Kế toán, kiểm toán - Chapter eleven: Cost behavior, operating leverage, and profitability analysis

Chapter ElevenCost Behavior, Operating Leverage, and Profitability Analysis© 2015 McGraw-Hill Education.Fixed Cost BehaviorConsider the followingconcert example where theband will be paid $48,000 regardless of the number of tickets sold.When activity . . . . 11-2Fixed Cost Behavior $48,000 ÷ 3,000 Tickets = $16.00 per Ticket 11-3Operating Leverage A measure of the extent to which fixedcosts are being used in an organization. Operating leverage is greatest in companies that have a high proportion of fixed costs in relation to variable costs.Consider the followingconcert example whereall costs are fixed.Fixed CostsSmallpercentagechange inrevenueLargepercentagechange inprofits 11-4Operating LeverageWhen all costs are fixed, every additional sales dollar contributes one dollar to gross profit.10% RevenueIncrease90% GrossProfit Increase 11-5Shifting the cost structure from fixed to variable not only reduces risk but also the potential for profits.Risk and Reward Assessment10% RevenueIncrease10% GrossProfit Increase 11-6Risk and Reward AssessmentRisk refers to the possibility thatsacrifices may exceed benefits.Risk may be reduced byconverting fixed costs into variable costs.Let’s see what happens to the concert example if the band receives $16 perticket sold instead of a fixed $48,000. 11-7The total variable cost increases in direct proportion to the number of tickets sold.Variable unit cost per ticket remains at$16 regardless of the number of tickets sold.Variable Cost Behavior 11-8Variable Cost BehaviorTotal variable cost increases in direct proportion to the number of units sold.The behavior of variable cost perunit is contradictory to the word variable, because variable cost per unit remains constant regardless of how many units are sold. 11-9Variable Cost BehaviorWhen activity . . .Consider the concert example where a band receives $16 for each ticket sold. The more sold will increase the band’s take from the concert, but they can only receive a constant $16 from each individual ticket sold. 11-10For Biltmore, this means that a 10 % increase in sales results in a 40 % increase in net income (or 10% x 4).Measuring Operating Leverage Using Contribution Margin$140$20BraggOperatingLeverage== 7BiltmoreOperatingLeverage=$80$20= 4 11-11VariableCostsFixedCostsEffect of Cost Structure on Profit Stability 11-12Mixed, or Semivariable, CostsMixed costs ( or semivariable costs) include both fixed and variable components.For example, Star Productions, Inc., has to pay a janitorial company a base fee of $1,000 plus $20 per hour required to do each cleanup job. The $1,000 base fee is fixed. The $20 per hour is variable. If 60 hours are required to accomplish a cleanup, the total mixed cost is:$1,000 + ($20 x 60 hours) = $2,200 11-13ActivityTotal CostRelevantRangeThe Relevant RangeOur variable cost assumption (constant unit variable cost) applies within the relevant range.Possible VariableCost BehaviorOur VariableCost Assumption 11-14The Equation MethodAt the break-even point:Sales = Variable cost + Fixed costWe can look at the above equation like this: 11-15Determining the Contribution Margin per UnitThe contribution margin per bottle of Delatine is:Break-evenvolume in units=Fixed costsContribution margin per unit=$60,000$12= 5,000 units 11-16Determining the Break-even PointBreak-evenvolume in dollars=Fixed costsContribution margin ratio=$60,000.33333= $180,000The break-even sales volume expressed in dollars can also be determined by dividing the fixed cost by the contribution margin ratio (which is contribution margin divided by sales) computed using either total or per unit figures.Contribution margin ratio = Contribution margin ÷ Sales$60,000$60,000 / $180,000= 11-17Calculating the Margin of SafetyMargin ofsafety=Budgeted sales – Break-even salesBudgeted salesMargin ofsafety=$122,500 – $52,500$122,500= 57.14% 11-18End of Chapter Eleven 11-19