AKUNTANSI MANAJEMEN

SESI 7:
Analisis Cost Volume Profit (CVP) *
Achmad Zaky,MSA.,Ak.,SAS.,CMA.,CA
* Slide ini di sadur dari Slide Resmi Hansen-Mowen 8Th Edition
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COST-VOLUME-PROFIT (CVP)
CVP expresses:
▫ # units that must be sold to break even
▫ Impact of a given reduction in fixed costs on
break-even point
▫ Impact of an increase in price on profit
▫ Sensitivity analysis of impact of various price or
cost levels on profit
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BREAK-EVEN POINT: Definition

Is the point where total revenue

equals total cost; the point of
zero profit.
WHITTIER CO.: Background
Operating income for mulching lawn mower

Sales (1,000 units @ $400) $ 400,000

Less: Variable expenses 325,000
Contribution margin $ 75,000
Less: Fixed expenses 45,000
Operating income $ 30,000

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FORMULA: Break-Even

Break-even is 0 profit.

Break-even:
0 = Sales revenue – Variable expenses – Fixed expenses
0 = ($400 x Units) – ($325 x Units) - $45,000
($75 x Units) = $45,000
Units = 600
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CONTRIBUTION MARGIN: Definition

Is sales revenue minus variable

costs (Sales – VC).
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FORMULA: Break-Even

Break-even using contribution margin.

Break-even units:
# Units = Fixed cost / Unit contribution margin
# Units = $45,000 / ($400 - $325)
= 600
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WHITTIER CO.: √Income Statement

√Check-up on break-even
Sales (600 units @ $400) $ 240,000
Less: Variable expenses 195,000
Contribution margin $ 45,000
Less: Fixed expenses 45,000
Operating income $ 0

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FORMULA: Target Profit

Target profit is profit desired.

Target profit in dollars:

$ 60,000 = ($400 x Units) – ($325 x Units) - $45,000
$105,000 = $75,000 x Units
Units = 1,400
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FORMULA: Target Profit in Units

Target profit is profit desired.

Target profit in units:

# Units = (Fixed cost + Target profit)
Unit contribution margin
# Units = ($45,000 + $60,000) / ($400 - $325)
# Units = 1,400
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WHITTIER CO.: √Income Statement

√Check-up on target profit

Sales (1400 units @ $400) $ 560,000

Less: Variable expenses 455,000
Contribution margin $ 105,000
Less: Fixed expenses 45,000
Operating income $ 60,000

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FORMULA: Target Profit % Sales

Target profit can be calculated as % of

revenue.

Target profit as % of sales:

0.15 ($400 x Units) =
($400 x Units) – ($325 x Units) - $45,000
$60 x Units = ($75 x Units) - $45,000
# Units = 3,000
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FORMULA: After-Tax Target Profit

If Whittier has a 35% tax rate & wants

Net income (after-tax profit) of $48,750.

After-tax target profit:

Net income = Operating income (1 – Tax rate)
$48,750 = Operating income (1 – 0.35)
$75,000 = Operating income
 LO 1

WHITTIER CO.: √Income Statement

√Check-up on target profit

Sales (1,600 units @ $400) $ 640,000
Less: Variable expenses 520,000
Contribution margin $ 120,000
Less: Fixed expenses 45,000
Operating income $75,000
Less: Income taxes (35%) 26,250
Net income $ 48,750

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VARIABLE COST RATIO: Definition

Is the proportion of each sales

dollar used to cover variable
costs.
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CONTRIBUTION MARGIN RATIO:

Definition

Is the proportion of each sales

dollar available to cover fixed
costs & provide profit.
WHITTIER CO.: Background
CMR for mulching lawn mower.

Sales (1,000 units @ $400) $ 400,000 100.00%

Less: Variable expenses 325,000 81.25%
Contribution margin $ 75,000 18.75%
Less: Fixed expenses 45,000
Operating income $ 30,000

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FORMULA: Break-Even CMR

Contribution margin ratio (CMR) makes

calculation easier.

0 = Sales (1 – VC rate) – Fixed Costs

= Sales (1 – 0.8125) - $45,000
Sales = $240,000
OR
Break-even Sales = Fixed cost / CMR
$240,000 = $45,000 / 0.1875
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LO

Can we use CVP if

Whittier has more than 1
product?

Yes. But we have to add direct

fixed expenses into the
analysis.
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DIRECT FIXED EXPENSES: Definition

Are fixed costs that can be

traced to each product and
would be avoided if the product
did not exist.
WHITTIER CO.: Sales Background

Operating income for multiple products.

Mulching Riding Total
Sales (1,000 units @ $400) $ 480,000 $640,000 $1,120,000
Less: Variable expenses 390,000 480,000 870,000
Contribution margin $ 90,000 $160,000 $ 250,000
Less: Direct fixed exp. 30,000 40,000 70,000
Product margin $ 60,000 $120,000 $ 180,000
Less: Fixed expenses 26,250
Operating income $ 153,750

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SALES MIX: Definition

Is the relative
combination of products
being sold.
WHITTIER CO.: Sales Mix & CVP Background
Margin for multiple products

Unit Package
Product Price VC CM Cont. Mix Margin*
Mulching $400 $325 $ 75 3 $ 225
Riding 800 600 200 2 400
Package Total $ 625

*Margin = Units in package x CM

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FORMULA: Break-Even Multiple Products

If Whittier has 2 products, calculate

break-even separately.

Break-Even = Fixed costs / (Price – Unit VC)

Mulching mower = $30,000 / $75
= 400 units
Riding mower = $40,000 / $200
= 200 units
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FORMULA: Break-Even Packages

Contribution margin approach to

multiple products.

Break-even packages = Fixed cost / Package CM

= $96,250 / $625
= 154 Packages
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BREAK-EVEN SOLUTION Mulching mower sales =

$400 x 3 x 154 packages.
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COST-PROFIT-VOLUME GRAPH
AKUNTANSI MANAJEMEN

SESI 8:
Tactical Decision Making (TDM) *
Achmad Zaky,MSA.,Ak.,SAS.,CMA.,CA
* Slide ini di sadur dari Slide Resmi Hansen-Mowen 8Th Edition
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Is there a difference
between tactical and
strategic decisions?

Yes! Tactical & strategic

decisions differ on the time
period affected.
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TACTICAL DECISION MAKING:

Definition

Consists of choosing among

alternatives with an immediate
or limited end in view.
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STRATEGIC DECISION MAKING:

Definition

Is selecting among alternative

strategies so that long term
competitive advantage is
established.
Model for Making Tactical Decisions
Step 1. Recognize and define the problem.
Increase capacity for warehousing and production.
Step 2. Identify alternatives as possible solutions to
the problem; eliminate alternatives that are
clearly not feasible.
1. Build new facility
2. Lease larger facility; sublease current facility
3. Lease additional facility
4. Lease warehouse space
5. Buy shafts and brushings; free up needed space

Continued
Model for Making Tactical Decisions
Step 3. Identify the costs and benefits associated with
each feasible alternative. Classify costs and
benefits as relevant or irrelevant, and eliminate
irrelevant ones from consideration.
Lease warehouse space:
Variable production costs $345,000
Warehouse lease 135,000
Buy shafts and bushings externally:
Purchase price $460,000

Continued
Model for Making Tactical Decisions
Step 4. Total the relevant costs and benefits for each
alternative.
Lease warehouse space:
Variable production costs $345,000
Warehouse lease 135,000
Total $480,000
Buy shafts and bushings externally:
Purchase price $460,000
Differential cost $ 20,000

Continued
Model for Making Tactical Decisions
Step 5. Assess qualitative factors. Quality of shafts
1. Quality of external suppliers and brushing is
2. Reliability of external suppliers significantly
Not reliablelower
3. Price stability
4. Labor relations and community image
Step 6. Make the decision.
Continue to produce shafts and bushings internally;
lease warehouse
 Relevant Costs Defined

Relevant costs are future costs that

differ across alternatives. A cost
must not only be a future cost but
most also differ between alternatives.
Flexible resources can be
easily purchased in the
amount needed and at the
time of use… like electricity.
Committed resources are
purchased before they are
used, such as salaried
employees.
Illustrative Examples of
Relevant Cost Applications
 Make or Buy
 Keep or Drop
 Special Order
 Sell or Process Further
 Product Mix

Important: Short-term Perspective

 Make or Buy
Swasey Manufacturing currently produces an
electronic component used in one of its printers.
Swasey must produce 10,000 of these parts. The
firm has been approached by a supplier who
offers to build the component to Swasey’s
specifications for $4.75 per unit.
 Make or Buy
The full absorption cost for the 10,000 parts is
computed as follows:
Total Cost Unit Cost
Rental of equipment $12,000 $1.20
Equipment depreciation 2,000 0.20
Direct materials 10,000 1.00
Direct labor 20,000 2.00
Variable overhead 8,000 0.80
General fixed overhead 30,000 3.00
Total $82,000 $8.20
Enough material is on hand to make 5,000 parts.
 Make or Buy
The cost to make or buy 5,000 units follows:
Alternatives Differential
Make Buy Cost to Make
Rental of equipment $12,000 ------- $12,000
Direct materials 5,000 ------- 5,000
Direct labor 20,000 ------- 20,000
Variable overhead 8,000 ------- 8,000
Purchase cost ------- $47,500 -47,500
Receiving Dept. labor ------- 8,500 - 8,500
Total $45,000 $56,000 $-11,000

Make
 Keep-or-Drop Decisions
Norton Materials, Inc. produces concrete blocks, bricks, and roofing
tile. The controller prepared the following income statements:
Blocks Bricks Tile Total
Sales revenue $500 $800 $150 $1,450
Less: Variable expenses 250 480 140 870
Contribution margin $250 $320 $ 30 $ 580
Less direct fixed expenses:
Advertising $ 10 $ 10 $ 10 $ 30
Salaries 37 40 35 112
Depreciation 53 40 10 103
Total $100 $ 90 $ 55 $ 245
Segment margin $150 $230 $- 45 $ 335
Less: Common fixed exp. 125
Operating income $ 210
 Keep-or-Drop Decisions
Differential
Keep Drop Amount to Keep
Sales $150 ---- $150
Less: Variable expenses 140 ---- 140
Contribution margin $ 10 ---- $ 10
Less: Advertising -10 ---- -10
Cost of supervision -35 ---- -35
Total relevant benefit
(loss) $- 35 $ 0 $- 35

Preliminary figures indicate that the

tile segment should be dropped!
 Keep-or-Drop Decisions
Tom Blackburn determines that dropping the tile section will
reduce sales in all sections as follows: $50,000 for blocks,
$64,000 for bricks, and $150,000 for roofing tile. His
summary in thousands is shown below:
Differential
Keep Drop Amount to Keep
Sales $1,450 $1,186.0 $264.0
Less: Variable expenses 870 666.6 203.4
Contribution margin $ 580 $ 519.4 $ 60.6
Less: Advertising -30 -20.0 -10.0
Cost of supervision -112 -77.0 -35.0
Total $ 438 $ 422.4 $ 15.6

Keep roofing tile segment!

 Keep-or-Drop Decisions
Alternate Use of Facilities

The marketing manager sees the market for floor tile as

stronger and less competitive than roof tile. He submits the
following figures for floor tile sales:
Sales $100,000
Less: Variable expenses 40,000
Contribution margin $ 60,000
Less: Direct fixed expenses 55,000
Segment margin $ 5,000
 Keep-or-Drop Decisions
Alternate Use of Facilities

Drop and Differential

Keep Replace Amount to Keep
Sales $1,450 $1,286.00 $164.00
Less: Variable expenses 870 706.60 163.40
Contribution margin $ 580 $ 579.40
$1,450 – $150 $ 0.60
–$50 – $140
$870 – $64 +–
$100
$25 – $38.40 +
Decision: Continue
$40making roof tile!
Special-Order Decisions

An ice cream company is

operating at 80 percent of its
productive capacity (20 million
half gallon units). The unit costs
associated with producing and
selling 16 million units are shown
on the next slide.
 Special-Order Decisions
Variable costs:
Dairy ingredients $ 0.70
Sugar 0.10
Flavoring 0.15
Direct labor 0.25
Packaging 0.20
Commissions 0.02
Distribution 0.03
Other 0.05
Wholesale Total variable costs $ 1.50
price = Total fixed costs 0.097
$2.00 Total costs $1.597
Special-Order Decisions

An ice cream distributor from a

geographic region not normally
served by the company has offered
to buy two million units at $1.55 per
unit, provided its own label can be
attached to the product. The
distributor has agreed to pay the
transportation cost.
 Special-Order Decisions
Variable costs:
Dairy ingredients $0.70
Sugar 0.10
Flavoring 0.15
Direct labor 0.25
Packaging 0.20
Commissions 0.02
Distribution 0.03
Other 0.05
Which costs Total variable costs $1.45
$1.50
are irrelevant? Total fixed costs 0.097
Total costs $1.45
$1.597
 Special-Order Decisions
Accept the
Variable offer ($0.10
costs:
x 2,000,000 =
Dairy ingredients $ 0.70
$200,000
Sugar more profit). 0.10
Flavoring 0.15
Direct labor 0.25
Packaging 0.20
Commissions 0.02
Distribution 0.03
Other 0.05
Which costs Total variable costs $$1.45
1.50
are irrelevant? Total fixed costs 0.097
Total cost $1.45
$1.597
 Sell or Further Process
Yield at Split-Off Further Processing
Grade A
800 lb
Sell for $0.40 lb

Bagged
Joint Cost
Grade B 120 Bags
$300
600 lb Cost $0.05/Bag
Sell for $1.30/Bag

Applesauce
Grade C 500 16-oz Cans
600 lb Cost $0.10/lb
Sell for $0.75 can
 Sell or Further Process

Process Differential Amount

Further Sell to Process Further
Revenues $450 $150 $300
Processing cost 120 ---- 120
Total $330 $150 $180

Further process!
Two Approaches to Pricing

1. Cost-Based Pricing
2. Target Costing and
Pricing
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COST-BASED PRICING: Definition

Means setting a sales price

based on marking up a base cost
such as COGS or direct
materials by a certain
percentage.
Target Costing and Pricing
Target costing is a method of determining the cost
of a product or service based on the price (target
price) that customers are willing to pay.

This is referred to as price-driven costing.

 Legal Aspects of Pricing

Predatory pricing. The practice of setting prices

below cost for the purpose of injuring or eliminating
competitors.
Price discrimination. Charging different prices to
different customers for essentially the same product.

The Robinson-Patman Act is the most potent

weapon against price discrimination, but it
doesn’t cover services and intangibles.