Kế toán, kiểm toán - Chapter 6: Financial modeling for short - Term decision - making

1Financial Modeling for Short-Term Decision-MakingCHAPTER 6Managerial Accounting 11E Maher/Stickney/WeilPowerPoint Presentation by LuAnn BeanProfessor of AccountingFlorida Institute of Technology© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2CHAPTER GOALThis chapter explains and illustrates financial modeling. Financial modeling canProvide an overview of an organization’s financial activitiesHelp managers make specific decisionsFinancial modeling relies on concepts of fixed and variable cost behavior.☼☼3FINANCIAL MODELFinancial modeling enables analysts to test the interaction of economic variables in a variety of settings. It requires analysts to develop a set of equations that represents a company’s operating and financial relations.LO 14COST-VOLUME-PROFIT (CVP)CVP can be used to answer questions such as What effect on profit can GM expect if it builds a larger SUV?How will NBC’s profit change if ratings increase for its evening news program?How many subscribers must a Dish Network obtain to break even for the year?What happens if Verizon reduces fees charged to customers?LO 25EXAMPLE: Early Horizons DaycareEarly Horizons Daycare is a daycare center that defines a unit of output as “service provided for 1 child for a month.” Building capacity is 30 children. An accountant developed the following estimates:LO 2ContinuedPrice per child per month$ 600Variable cost per child per month200Fixed costs per month5,000EHD6CAPACITY and COSTS Early Horizons Daycare has a capacity of 20 units (relevant range), after which it must hire more staff.Variable costs includeSnacks and food Supplies A portion of insuranceFixed costs include:Rent and utilitiesA portion of insuranceMinimum staffingLO 2EHD7BREAK-EVEN POINT: DefinitionIs the point in the basic CVP model where revenues equal costs.Total Revenue = Total CostsLO 28BREAK-EVEN: Table FormatUsing break-even computations:LO 2Sales Revenue (12.5 X $600)$ 7,500Less Variable costs (12.5 X $200)2,500Contribution Margin (CM)$ 5,000Less Fixed costs5,000Operating profit$ 0EHD9CONTRIBUTION MARGIN: DefinitionIs the excess of revenue over variable costs.Total Revenue – Variable CostsLO 210Can we use contribution margin to compute break- even (BE) volume?YES! BE Volume = Fixed cost / CM per childLO 2MANAGERS WANT TO KNOW!EHD11CONTRIBUTION MARGIN APPROACHUsing the contribution margin approach:LO 2EHDBreak-even Volume = Fixed Costs / CM per child= $5,000 / $400= 12.5 childrenClick the button to skip equation approach12EQUATION APPROACHUsing the equation approach (Operating profit at break-even = 0):LO 2EHDOperating profit 0= Sales revenue - Costs= Sales revenue -Variable costs (VC) – Fixed costs (FC)= (Unit selling price (SP) × Sales volume) - (VC per unit × Sales volume) - FC ($600 - $200) × Sales volume = $5,000Sales volumeBE = $5,000/$400 = 12.5 children/month13Can we graph the relationships in CVP analysis?YES! LO 2MANAGERS WANT TO KNOW!14LO 2EXHIBIT 6.1By graphing revenues and costs on same graph, you can find BE, profit and loss areas. Break-even Volume = Fixed Costs / CMEHD15LO 2EXHIBIT 6.2Slope of line is variable cost per unit. Break-even Volume = Fixed Costs / CMEHD16TARGET PROFIT: CM ApproachLO 2Target profit Volume = (Fixed costs + Target Profit) / CM = ($5,000 + $3,000) / $400Sales revenue (20*$600)$ 12,000Less Variable costs (20*$200)4,000Contribution Margin$ 8,000Less Fixed costs5,000Operating profit$ 3,000EHDContinued# children = 2017TARGET PROFIT: Equation ApproachLO 2Sales revenue – Variable costs - Fixed costs = Operating Profit ($600 - $200) × Sales volume - $5,000 = $3,000 $400*Sales volume = $8,000Sales revenue (20 X $600)$ 12,000Less Variable costs (20 X $200)4,000Contribution Margin$ 8,000Less Fixed costs5,000Operating profit$ 3,000EHDContinuedSales volume = 20 children18TARGET PROFIT: ReminderLO 3Target profit Volume = (Fixed costs + Target Profit) / CM Sales revenue (20 X $600)$ 12,000Less Variable costs (20 X $200)4,000Contribution Margin$ 8,000Less Fixed costs5,000Operating profit$ 3,000EHDContinued19EARLY HORIZONS DAYCARE: Sensitivity AnalysisAssumptions Price/child$ 600$ 600$ 600$ 660 VC/child$ 200$ 200$ 210$ 200 Monthly FC$5,000$4,500$5,000$5,000 Children enrolled20202018Model results: ISSales revenue$ 12,000$ 12,000$ 12,000$ 11,880Less VC4,0004,0004,2003,600 Total CM$8,000$8,000$7,800$ 8,280Less FC5,0004,5005,0005,000Operating profit$3,000$3,500$2,800$ 3,280LO 3Base CostFC $500VC $10Price $60, Vol. 2Alt #1Alt #2Alt #3EHDEXHIBIT 6.320MARGIN OF SAFETY: DefinitionIs the excess of projected (or actual) sales units over Break-even unit sales level.Sales units – BE Sales units orSales dollars – BE Sales dollarsLO 321COST STRUCTURE: DefinitionRefers to the proportion of fixed and variable costs to total costs.LO 4OPERATING LEVERAGE: DefinitionIs the extent to which an organization’s cost structure is made up of fixed costs.Note: the higher the fixed costs, the higher the break-even point.22What is the contribution margin ratio?Contribution margin ratio (CMR) is the contribution amount per dollar of sales.CM / Sales LO 423LO 6MANAGERS WANT TO KNOW!How can a company determine the effect of taxes will be on its profits?After tax profits = Before tax profits X (1 - tax rate)EHD24SUMMARY OF SIMPLIFYING CVP ASSUMPTIONSCan separate total costs into fixed and variableCost and revenue behavior is linear. Implies the following in the relevant rangeTotal fixed costs do not change Variable costs per unit remain constantSelling price per unit remains constantProduct mix remains constant over relevant rangeLO 725USING ABC FOR EHD Previously, Early Horizons Daycare used a financial model with only volume (number of children) as the cost driver. What if multiple cost drivers using the cost hierarchy are identified and used? LO 8EHD26Activity CategoryExampleCapacitySize limitationsBuilding size: 30 childrenCustomerNeedsChildren transportedProductProduction needsField tripsBatchBatchA room of 5 childrenUnitVariable costsChildHIERARCHY OF COSTS: ReminderLO 827COST EQUATIONLO 8EHDTotal Cost = (Unit-level cost × #children) + (Batch-level cost × # rooms) + (Product-level cost × #field trips) + (Customer-level cost × #children transported) + (Capacity-level costs × #facilities)Continued28EHD: ABC and Sensitivity AnalysisSales$ 12,000$ 13,200$ 9,000Unit-level costs400440300Batch-level costs2,8003,5002,100Product-level costs300300300Customer-level costs800800500Facility-level costs4,7004,7004,700Operating profits$ 3,000$ 3,480$ 1,100LO 8Base CaseIncrease to 22Decrease to 15EHDEXHIBIT 6.829End of CHAPTER 6