wood tables.

    Classify each cost as variable, fixed, or mixed

    relative to tables produced and sold.

    1. Wood used to build tables

    Variable

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-23

  • Following is a list of costs for a furniture

    manufacturer that specializes in wood tables.

    Classify each cost as variable, fixed, or mixed

    relative to tables produced and sold.

    2. Depreciation on saws and other

    manufacturing equipment

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-24

  • Following is a list of costs for a furniture

    manufacturer that specializes in wood tables.

    Classify each cost as variable, fixed, or mixed

    relative to tables produced and sold.

    2. Depreciation on saws and other

    manufacturing equipment

    Fixed

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-25

  • Following is a list of costs for a furniture

    manufacturer that specializes in wood tables.

    Classify each cost as variable, fixed, or mixed

    relative to tables produced and sold.

    3. Compensation for sales representatives paid

    on a salary plus commission basis

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-26

  • Following is a list of costs for a furniture

    manufacturer that specializes in wood tables.

    Classify each cost as variable, fixed, or mixed

    relative to tables produced and sold.

    3. Compensation for sales representatives paid

    on a salary plus commission basis

    Mixed

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-27

  • Following is a list of costs for a furniture

    manufacturer that specializes in wood tables.

    Classify each cost as variable, fixed, or mixed

    relative to tables produced and sold.

    4. Supervisors salary

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-28

  • Following is a list of costs for a furniture

    manufacturer that specializes in wood tables.

    Classify each cost as variable, fixed, or mixed

    relative to tables produced and sold.

    4. Supervisors salary

    Fixed

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-29

  • Following is a list of costs for a furniture

    manufacturer that specializes in wood tables.

    Classify each cost as variable, fixed, or mixed

    relative to tables produced and sold.

    5. Wages of production workers

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-30

  • Following is a list of costs for a furniture

    manufacturer that specializes in wood tables.

    Classify each cost as variable, fixed, or mixed

    relative to tables produced and sold.

    5. Wages of production workers

    Variable

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-31

  • Learning Objective 2

    Calculate operating

    income using

    contribution margin

    and contribution

    margin ratio

    20-32 Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

  • Contribution Margin

    If Smart Touch Learning sells 200 tablets for $500

    each that incur variable costs of $275 each, then

    the contribution margin is:

    Contribution margin = Net sales revenue Variable costs

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-33

  • Contribution Margin

    If Smart Touch Learning sells 200 tablets for $500

    each that incur variable costs of $275 each, then

    the contribution margin is:

    Contribution margin = Net sales revenue Variable costs

    = ($500 per tablet 200 tablets) ($275 per tablet 200 tablets)

    = $100,000 $55,000

    = $45,000

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-34

  • Unit Contribution Margin

    If Smart Touch Learning sells 200 tablets for $500

    each that incur variable costs of $275 each, then

    the unit contribution margin is:

    Unit contribution margin = Net sales revenue per unit Variable costs per unit

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-35

  • Unit Contribution Margin

    If Smart Touch Learning sells 200 tablets for $500

    each that incur variable costs of $275 each, then

    the unit contribution margin is:

    Unit contribution margin = Net sales revenue per unit Variable costs per unit

    = $500 per tablet $275 per tablet

    = $225 per tablet

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-36

  • Contribution Margin Ratio

    If Smart Touch Learning sells 200 tablets for $500

    each that incur variable costs of $275 each, then

    the contribution margin ratio is:

    Contribution margin ratio = Contribution margin / Net sales revenue

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-37

  • Contribution Margin Ratio

    If Smart Touch Learning sells 200 tablets for $500

    each that incur variable costs of $275 each, then

    the contribution margin ratio is:

    Contribution margin ratio = Contribution margin / Net sales revenue

    = $45,000 / $100,000

    = 45%

    = $225 per tablet / $500 per tablet

    = 45%

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-38

  • Traditional Income

    Statement Format

    Net sales revenue

    Cost of goods sold

    = Gross profit

    Selling and administrative expenses

    = Operating income

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-39

    Period costs (some variable, some fixed)

    Product cost (some variable, some fixed)

  • Contribution Margin

    Income Statement Format

    Net sales revenue

    Variable costs

    = Contribution margin

    Fixed Costs

    = Operating income

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-40

    Some product, some period

    Some product, some period

  • A furniture manufacturer specializes in wood

    tables. The tables sell for $100 and incur $40 in

    variable costs. The company has $6,000 in fixed

    costs per month.

    6. Prepare a contribution margin income statement

    for one month if the company sells 200 tables.

    7. What is the total contribution margin for the month

    when the company sells 200 tables?

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-41

  • 6. Sales revenue (200 tables $100 per table) $ 20,000

    Variable costs (200 tables $40 per table) 8,000

    Contribution margin (200 tables $60 per table) 12,000

    Fixed costs 6,000

    Operating income $ 6,000

    7. Contribution margin = $12,000

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-42

  • A furniture manufacturer specializes in wood

    tables. The tables sell for $100 and incur $40 in

    variable costs. The company has $6,000 in fixed

    costs per month.

    8. What is the unit contribution margin?

    9. What is the contribution margin ratio?

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-43

  • A furniture manufacturer specializes in wood

    tables. The tables sell for $100 and incur $40 in

    variable costs. The company has $6,000 in fixed

    costs per month.

    8. What is the unit contribution margin?

    Unit contribution margin = $100 per table $40 per table = $60 per table

    9. What is the contribution margin ratio?

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-44

  • A furniture manufacturer specializes in wood

    tables. The tables sell for $100 and incur $40 in

    variable costs. The company has $6,000 in fixed

    costs per month.

    8. What is the unit contribution margin?

    Unit contribution margin = $100 per table $40 per table = $60 per table

    9. What is the contribution margin ratio?

    Contribution margin ratio = $60 per table / $100 per table = 60%

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-45

  • Learning Objective 3

    Use cost-volume-profit

    (CVP) analysis for

    profit planning

    20-46 Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall

  • Cost-Volume-Profit Analysis

    Assumes the Following:

    The price per unit does not change as volume changes.

    Managers can classify each cost as variable, fixed, or mixed.

    The only factor that affects total costs is change in volume, which increases variable and mixed

    costs.

    Fixed costs do not change.

    There are no changes in inventory levels.

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-47

  • Target ProfitThree Approaches

    Equation approach

    Contribution margin approach

    Contribution margin ratio approach

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-48

  • Equation Approach

    Net sales revenue Total costs = Operating income

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-49

  • Equation Approach

    Net sales revenue Total costs = Operating income

    Net sales revenue Variable costs Fixed costs = Operating income

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-50

  • Equation Approach

    Smart Touch Learning sells tablets for $500 each, variable costs are $275 each, and fixed costs are $12,000 per month. If the company desires to earn $6,000 in profits each month, how many tablets must it sell?

    Net sales revenue Variable costs Fixed costs = Target profit

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-51

  • Equation Approach

    Smart Touch Learning sells tablets for $500 each, variable costs are $275 each, and fixed costs are $12,000 per month. If the company desires to earn $6,000 in profits each month, how many tablets must it sell?

    Net sales revenue Variable costs Fixed costs = Target profit

    ($500 per unit Units sold) ($275 per unit Units sold) - $12,000 = $ 6,000

    [($500 $275 per unit) Units sold] - $12,000 = $ 6,000

    $225 per unit Units sold = $12,000 + $6,000

    $225 per unit Units sold = $18,000

    Units sold = $18,000 / $225 per unit

    Units sold = 80 units

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-52

  • Equation Approach Check Your Calculation

    Net sales revenue Variable costs Fixed costs = Operating income

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-53

  • Equation Approach Check Your Calculation

    Net sales revenue Variable costs Fixed costs = Operating income

    ($500 per unit 80 units) ($275 per unit 80 units) $12,000 = $6,000

    $40,000 -- $22,000 $12,000 = $6,000

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-54

  • Contribution Margin Approach

    Smart Touch Learning sells tablets for $500 each, variable costs are $275 each, and fixed costs are $12,000 per month. If the company desires to earn $6,000 in profits each month, how many tablets must it sell?

    Required sales in units = Fixed costs + Target profit

    Contribution margin per unit

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-55

  • Contribution Margin Approach

    Smart Touch Learning sells tablets for $500 each, variable costs are $275 each, and fixed costs are $12,000 per month. If the company desires to earn $6,000 in profits each month, how many tablets must it sell?

    Required sales in units = Fixed costs + Target profit

    Contribution margin per unit

    = $12,000 + $6,000

    $225 per unit

    = 80 units

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-56

  • Contribution Margin ApproachCheck Your Calculation

    Net sales revenue

    Variable costs

    = Contribution margin

    Fixed costs

    = Operating income

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-57

  • Contribution Margin ApproachCheck Your Calculation

    Net sales revenue ($500 per unit 80 units) $ 40,000

    Variable costs ($275 per unit 80 units) 22,000

    = Contribution margin ($225 per unit 80 units) 18,000

    Fixed costs 12,000

    = Operating income $ 6,000

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-58

  • Contribution Margin Ratio Approach

    Smart Touch Learning sells tablets for $500 each, variable costs are $275 each, and fixed costs are $12,000 per month. If the company desires to earn $6,000 in profits each month, how many tablets must it sell?

    Required sales in dollars = Fixed costs + Target profit

    Contribution margin ratio

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-59

  • Contribution Margin Ratio Approach

    Smart Touch Learning sells tablets for $500 each, variable costs are $275 each, and fixed costs are $12,000 per month. If the company desires to earn $6,000 in profits each month, how many tablets must it sell?

    Required sales in dollars = Fixed costs + Target profit

    Contribution margin ratio

    = $12,000 + $6,000

    45%

    = $40,000

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-60

  • Breakeven Point Calculations

    for Smart Touch Learning

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-61

  • Breakeven Point Calculations

    for Smart Touch Learning Exhibit 21-6 Breakeven Point Calculations for Smart Touch Learning

    Equation approach

    Net sales revenue Variable costs Fixed Costs = Target Profit

    ($500 per unit Units sold) ($275 per unit Units sold) $12,000 = $ 0

    [($500$275 per unit) Units sold] $12,000 = $ 0

    $225 per unit Units sold = $ 12,000

    Units sold = $ 12,000/$225 per unit

    Units sold = 54 units*

    Contribution Margin Approach

    Contribution Margin Ratio Approach

    *Actual result of 53.3333 rounded up to the next full unit as it is not possible to sell partial tablets.

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-62

  • Breakeven Point Calculations

    for Smart Touch Learning Exhibit 21-6 Breakeven Point Calculations for Smart Touch Learning

    Equation approach

    Net sales revenue Variable costs Fixed Costs = Target Profit

    ($500 per unit Units sold) ($275 per unit Units sold) $12,000 = $ 0

    [($500$275 per unit) Units sold] $12,000 = $ 0

    $225 per unit Units sold = $ 12,000

    Units sold = $ 12,000/$225 per unit

    Units sold = 54 units*

    Contribution Margin Approach

    Required sales in units = Fixed Costs + Target profit

    Contribution margin per unit

    = $12,000 + $0

    $225 per unit

    = 54 units*

    Contribution Margin Ratio Approach

    *Actual result of 53.3333 rounded up to the next full unit as it is not possible to sell partial tablets.

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-63

  • Breakeven Point Calculations

    for Smart Touch Learning Exhibit 21-6 Breakeven Point Calculations for Smart Touch Learning

    Equation approach

    Net sales revenue Variable costs Fixed Costs = Target Profit

    ($500 per unit Units sold) ($275 per unit Units sold) $12,000 = $ 0

    [($500$275 per unit) Units sold] $12,000 = $ 0

    $225 per unit Units sold = $ 12,000

    Units sold = $ 12,000/$225 per unit

    Units sold = 54 units*

    Contribution Margin Approach

    Required sales in units = Fixed Costs + Target profit

    Contribution margin per unit

    = $12,000 + $0

    $225 per unit

    = 54 units*

    Contribution Margin Ratio Approach

    Required sales in dollars = Fixed Costs + Target profit

    Contribution margin ratio

    = $12,000 + $0

    45%

    = $26,667**

    *Actual result of 53.3333 rounded up to the next full unit as it is not possible to sell partial tablets.

    **Actual result of $26,666.6667 rounded up to next full dollar.

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-64

  • Cost-Volume-Profit Graph

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-65

  • A furniture manufacturer specializes in wood

    tables. The tables sell for $100 and incur $40 in

    variable costs. The company has $6,000 in

    fixed costs per month. The company desires to

    earn an operating profit of $12,000 per month.

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-66

  • 10. Calculate the required sales in units to earn the

    target profit using the equation method.

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-67

  • 10. Calculate the required sales in units to earn the

    target profit using the equation method.

    Net sales revenue Variable costs Fixed costs = Target profit

    ($100 per unit Units sold) ($40 per unit Units sold) $6,000 = $12,000

    [($100 $40 per unit) Units sold] $6,000 = $12,000

    $60 per unit Units sold = $ 6,000 + $12,000

    $60 per unit Units sold = $18,000

    Units sold = $18,000 / $60 per unit

    Units sold = 300 units

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-68

  • 11. Calculate the required sales in units to earn the

    target profit using the contribution margin

    method.

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-69

  • 11. Calculate the required sales in units to earn the

    target profit using the contribution margin

    method.

    Required sales in units = Fixed costs + Target profit Contribution margin per unit

    = $6,000 + $12,000

    $100 per unit $40 per unit

    = 300 units

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-70

  • 12. Calculate the required sales in dollars to earn

    the target profit using the contribution margin

    ratio method.

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-71

  • 12. Calculate the required sales in dollars to earn

    the target profit using the contribution margin

    ratio method.

    Contribution margin ratio = $60 per table / $100 per table = 60%

    Required sales in dollars = Fixed costs + Target profit

    Contribution margin ratio

    = $6,000 + $12,000

    60%

    = $30,000

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-72

  • 13. Calculate the required sales in units to

    breakeven using the contribution margin

    method.

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-73

  • 13. Calculate the required sales in units to

    breakeven using the contribution margin

    method.

    Required sales in units = Fixed costs + Target profit

    Contribution margin per unit

    = $6,000 + $0

    $100 per unit $40 per unit

    = 100 units

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-74

  • Change in the Selling PriceContribution Margin Approach

    Smart Touch Learning believes it must cut the selling price to $475 per tablet. Variable costs remain at $275 per tablet. Fixed costs stay at $12,000. How many tablets must be sold to break even?

    Required sales in units = Fixed costs + Target profit

    Contribution margin per unit

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-75

  • Change in the Selling PriceContribution Margin Approach

    Smart Touch Learning believes it must cut the selling price to $475 per tablet. Variable costs remain at $275 per tablet. Fixed costs stay at $12,000. How many tablets must be sold to break even?

    Required sales in units = Fixed costs + Target profit

    Contribution margin per unit

    = $12,000 + $0

    $475 per unit $275 per unit

    = 60 units

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-76

  • Change in the Variable CostsContribution Margin Approach

    Smart Touch Learnings selling price remains at $500 per tablet. Variable costs increase to $285 per tablet. Fixed costs stay at $12,000. How many tablets must be sold to break even?

    Required sales in units = Fixed costs + Target profit

    Contribution margin per unit

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-77

  • Change in the Variable CostsContribution Margin Approach

    Smart Touch Learnings selling price remains at $500 per tablet. Variable costs increase to $285 per tablet. Fixed costs stay at $12,000. How many tablets must be sold to break even?

    Required sales in units = Fixed costs + Target profit

    Contribution margin per unit

    = $12,000 + $0

    $500 per unit $285 per unit

    = 56 units*

    * Rounded up to next full unit

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-78

  • Change in the Fixed CostsContribution Margin Approach

    Smart Touch Learnings selling price remains at $500 per tablet. Variable costs stay at $275 per tablet. Fixed costs increase to $15,000. How many tablets must be sold to break even?

    Required sales in units = Fixed costs + Target profit

    Contribution margin per unit

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-79

  • Change in the Fixed CostsContribution Margin Approach

    Smart Touch Learnings selling price remains at $500 per tablet. Variable costs stay at $275 per tablet. Fixed costs increase to $15,000. How many tablets must be sold to break even?

    Required sales in units = Fixed costs + Target profit

    Contribution margin per unit

    = $15,000 + $0

    $500 per unit $275 per unit

    = 67 units*

    * Rounded up to the next full unit

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-80

  • Effects of Changes in Selling Price,

    Variable Costs, and Fixed Costs

    Exhibit 20-8 Effects of Changes in Selling Price, Variable Costs,

    and Fixed Costs

    Cause Effect Result

    Change Contribution Margin per Unit Breakeven point

    Selling price per unit increases Increases Decreases

    Selling price per unit decreases Decreases Increases

    Variable cost per unit increases Decreases Increases

    Variable cost per unit decreases Increases Decreases

    Total fixed cost increases No effect Increases

    Total fixed cost decreases No effect Decreases

    Copyright 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-81