HFT 3431HFT 3431

Chapter 7Chapter 7

Cost-Volume-Profit AnalysisCost-Volume-Profit Analysis

Cost Volume Profit AnalysisCost Volume Profit Analysis

What Is the Break-Even Point?What Is the Break-Even Point? What Is the Profit at Occupancy What Is the Profit at Occupancy

Percentages Above Break-Even?Percentages Above Break-Even? How Do Increases in Fixed Charges How Do Increases in Fixed Charges

Affect Break-Even?Affect Break-Even? How Many More Rooms Must Be Sold How Many More Rooms Must Be Sold

to Recover Cost Increases?to Recover Cost Increases?

Cost Volume Profit AnalysisCost Volume Profit Analysis

How Many Rooms Must Be Sold to How Many Rooms Must Be Sold to Reach a Certain Profit?Reach a Certain Profit?

What Is the Effect of Profits When What Is the Effect of Profits When Prices, Variable Costs, and Fixed Prices, Variable Costs, and Fixed Costs Change?Costs Change?

How Do Labor Rate Changes Affect How Do Labor Rate Changes Affect Profits?Profits?

Cost-Volume Profit Cost-Volume Profit AssumptionsAssumptions

Fixed Costs Remain Constant During Fixed Costs Remain Constant During the Period Being Analyzed.the Period Being Analyzed.

Variable Costs Fluctuate in a Linear Variable Costs Fluctuate in a Linear Fashion With Revenues.Fashion With Revenues.

Variable Costs Are Constant on a Per Variable Costs Are Constant on a Per Unit Basis.Unit Basis.

Cost-Volume Profit Cost-Volume Profit Assumptions Assumptions

Productivity Remains Constant.Productivity Remains Constant. Revenues Are Proportional to Revenues Are Proportional to

Variable Costs.Variable Costs. There Are No Volume Discounts.There Are No Volume Discounts.

Cost-Volume Profit Cost-Volume Profit Assumptions Assumptions

All Costs Can Be Broken Down Into All Costs Can Be Broken Down Into Their Fixed and Variable Their Fixed and Variable Components.Components.

Joint Costs Are Not Eliminated When Joint Costs Are Not Eliminated When One Department Is.One Department Is.

CVP Basic FormulaCVP Basic Formula

How Much Should Be Charged to How Much Should Be Charged to Break-Even?Break-Even?

10 Room Motel10 Room Motel Variable Costs Are $5 Per RoomVariable Costs Are $5 Per Room Fixed Costs Are $2,500Fixed Costs Are $2,500

CVP Basic FormulaCVP Basic Formula

250 Rooms Will Be Sold250 Rooms Will Be Sold

SP = VC Per Room + (Fixed Costs / SP = VC Per Room + (Fixed Costs / Number Rooms Sold)Number Rooms Sold)

SP = $5 +( $2,500 / 250)SP = $5 +( $2,500 / 250) SP = $15 Per RoomSP = $15 Per Room

Most Common Expression Most Common Expression of CVP Analysis Is a Graphof CVP Analysis Is a Graph

Fixed Costs

0

1000

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5000

6000

7000

0 100 200 300

Rooms Sold

$ Fixed Costs

Most Common Expression Most Common Expression of CVP Analysis Is a Graphof CVP Analysis Is a Graph

Variable Costs

0

1000

2000

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4000

5000

6000

7000

0 100 200 300

Rooms Sold

$ VariableCosts

Most Common Expression Most Common Expression of CVP Analysis Is a Graphof CVP Analysis Is a Graph

Total Costs

0

1000

2000

3000

4000

5000

6000

7000

0 100 200 300

Rooms Sold

$ Total Costs

Most Common Expression Most Common Expression of CVP Analysis Is a Graphof CVP Analysis Is a Graph

Revenue

0500

100015002000250030003500400045005000

0 100 200 300

Rooms Sold

$ Revenue

Most Common Expression Most Common Expression of CVP Analysis Is a Graphof CVP Analysis Is a Graph

Break - Even

0

1000

2000

3000

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5000

0 100 200 300

Rooms

$

Fixed Costs Variable Costs Total Costs Revenue

Profit

Breakeven

Loss but cover FC

Loss

CVP Basic FormulaCVP Basic Formula

How Much Should Be Charged to How Much Should Be Charged to Earn $2,000 in a 30 Day Period?Earn $2,000 in a 30 Day Period?

10 Room Motel10 Room Motel Variable Costs Are $5 Per RoomVariable Costs Are $5 Per Room Fixed Costs Are $2,500Fixed Costs Are $2,500

CVP Basic FormulaCVP Basic Formula

250 Rooms Will Be Sold250 Rooms Will Be Sold

SP = VC Per Room + (Profit + FC) / SP = VC Per Room + (Profit + FC) / Number Rooms SoldNumber Rooms Sold

SP = $5 +( $2,000 + $2,500) / 250SP = $5 +( $2,000 + $2,500) / 250 SP = $23 Per RoomSP = $23 Per Room

Most Common Expression Most Common Expression of CVP Analysis Is a Graphof CVP Analysis Is a Graph

With $2,000 Profit

0

1000

2000

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6000

7000

8000

0 100 200 300

Rooms Sold

$

Fixed + Profit

VariableCosts

Total Costs

Revenue

CVP Formula for Single CVP Formula for Single Product AnalysisProduct Analysis

I = Net IncomeI = Net Income S = Selling PriceS = Selling Price X = Units SoldX = Units Sold V = Variable Costs Per UnitV = Variable Costs Per Unit F = Total Fixed Costs (Plus Profit)F = Total Fixed Costs (Plus Profit)

CVP Formula for Single CVP Formula for Single Product AnalysisProduct Analysis

SX = Total RevenueSX = Total Revenue VX = Total Variable CostsVX = Total Variable Costs

Basic Formula for Break-Even Basic Formula for Break-Even (Income Equals 0)(Income Equals 0)

0 = SX - VX - F0 = SX - VX - F

Break-Even Formula Break-Even Formula VariationsVariations

Units Sold at Break-Even Units Sold at Break-Even X = F / (S - V)X = F / (S - V) Fixed Costs at Break-Even Fixed Costs at Break-Even F = SX - VXF = SX - VX Selling Price at Break-Even Selling Price at Break-Even S = (F / X) + VS = (F / X) + V

Break-Even Formula Break-Even Formula Variations Variations

Variable Cost Per Unit at Break-Even Variable Cost Per Unit at Break-Even V = S - (F / X)V = S - (F / X)

Most Hospitality Operations Sell Most Hospitality Operations Sell Multiple Products. Therefore, We Multiple Products. Therefore, We Need Additional Tools.Need Additional Tools.

Contribution MarginContribution Margin

Contribution Margin (CM) Is the Contribution Margin (CM) Is the Selling Price, or Sales, Minus the Selling Price, or Sales, Minus the Variable Cost(s).Variable Cost(s).

Contribution Margin Percentage Contribution Margin Percentage (Ratio) Is the CM Divided by the (Ratio) Is the CM Divided by the Selling Price (or Sales).Selling Price (or Sales).

Contribution MarginContribution Margin

To Get Break-Even in Units, Divide To Get Break-Even in Units, Divide the Fixed Costs by the Contribution the Fixed Costs by the Contribution Margin.Margin.

To Get Break-Even in Sales Dollars, To Get Break-Even in Sales Dollars, Divide the Fixed Costs by the Divide the Fixed Costs by the Contribution Margin Percentage.Contribution Margin Percentage.

Contribution MarginContribution Margin

Since Our Products Have Different Since Our Products Have Different CM, We Use CM Percent (Weighted) a CM, We Use CM Percent (Weighted) a Lot.Lot.

Weighted Contribution Weighted Contribution Margin PercentMargin Percent

The Contribution Margin Percent, or The Contribution Margin Percent, or Contribution Margin Ratio (CMR) Contribution Margin Ratio (CMR) Says That the Amount Available to Says That the Amount Available to Cover Fixed Costs Is the CMR Times Cover Fixed Costs Is the CMR Times the Sales Dollars.the Sales Dollars.

Weighted Contribution Weighted Contribution Margin PercentMargin Percent

The Weighted CMR Is Computed As The Weighted CMR Is Computed As Follows:Follows:

(Total Revenue - Total Variable (Total Revenue - Total Variable Costs) / Total RevenueCosts) / Total Revenue

Weighted Contribution Weighted Contribution Margin PercentMargin Percent

Another Way of Looking at it is to Another Way of Looking at it is to Take the Sales Mix Percentage for Take the Sales Mix Percentage for Each Area (Which in Total Must Add Each Area (Which in Total Must Add up to 100%) and Multiply That up to 100%) and Multiply That Percentage by the CMR for the Percentage by the CMR for the Particular Area. Then Add All Particular Area. Then Add All Results to Get the Weighted CMR.Results to Get the Weighted CMR.

Weighted Contribution Weighted Contribution Margin PercentMargin Percent

Divide the Weighted CMR Into the Divide the Weighted CMR Into the Fixed Costs (and Profit if Applicable) Fixed Costs (and Profit if Applicable) and the Result is the Required Sales and the Result is the Required Sales Level.Level.

Margin of SafetyMargin of Safety

Excess of Budgeted or Actual Sales Excess of Budgeted or Actual Sales Over Sales at Break-EvenOver Sales at Break-Even

Expressed in Units or DollarsExpressed in Units or Dollars

Sensitivity AnalysisSensitivity Analysis

Study of the Sensitivity of Dependent Study of the Sensitivity of Dependent Variables to Changes in Independent Variables to Changes in Independent VariablesVariables

Looks at the Incremental Number of Looks at the Incremental Number of Units Required to Sold to Cover Units Required to Sold to Cover Additional CostsAdditional Costs

Operating LeverageOperating Leverage

Extent to Which Expenses Are Fixed Extent to Which Expenses Are Fixed Rather Than VariableRather Than Variable

Highly Levered When Fixed Costs to Highly Levered When Fixed Costs to Variable Costs Is HighVariable Costs Is High

Highly Levered Means a Small Highly Levered Means a Small Increase in Sales Yields a Large Increase in Sales Yields a Large Profit (Above Break-Even)Profit (Above Break-Even)

AssignmentAssignment

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