The Break-Even PointThe break-even point is the point in the volume of activity where the organizations revenues and expenses are equal.

Equation ApproachSales revenue Variable expenses Fixed expenses = ProfitX = 400 surf boards

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning Objective2

Contribution-Margin Approach For each additional surf board sold, Curl generates $200 in contribution margin.Consider the following information developed by the accountant at Curl, Inc.:

Contribution-Margin Approach Fixed expenses Unit contribution margin =Break-even point(in units)

Contribution-Margin Approach Here is the proof!

Contribution Margin RatioCalculate the break-even point in sales dollars rather than units by using the contribution margin ratio. Contribution margin Sales= CM Ratio

Contribution Margin Ratio

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning Objective3

Graphing Cost-Volume-Profit RelationshipsViewing CVP relationships in a graph gives managers a perspective that can be obtained in no other way.Consider the following information for Curl, Inc.:

Cost-Volume-Profit GraphFixed expensesTotal expensesTotal salesBreak-evenpointProfit areaLoss area

Sheet1

FCTCTR

0.080,00080,0000.0

10080,000110,00050,000

20080,000140,000100,000

30080,000170,000150,000

40080,000200,000200,000

50080,000230,000250,000

60080,000260,000300,000

70080,000290,000350,000

80080,000320,000400,000

Sheet2

450,000

Dollars

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

100200300400500600700800

Units

Sheet3

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning Objective4

Target Net Profit We can determine the number of surfboards that Curl must sell to earn a profit of $100,000 using the contribution margin approach.See the Equation Approach example in text book (LO1)

Applying CVP AnalysisSafety MarginThe difference between budgeted sales revenue and break-even sales revenue.The amount by which sales can drop before losses begin to be incurred.See example the Safety Margin example in text book LO4)

What would happen to BREAK EVEN POINT if there is a:

Changes in Fixed Costs: See example in text book (LO4)Changes in Unit Contribution Margin: See example in text book (LO4) for:Unit Variable expensesSale prices

Predicting Profit Given Expected VolumeSee the example in text book (LO4)

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning Objective5

CVP Analysis with Multiple ProductsFor a company with more than one product, sales mix is the relative combination in which a companys products are sold.Different products have different selling prices, cost structures, and contribution margins. See the example in text book (LO5)

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning Objective6

Assumptions UnderlyingCVP AnalysisSelling price is constant throughout the entire relevant range.Costs are linear over the relevant range.In multi-product companies, the sales mix is constant.In manufacturing firms, inventories do not change (units produced = units sold).

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning Objective7 11 can be found in the text book.

End of Chapter 7We madeit!