1

CHAPTER ONE
COST-VOLUME-PROFIT ANALYSIS
Variable, Fixed and Mixed Cost Behavior and Patterns
The starting point in cost behavior analysis is measuring the key business activities. Activity
levels may be expressed in terms of sales dollars (in a retail company), miles driven (in a
trucking company), room occupancy (in a hotel), or dance classes taught (by a dance studio).
Many companies use more than one measurement base. A manufacturer, for example, may use
direct labor hours or units of output for manufacturing costs and sales revenue or units sold for
selling expenses.
For an activity level to be useful in cost behavior analysis, changes in the level or volume of
activity should be correlated with changes in costs. The activity level selected is referred to as
the activity (or volume) index. The activity index identifies the activity that causes changes in the
behavior of costs. With an appropriate activity index, companies can classify the behavior of
costs in response to changes in activity levels into three categories: variable, fixed, or mixed.
Variable Costs: - Variable costs are costs that vary in total directly and proportionately with
changes in the activity level. If the level increases 10%, total variable costs will increase 10%. If
the level of activity decreases by 25%, variable costs will decrease 25%. Examples of variable
costs include direct materials and direct labor for a manufacturer; cost of goods sold, sales
commissions, and freight-out for a merchandiser; and gasoline in airline and trucking companies.
A variable cost may also be defined as a cost that remains the same per unit at every level of
activity.
Fixed Costs: -
Fixed costs are costs that remain the same in total regardless of changes in the activity level.

Examples include property taxes, insurance, rent, supervisory salaries, and depreciation on
buildings and equipment. (Variable sales commissions, and freight-out for a merchandiser)
Because total fixed costs remain constant as activity changes, it follows that
fixed costs per unit vary inversely with activity: As volume increases, unit cost declines, and vice
versa.
Cost-Volume-Profit Analysis

Cost-volume profit (CVP) analysis examines the behavior of total revenues, total cost and
operating income as changes occur in the out put level, selling price, variable costs per unit or
fixed costs.

Managers often classify costs as fixed or variable when making decisions that affect the volume
of out put. The managers want to know how such decision will affect costs and revenues. They
realize that many factors in addition to the volume of out put will affect cost. Yet, a useful
starting point in their decision process is to specify the relationship between the volume of out
puts and costs and revenues.
The mangers of profit-seeking organizations usually study the effects of out put volume on
revenue (sales), expenses (costs) and net income (net profit). This study is commonly called cost-
volume profit (CVP) analysis. The mangers of nonprofit organizations also benefit from the
study of CVP relationships. Why? No organization has unlimited resources, and knowledge of
how cost fluctuate as volume changes helps managers to understand how to control costs. For
 2

example, administrators of nonprofit hospitals are constantly concerned about the behavior of
costs as the volume of patients fluctuates.
To apply CVP analysis, mangers usually resort to some simplifying assumptions. The major
simplification is to classify costs as either variable or fixed with respect to a measure of the
volume of output activity. That is, all costs must be classified as either fixed or variable with
respect to production or sales volume before CVP analysis can be used.
CVP analysis can be used to develop predictions of what can happen under alternative strategies
concerning sales volume, selling price, variable costs or fixed costs. Applications include “what
if” analysis. For example, how will revenues and cost be affected if we sell 1,000 more units?
 If we raises or lower our selling prices
 If we expand business in to overseas markets
By examining various possibilities and alternatives, CVP analysis illustrates various decision
outcomes and thus serves as an invaluable aid in the planning process.
Cost – volume profit Assumptions
Cost-Volume- Profit (CVP) analysis is based on several assumptions
a) Changes in the level of revenues and costs arise only because of changes in the number of
product (service) units produced and sold-for example the number of television sets
produced and sold by Sony corporations.
b) Total costs can be divided in to a fixed component and a component that is variable with
respect to the level of output.
c) The behavior of total cost and total revenue is linear in relation to out put units with in the
relevant range and time period.
d) The unit selling price, unit variable costs, and fixed costs are known and constant.
e) The analysis either cover a single product or assumes that the sales mix when multiple
products are sold will remain constant as the level of total units sold changes.
f) Time value of money is not considered.
A cost behavior is described in terms of how its amount changes in relation to production and
sales volume changes. Total fixed costs remain constant to changes in sales volume. Total
variable costs change in direct proportion to sales volume changes. Mixed costs display the
effects of both fixed and variable components. Step costs remains the same over various ranges
of the level of activity, but the cost increases by discrete amounts (that is, in steps) as the level of
activity changes from one range to the next. Curvilinear costs change in a non-linear relation to
volume changes.
The breakeven point
is that quality of out put where total revenues equal total cost- that
is, where the operating income is zero. Why would mangers be interested in the breakeven point?
Mainly because they want
to avoid operating losses, and the breakeven point
tells them what level of sales they must generate to avoid a loss.

Breakeven point can be determined by using: the equation method, the contribution margin
method and the graph method. In order to compute the break-even point and perform various
CVP analyses, note the following important concepts.
Contribution margin (CM) is the excess of sales (S) over the variable costs (VC) of the product.
It is the amount of money available to cover fixed costs (FC) and to generate profits.
Symbolically:
 3

CM = S – VC
The unit CM is the excess of the unit selling price (USP) over the unit variable cost (UVC)
Symbolically:
Unit CM = USP – UVC
The CM ratio is the contribution margin as a percentage of sales, i.e.
CM ratio = A) S – VC = B).CM = C). 1- VC
S S S

OR

CM ratio = Unit CM = SPU – VCU = 1-VCU

SPU SPU SPU

The CM ratio can also be computed using per-unit data as follows:

CM ratio = Unit CM = SPU – VCU = 1-VCU
SPU SPU SPU
Note that the CM ratio is 1 minus the variable cost ratio. For example, if variable costs account
for 70 percent of the price, the CM ratio is 30 percent.
Exmple1: to illustrate the various concepts of CM, consider the following data for Company Z:
Per Unit Total Percentage
Sales (1,500 units) $25 $37,500 100%
Less: Variable costs 10 15,000 40
Contribution margin $15 $22,500 60%
Less: Fixed costs 15,000
Net income $ 7,500
From the data listed above, CM, unit CM, and the CM ratio are computed as
CM = S -VC = $37,500 - $15,000 = $22,500
Unit CM = SPU - VCU = $25 - $10 = $15
CM ratio = S – VC = CM = 1- VC
S S S
= $37, 000 - $15, 000 = 60%
$37, 000
Break-even analysis:
The break-even point, the point of no profit and no loss, provides managers with insights into
profit planning. It can be computed in three different ways:
1. The equation approach
2. The contribution approach
3. The graphical approach
The equation approach: is based on the cost-volume equation, which shows the relationships
among sales, variable and fixed costs, and net income:

Example2: X- Company manufactures and sells pens. Currently, 5,000,000 units are sold per
year at a selling price of $ 0.50 per unit. Fixed costs are $ 900,000 per year. Variable costs are $
0.30 per unit.
Required:
 4

a. Calculate the breakeven units and revenue using the above methods
Solution:
Given
USP = $0.50
UVC = $0.30
FC = $900, 000
1. Equation method:
Revenues –Variable cost- Fixed cost = Operating income
(USP x Q) – (UVC x Q) – FC = Operating income
0.5 Q – 0.3 Q – 900,000 – 0
0.2Q = 900, 000
Q = 900, 0000/0.2 = 4, 500, 000 units
BEP in revenue = BEP Q x USP
4, 500, 000units x $0.50 = $ 2, 250, 000
If X Company sells fewer than 4,500,000 units, it will have a loss, if it sells 4,500,000 it will
break even; and if it sells more that 4,500,000 it will mark a profit.
2. Contribution margin method:
BEP Q = FC/ UCM = $900, 000/ $ 0.20 = 4,500, 000 units
BEP in revenue = FC/ CM ration
$900, 000/ 0.4 = $2, 250, 000
3. Graph method (FOR GROUP ASST WITH DIFFERENT INPUTES)= BASED ON THE ABOVE GIVEN CONDITION, MAKE A Break-even analysis graph USING
The graphical approach

Plot a line of total costs and a line of total revenues. Their point of intersection is breakeven
point. The graph also shows the profit or loss out look for a wide range of out put levels beside
the breakeven point.

4,000,000 Total revenue line

Profit

3,000,000

BEP
2,000000

1,000,000 Total cost line

900,000 Loss
Fixed cost

1 2 3 4 5 6

Units sold (in millions)

 5

Target income Volume and Margin of Safety

Determination of target income volume
CVP analysis may use to determine the total sales, in units and dollars needed to reach a target
profit. Besides being able to determine the break-even point, CVP analysis determines the sales
required to attain a particular income level or target net income. There are two ways in which
target net income can be expressed:
a. As a specific dollar amount
b. As a percentage of sales
a. As a specific dollar amount, the cost-volume equation specifying target net income or sales
volume required to achieve a given target income is:
Target Revenue – Target Variable cost – Fixed cost= Target operating income
USP x Q – UVC x Q – FC = Target operating income
Q (USP - UVC) = FC + Target operating income
FC +TOI
Target Q = UCM ……………………………………… xx
FC +TOI
Target Revenue = CM % …………………………………. xx
b. Specifying target income as a percentage of sales, the cost-volume equation is
Target Revenue – Target Variable cost – Fixed cost= % sale
USP x Q – UVC x Q – FC = % USP x Q
USP x Q – UVC x Q - %USP x Q = FC
Q (USP – UVC - %USP) = FC
Q = FC________
(UCM - %USP)
Example3: Using the same data given in Example 1, assume that Company Z wishes to attain:
1. A target income of $15,000 before tax
2. A target income of 20% of sales
Exmple1: to illustrate the various concepts of CM, consider the following data for Company Z:
Per Unit Total Percentage
Sales (1,500 units) $25 $37,500 100%
Less: Variable costs 10 15,000 40
Contribution margin $15 $22,500 60%
Less: Fixed costs 15,000
Net income $ 7,500

In Case 1, target income sales volume (in units) required is

FC +TOI
Target Q = UCM
= $15, 000 + $15, 000 = 2000 units
$15
Sales (2,000 units) …………………………….. $50,000
VC (2,000 units) ………………………………… (20,000)
CM ……………………………………………….. $30,000
FC ………………………………………………. ($ 15, 000)
Net income ………………………………………. $15, 000
In Case 2, the target income volume required is:
 6

Q= FC = $15, 000
(UCM - %USP) $15 - 20 %( $25)
Q = $15, 000 = 1,500 units
($15 - $5)
Sales (1,500 units) …………………………………….. $37,500 (100%)
VC (1,500 units) ………………………………………. ($15,000)
CM …………………………………………………….. $22,500 (60%)
FC ……………………………………………………… ($15, 000)
Net income ……………………………………………… $7,500 ('20%)
1.1.1. Margin of safety
The margin of safety is a measure of difference between the actual level of sales and the break-
even sales.
a) It is the amount by which sales revenue may drop before losses begin, and is
expressed as a percentage of budgeted sales:
Margin of safety = Budgeted sales - Break-even sales
Budgeted sales
b) The margin of safety is often used as a measure of risk.
c) The larger the ratio, the safer is the situation, since there is less risk of reaching the
break-even point.
Example: Assume that Company Z projects sales of $30,000 with a break-even sales level of
$25,000. The expected margin of safety is
Margin of safety = $30,000 - $25,000 = 16.7% (this is to mean that
$30,000
sales can reduce up to 16% of total budgeted sales not beyond that, in
order not to pass the break even point (not to incurring loss ).

Target Net Income and Income Taxes

Thus far, we have ignored the effect of income taxes in our CVP analysis. At times, managers
want to know the effect of their decisions on income after taxes. Net income is operating income
minus income taxes. CVP calculations for target income must then be stated in terms of target
net income instead of target operating income.
Revenues – Variable cost- Fixed cost = Target operating income
Furthermore,
Target net income = Target operating income– income tax
Target net income = Target operating income – Target operating income x Tax rate
Target net income = Target operating income (1- Tax rate)
T arg et net income
Target operating income = 1−Taxrate
FC +TOI
Target Q = UCM …………………………………. (xx)
TNI
FC+
1−TR
Q=
UCM …………………………………. (xx)
 7

TNI
FC +
1−TR
Target revenue = CM % …………………………………... (xx)
Example 4: Assume in Example1 that Company Z wants to achieve an after-tax income of
$6,000. An income tax is levied at 40 percent. Then,
Require:
1. Determine the target net income Volume
Target net income volume = FC + TNI/ (1-TR)
UCM
= $15, 000 + [$6, 000/ (1 - 0.4)] = 1, 667 units
$15
Sales Mix Analysis

Sales mix is the relative combination of quantities of products (or services) that constitutes total
unit sales. If the proportions of the mix change, the cost volume profits relationships also change.
Unlike in the single product (or service) situation, there is no unique breakeven number of units
for a multiple- product situation. The breakeven quantity depends on the sales mix. One possible
assumption is that the budgeted sales mix will change at different levels of total unit sales.
Example 2: Suppose Ramos Company has two products, wallets (W) and key cases (K). The
income budget follows:
Wallets (W) Key cases (K) Total
Sales in units 300,000 75,000 375,000
Sales @ $ 8, and $ 5 2,400,000 375,000 2,775,000
Variable expenses @ $ 7 and $ 3 2,100,000 225,000 2,325,000
Contribution margin @ $ 1 and $ 2 300,000 150,000 450,000
Fixed costs 180,000
Net income $270,000
Required: -
Calculate the breakeven point:
Assume that there is no change in sales mix and ignore income taxes.
 Since the sale mix will not be changed there is a constant mix of 4 units of W, for every
unit of K. There fore. W= 4K
Solution
Method 1 = [(8w – 7w) + 5k – 3k)] – 180,000 = 0
= (32k – 28k) + (5k – 3k) - 180,000 = 0
k = 30,000 units
w = 4k = 4 (30,000 units) = 120,000 units
K = w/4 = 120, 000/4 = 30, 000 units
Managers usually want to maximize the sales of all their products. Faced with limited resource
and time, however, executive prefer to generate the most profitable sales mix achievable.
Profitability of a given product helps guide executive who must decide to emphasize or de-
emphasize particular products. For example given limited production facilities or limited time of
sales personnel, should we emphasize wallets or ray cases? These decisions may be affected by
other factors beyond the contribution margin per unit of product.
In general, other things being equal, for any given total quantity of units sold, if the sales mix
shifts toward unit with higher contribution margins operating income will be higher.
 8

UNIT TW0
RELEVANT INFORMATION AND DECISION MAKING
2.1. Introduction: Decision making process
 Decision-making is a fundamental part of management. Managers are constantly faced with
problems of deciding what product to sell, what production method to use, whether to make
or buy component parts, what prices to charge, what channels of distribution to use, whether
to accept special orders at special prices, and so forth. This unit covers the role of
management accounting information in a variety of marketing decisions. The next examines
product decisions.
2.1.2. The Accountant’s role in Decision Making
The management accountant’s role in the decision-making process is to provide relevant
information to the managers who make the decisions. Production managers typically make the
decisions about alternative production processes and schedules, marketing managers make
pricing decisions, and specialists in finance usually are involved in decisions about major
acquisitions of equipment. All of these managers require information pertinent to their
decisions. The management accountant’s role is to provide information relevant to the decisions
faced by managers throughout the organization. Thus, the management accountant needs a good
understanding of the decisions faced by those managers.

Management
Accountant

Designs and implements Managers who make production,

accounting information Marketing, and finance decisions
system
Exhibit 2-1 Accountant’s Role in Decision Making
Make substantive economic
decisions affecting operations.
 9

1.2. The Concept of Relevance

Accountants have an important role in the decision-making process, not as a decision maker but
as collectors and reporters of relevant information. What makes information relevant to a
decision problem? Relevant information is the predicted future costs and revenues that will
differ among the alternatives. These two criteria are discussed here under:
1. Bearing on the Future: To be relevant to a decision, cost or benefit information must
involve a future event. Relevant information is a prediction of the future, not a summary of
the past. Historical (past) data have no bearing on a decision. Such data can have an indirect
bearing on a decision because they may help in predicting the future. But past figures, in
themselves, are irrelevant to the decision itself. Why because decision-making affect, future
but not past. Nothing can alter what has already happened.
2. Different under Competing Alternatives: Relevant information must involve future costs or
benefits that differ among the alternatives. Costs or benefits that are the same across all the
available alternatives have no bearing on the decision. For example, if management is
evaluating the purchase of either a manual or an automated drill press, both of which require
skilled labor costing Br. 10 per hour, the labor rate is not relevant because it is the same for
both alternatives.
Example (1) Marina Company, a manufacturer of a line of ashtrays, is thinking of using
aluminum instead of copper in the manufacture of its product. Historical direct material cost was
Br. 0.30 per unit. The company expected future costs for aluminum is Br 0.20 and it is
unchanged for copper. Direct labor cost was Br. 0.70 per unit and will not be affected by the
switch in materials. The analysis in a nutshell is as follows.
Copper Aluminum Difference
Direct material Br. 0.30 Br. 0.20 Br. 0.10
Direct labor 0.70 0.70 -

Required: Given the above-summarized data identify the relevant data for the decision on hand.
Solution:
The cost of copper and direct labor costs used for this comparison probably came from historical
cost records on the amount paid most recently for copper and direct laborers, respectively. Past
or historical costs are relevant to the decision only if they are expected to continue in the future,
or are used as the basis for predicting the future costs.
In the foregoing analysis, the material cost (the expected future cost of copper compared with the
expected future cost of aluminum) is the only relevant cost. The material cost met both criteria
for relevant information.
That is, bearing on the future and an element of difference between the alternatives. However,
the direct – labor cost will continue to be Br. 0.70 per unit regardless of the material used. It is
irrelevant because the second criterion – an element of difference between the alternatives – is
not met.
Therefore we can safely exclude direct labor. There is no harm in including irrelevant items in a
formal analysis, provided that they are included properly. However, confining the reports to the
relevant items provides greater clarity and time savings for busy managers.
 Accuracy and relevance: Information used for decision-making would be both relevant and
accurate. However, the cost of such information exceeds its benefits. As a result,
accountants often trade off relevance versus accuracy.
 10

Relevant information must be reasonably accurate but not precisely (exactly) so. Precise
but irrelevant is worthless for decision – making. On the other hand, imprecise (inaccurate)
but relevant information can be useful. A university president’s salary, for example, may be
Br. 60,000 per year; but this may have no bearing on the question of whether to buy or rent data
processing equipment. In contrast, sales predictions for a new product may be subjected to great
error, but they still are helpful to the decision of whether to manufacture the product or not.

The degree to which information is relevant or precise often depends on the degree to which it is
qualitative or quantitative. Qualitative aspects are those for which measurement in birrs and
cents is difficult and imprecise. Quantitative aspects, on the other hand, are those for which
measurement is easy and precise. To summarize, relevance is more crucial than precision in
decision – making. Thus, a qualitative aspect may easily carry more weight than a measurable
(quantitative) aspect.
 Why isolate relevant information?
Why is it important for the management accountant to isolate the relevant costs and benefits in a
decision analysis? The reasons are twofold.
 First, generating information is a costly process. The management accountant can
simplify and shorten the data gathering process by focusing on only relevant information.
 Second, people can effectively use only a limited amount of information. If a manager
is provided with irrelevant revenues and costs, these figures can cause information
overload, and decision-making effectiveness of the manager declines.
2.3. Alternative Choice Decisions
2.3.1. Market Decision
Many of the decisions described in this unit are frequently referred to as alternative choice
decision. Alternative choice decisions are situations with two or more courses of action from
which the decision maker must select the best alternative.
The variety of alternative choice decisions is limitless. Some business example follows:
 Should we accept a special order for a product below our normal selling price?
 Should we raise the price of a product or maintain the current price?
 Should we make or buy a component part?
 Should we sell a joint product at the split off point or process it further?
 Should we keep our copying machine or acquire a faster one?
The analyses of these and other types of alternative choice decisions are aided by relevant cost
and benefit data. The discussions that follow illustrate a variety of to each decision. The first
marketing decision for which we examine relevant information is the special sales order.
2.3.1.1. Special Order Decisions
Potential customers seeking a special deal will frequently approach firms directly with their
proposal. For example, a discount department store chain planning a big spring sale offers to
make a large one-time purchase of a firm’s product but wants a reduced price. Or a foreign
buyer is interested in a firm’s product and also requests a reduced selling price. In each case
management must decide whether to accept or reject the special sales order at a reduced selling
price. In brief, a special order is a one-time order that is not considered part of the company’s
normal ongoing business.
In general, a special order is profitable as long as the incremental revenue from the special
order exceeds the incremental costs of the order.
 11

The incremental revenue in this decision will be the price per unit offered by the potential
customer times the number of units to be purchased.
The incremental costs will be the amount of the expected cost increase if the offer is accepted.
The incremental cost usually includes variable manufacturing costs of producing the units.

Since the units being sold in the special order are not being sold through the firm normal
distribution channel, the firm may or may not incur variable selling and administrative
expenses in conjunction with the special order.
The incremental costs usually do not include fixed manufacturing costs. Although the fixed
costs must be incurred to permit production, the amount of fixed costs incurred by the firm
usually will not increase if the special order offer is accepted.
For the same reason, other fixed expenses, such as fixed selling and administrative expenses, are
usually not relevant in the special order price.
However, management must also be assured that it has sufficient capacity to produce the special
order without affecting normal sales. When there is no excess capacity, the opportunity cost of
using the firm’s facilities for the special order are also relevant to the decision. The opportunity
cost would be the contribution margin forgone on regular sales that have to be reduced to
accommodate the special order.
The relevant costs to accept the special order, therefore, would include a forgone contribution
margin on regular sales that could not be made in addition to the incremental costs associated
with the special order that have already been discussed.
Example (1) Consider the following details of the income statement of Samson Company for the
year just ended December 31, 2003.
Sale (1, 000, 000 units) ……………………………………….. Br. 20, 000, 000
Manufacturing cost of goods sold ……………………………….. (15, 000, 000)
Gross margin …………………………………………………… Br. 5, 000, 000
Selling and administration expense ……………………………. Br. (4, 000, 000)
Operating income ……………………………………………… Br. 1, 000, 000
Samson’s fixed manufacturing costs were Br. 3 million and its fixed selling and administrative
costs were Br. 2.9 million.
Near the end of the year, Ethio Company offered Samson Br. 13 per unit for 100,000 unit special
order. The special order would not affect Samson’s regular business in any way. Furthermore,
the special sales order would not affect total fixed costs and would not require any additional
variable selling and administrative expenses.

Instruction: Should Samson accept or reject the special order? By what percentage the
operating income decreases or increases if the order had been accepted? Assume that the
company would utilize its idle manufacturing capacity to accept the special order.

Solution:
There are two approaches to costs on income statement.
1. Absorption/financial approach (no variable and fixed cost/expense classification)
(operational classification of cost/expense)
2. Contribution approach (variable and fixed cost/expense classification)
(no operational classification of cost/expense)
 12

1. An absorption approach is a costing technique that considers all factory overheads (both
variable and fixed) to be product costs that become an expense in the form of manufacturing
cost of goods sold as sales occur.
2. A contribution approach is a method of internal reporting (management accounting) that
emphasizes the distinction between variable and fixed costs for the purpose of better
decision.

Financial Approach Contribution Approach

Sales Xxx Sales Xxx
Cost of goods sold Xxx Variable costs Xxx
Gross profit Xxx Contribution margin Xxx
Selling and Administrative Xxx Fixed costs Xxx
expenses
Operating income Xxx Operating income Xxx
Exhibit 2-2 Approaches to costs on income statement

The correct analysis to the above problem employs the contribution approach to income
statement, not the financial approach. The fallacy in the case of the later approach is that it treats
a fixed cost, i.e., fixed manufacturing cost as if it were variable.
Exhibit 2-3, the correct analysis
With special
Without special Effect of
order
order special order
1,100,000
1,000,000 units 100,000 units
units
Sales Br. 20,000,000 Br. 1,300,000 Br. 21,300,000
Variable expenses
Manufacturing Br. 12,000,000 Br. 1,200,000 Br. 13,200,000
Selling and Administrative 1,100,000 - 1,100,000
Total variable expenses Br. 13,100,000 Br. 1,200,000 Br. 14,300,000
Contribution Margin Br. 6,900,000 Br. 100,000 Br. 7,000,000
Fixed expenses
Manufacturing Br. 3,000,000 - Br. 3,000,000
Selling and administrative 2,900,000 - 2,900,000
Total fixed expenses Br. 5,900,000 - Br. 5,900,000
Operating income Br. 1,000,000 Br. 100,000 Br. 1,100,000
The accountant’s role in decision making is primarily that of a technical expert on cost analysis,
i.e., collecting and reporting relevant information. However, many managers want the
accountant to recommend the proper decision; the final choice always rests with the operating
executives.
Recommendation: Based on the relevant data, Samson Company should accept the special order
because it brings an additional income of Br. 100,000 for company and as a result the
operating income increase by 10% if the order had been accepted.
Income with special order Br. 1,100,000
Income without special order 1,000,000
Additional income if the order had been accepted Br. 100,000
 13

%DNI = DNI
NIo
Where %DNI = Percentage change in income.
DNI = Change in income.
NIo = Income if the special order had not been accepted.
%DNI = DNI = Br. 100,000 = 0.1 or 10%
NIo Br. 1,000,000
Exhibit 2-4, the Incorrect Analysis
Incorrect effect With special
Without Special
of special order
order
order 100,000 1,100,000
1,000,000 units
units units
Sales Br. 20,000,000 Br. 1,300,000 Br. 21,300,000
Manufacturing COGs* 15,000,000 1,500,000 16,500,000
Gross margin Br. 5,000,000 Br. (200,000) Br. 4,800,000
Selling & administrative 4,000,000 - 4,000,000
expenses
Operating income Br. 1,000,000 Br. (200,000) Br. 800,000
*COGs denote cost of goods sold.
Here above, the analysis treats the fixed manufacturing COGs as if it were variable. Refer the
effect of the special order on manufacturing COGs; it amounted to Br. 1,500,000 that include Br.
300,000 fixed cost.
However, the special sales order would not affect the total fixed costs.
Example (2) Lucy Company has the capacity to produce 15,000 units per month. Current regular
production and sales are 10,000 units per month at a selling price of Br. 15 each. Based on the
current production level, the following costs are to be incurred per unit:
Direct materials Br. 5.00
Direct labor 3.00
Variable factory overhead (FOH) 0.75
Fixed FOH 1.50
Variable selling expense 0.25
Fixed administrative expense 1.00

Lucy Company has received special order from a customer that wants to purchase 4,000 units at
Br. 10 each. There would be no selling expense in connection with this special order.
Instructions
(A) Should Lucy Company accepts or rejects the special order? Why or Why not? Assume that
the special order should not disturb regular business.
(B)Suppose that the special order was for 8,000 units instead of 4,000 units. Thus, regular
business would be reduced by 3,000 units to accept the special order because production
capacity cannot be expanded in the short run. What would be the overall profit of the firm if it
accepts this order?
(C) Refer the data given in requirement (b) above. At what selling price per unit from the
customer would the Lucy Company be economically indifferent between accepting and
rejecting the offer?
 14

Solutions:
A. Here, the incremental costs (variable manufacturing costs) are the only relevant costs.
The special order would have no effect on the company’s variable selling expenses. Since
the existing fixed costs would not be affected by the order, they are not incremental costs
and are therefore not relevant.
The incremental net operating income from accepting the special order can be computed as
follows:

Per unit Total

Incremental revenue Br. 10.00 Br. 40,000
Incremental costs:
Variable mnfg. Costs
Direct material 5.00 20,000
Direct labor 3.00 12,000
Factory overhead 0.75 3,000
Total variable mnfg. Costs Br. 8.75 Br. 35,000
Fixed costs 0
Total incremental costs Br. 35,000
Incremental net operating income Br. 5,000
Accepting the special order will increase costs by Br. 8.75 per unit produced.
The offered price of Br. 10 per unit exceeds the Br.8.75 incremental variable
costs, implying that the special order will provide a positive contribution to profits. The
contribution margin earned on the order will be Br. 1.25 per unit, so for the 4,000 units special
order, the firm should be Br. 5,000 (Br. 1.25 x 4,000) better off by accepting the special order.

i.e.,
 Advantage of accepting the special order
= Income with special order - Income for regular sale (A-B) Br. 5,000
A. Income with special order (for 14, 000unit)
= Income for regular sale + Income for the special order
=35,000 (B) + 5,000 (from table)= Br. 40,000

B. Income without special order (for 10,000 units of regular sale)

= Total sales – Total variable cost – Total fixed costs

Unit variable cost = 5 + 3 + 0.75 mnfg+ 0.25 = Br. 9.00

Unit fixed costs = 1.50 + 1.00 = Br. 2.50
Total fixed costs = 2.50 x 10,000 = Br. 25,000
Therefore, Income (for 10,000 units of regular sale) =[10,000(15-9)] -25,000 = Br. 35, 000

B. In this case, the company has no sufficient capacity to produce the special order without
affecting normal sales. Therefore, the relevant costs to use in evaluating the special order
include an opportunity cost. The opportunity cost is the contribution margin forgone on
regular sales.
 15

The net relevant costs to accept the special order would now be the total of Br. 70,000
variable manufacturing costs and a forgone contribution margin of Br. 18,000.
The total cost of accepting the special order, Br. 88,000, exceeds the offered selling price of
Br. 80,000.

Incremental revenue (8000*10) Br. 80,000

Incremental cost
Variable costs * Br. 70,000
Opportunity costs* 18,000 88,000
Detrimental (disadvantage) net operating income Br (8,000)

Incremental revenue = 10 x 8,000 = Br. 80,000

Less: The net relevant costs to accept the special order
Variable costs = 8,000 (5 + 3 + 0.75) = Br. 70,000
Opportunity cost = 3,000 [15 – (5 + 3 + 0.75 + 0.25)] = Br. 18,000

Note that special order would not require the Br. 0.25 variable selling expenses.
The normal sales, however, require the Br. 0.25 variable selling expenses.
Recommendation: Lucy Company should not accept the special order because it has a net Br.
8,000 disadvantage.

A B C (A – B) + C
WITHOUT EFFECT OF SPECIAL EFFECT OF WITH SPECIAL
SPECIAL ORDER ON REGULAR SPECIAL ORDER 15,000
ORDER 10,000 SALES 3,000 units ORDER 8,000 units
units units
Sales Br. 150,000 Br. 45,000 Br. 80,000 Br. 185,000
 16

Variable expenses
Direct material Br. 50,000 Br. 15,000 Br. 40,000 B4. 75,000
Direct labor 30,000 9,000 24,000 45,000
Factory overhead 7,500 2,250 6,000 11,250
Selling 2,500 750 - 1,750

Total variable costs Br. 90,000 Br. 27,000 Br. 70,000 Br. 133,000

Contribution margin Br. 60,000 Br. 18,000 Br. 10,000 52,000

Fixed expenses
Factory overhead Br. 15,000 - - Br. 15,000
Administrative 10,000 - - 10,000

Total fixed expenses Br. 25,000 - - Br. 25,000

Operating income (loss) Br. 35,000 Br. 18,000 Br. 10,000 Br. 27,000

Income without special order = 35,000

Disadvantage of accepting the special order Br. (8,000)

***THE Indifferent price either to accept or reject is the price that makes the contribution to
profit from the special order equals a contribution margin forgone from regular sales.

a. In requirement (b) above the company will be economically indifferent between

accepting and rejecting the special sales order if the contribution to profit from the
special order equals a contribution margin forgone from regular sales. Therefore, the
offer “p” will make Lucy Company equally attractive between two alternatives as
computed here under:

Therefore , the contribution margin forgone from regular sales is 18,000 = the
contribution to profit from the special order

Therefor, the contribution to profit from the special order

=P (8,000) – 8,000 (8.75) = 18,000
P (8,000) = 18,000 + 70,000
P (8,000) = 88,000
P = 88,000
8,000
P = Br. 11
Thus, assuming an offer of Br. 11 instead of Br. 10, the company will be indifferent between
accepting and rejecting the special order in requirement (b) above.
2.3 Deletion or Addition of Products or Departments
Decisions relating to whether old product lines or other segments of a company should be
dropped and new ones added are among the most difficult that a manager has to make. In such
decisions, many factors must be considered that are both qualitative and quantitative in nature.
Ultimately, however, any final decision to drop an old segment or to add a new one is going to
hinge primarily on the impact the decision will have on net operating income. To assess this
 17

impact, it is necessary to make a careful analysis of the costs involved. To this end, let us try to
distinguish the difference between avoidable and unavoidable fixed expenses.
Fixed costs are divided into two categories, avoidable and unavoidable.

Avoidable costs ar e costs that will not continue if an ongoing operation is changed, deleted or
eliminated. These costs are relevant costs in decision-making. Examples of avoidable costs
include departmental salaries and other costs that could be avoided by not operating the specific
department.

Unavoidable costs are costs that continue even if a subunit or an activity is eliminated and are
not relevant for decision. The reason for this is that such costs are not affected by a decision to
delete a particular activity. Unavoidable costs include many common costs, which are defined as
those costs of facilities and services that are shared by users. Examples are store depreciation,
heating, air conditioning, and general management expenses.
Example (1) Eyoha Department Store has three major departments: groceries, general
merchandise, and drugs. Management is considering dropping groceries, which have
consistently shown a net loss. The following table reports the present annual net income (in
thousands).
DEPARTMENTS
Groceries General merchandise Drugs Total
Sales Br. 1,000 Br. 800 Br. 100 1,900
Variable COGS* & Expenses 800 560 60 1,420
Contribution margin Br. 200 Br. 240 Br. 40 Br. 480
Fixed expenses
Avoidable Br. 150 Br. 100 Br. 15 Br. 265
Unavoidable 60 100 20 180
Total fixed expenses Br. 210 Br. 200 Br. 35 Br. 445
Operating income (loss) Br. (10) Br. 40 Br. 5 Br. 35
*COGS denote cost of goods sold.
Instructions:
a. Which alternative would you recommend if the only alternatives to be considered are
dropping or continuing the grocery department? Assume that the total assets would be
unaffected by the decision and the space made available by dropping groceries would
remain idle.
b. Refer the income statement presented above. However, assume that the space made
available by dropping groceries could be used to expand the general merchandise
department. The space would be occupied by merchandise that would increase sales by Br.
500,000, generate a 30% contribution margin percentage and have additional avoidable
fixed costs of Br. 70,000. Should Eyoha discontinue grocery and expand merchandise
department?

a.
A B A–B
Total before change Effect of dropping grocery Total after change
Sales Br. 1,900 Br. 1,000 Br. 900
Variable COGS and 1,420 800 620
Expenses
Contribution margin Br. 480 Br. 200 Br. 280
Fixed expenses
Avoidable Br. 265 Br. 150 Br. 115
 18

Unavoidable 180 - 180

Total fixed expenses Br. 445 Br. 150 Br. 295
Operating income (loss) Br. 35 Br. 50 Br. (15)

Income with grocery department = Br. 35,000

Loss assuming grocery is eliminated = (15,000)
Disadvantage of discontinuing grocery = Br. (50,000)
Notice that all of the grocery’s variable expenses are avoidable. If the grocery department is
discontinued, the Br. 60,000 of the fixed expenses will continue. Eyoha Department Store will
incur these expenses regardless of its decision about that particular department.
Recommendation: Dropping grocery and leaving the vacated facilities idle would be worse.
Groceries bring in contribution margin of Br. 200,000, which is Br. 50,000 more than the Br.
150,000 fixed expenses that would be saved by closing the grocery department.

b.
A B C (A – B) + C
Total before Effect of Effect of Total
change Dropping Expanding General after
Groceries Merchandise Change
Sales Br. 1,900 Br. 1000 Br. 500 Br. 1,400
Variable COGS and Expense 1,420 800 350 970
Contribution margin Br. 480 Br. 200 Br. 150 (500*30%) Br. 430
Fixed expenses
Avoidable Br. 265 Br. 150 Br. 70 Br. 185
Unavoidable 180 - - 180
Total fixed expenses Br. 445 Br. 150 Br. 70 Br. 365
Operating income (loss) Br. 35 Br. 50 Br. 80 Br. 65
Effect of expanding general merchandise:
Incremental revenue = Br. 500,000
Incremental cost
Variable cost = (1-0.30) x 500,000 = (350,000)
Fixed cost = (70,000)
Incremental income Br. 80,000

NB. All birrs in the exhibit above are in thousands.

Recommendation: The conclusion in (a) will be correct if and only if the space made available
by dropping grocery would not be idle. As the above analysis shows, dropping grocery and
using the vacated space to expand general merchandise is recommendable.
The Br. 80,000 increase in operating income of general merchandise more than offset the Br.
50,000 decline fro eliminating groceries, providing an overall increase in operating income of
Br. 30,000, i.e., Br. 65,000 less Br. 35,000.

Example (2) Selam’s Home Center has two departments, A and B. The most recent income
statement for the company follows:
 19

Department
A B Total
Sales Br. Br. Br. 5,000,000
1,000,000 4,000,000
Variable expenses 300,000 1,600,000 1,900,000
Contribution margin 700,000 2,400,000 Br. 3,100,000
Fixed expenses 900,000 1,800,000 2,700,000
Operating income Br. Br. 600,000 Br. 400,000
(loss) (200,000)
A study indicates that Br. 370,000 of the fixed expenses being charged to department A are sunk
costs and allocated costs that will continue even if department A is dropped. In addition, the
elimination of department A would result in a 10% decrease in the sales of department B.

If department A is dropped, what will be the effect on the income of the company as a whole?
Solution:
Sunk costs are costs that have already been incurred and that can’t be avoided regardless of
which course of action a manager may decide to take. Thus, sunk costs are unavoidable costs.
Put differently, these costs have no relevance to future events and must be ignored in
decision-making.
Effect of dropping department A on B
Decrement revenue = 10% x 4,000,000 = Br.400, 000
Decrement costs

Variable cost = Tvcb*%change = (1,600,000 x 400,000) = (160,000)

4,000,000
Fixed cost 0
Decrement income Br. 240,000

Total fixed costs of department A = Br. 900,000

Unavoidable fixed costs 370,000
Avoidable fixed costs of department A Br. 530,000

X Y Z X–Y–Z
Total before Effect of Effect of
change dropping A on B dropping A
Sales Br. 5,000 Br. 400 Br. 1,000 Br. 3,600
Variable expenses 1,900 160 300 1,440
Contribution margin Br. 3,100 Br. 240 Br. 700 Br. 2,160
Fixed expenses 2,700 - 530 2,170
Operating income (loss) Br. 400 Br. 240 Br. 170 Br. (10)
* All birr amounts are in thousands.
Income with department A Br. 400,000
Loss if department A is dropped (10,000)
Disadvantage of dropping department A Br. (410,000)
 20

Recommendation: Dropping department A would be worse because it has a net Br. 410,000
disadvantage. ==(-10-400) = -410

2.3.1.2. Optimal Use of Limited Resources

Managers are routinely faced with the problem of deciding how scarce resources are going to be
utilized. A scarce resource or a limiting factor refers to any factor that restrict or constraint the
production or sale of a product or service.
It include the following, among others, labor hours, machine hours, square feet of floor space,
cubic meters of display space .A department store, for example, has a limited amount of floor
space and therefore cannot stock every product that may be available. A manufacturing firm has
a limited number of machine- hours and a limited number of direct labor-hours at its disposal.
When capacity becomes pressed because of scarce resource, the firm is said to have a
constraint.
 When a plant that makes more than one product is operating at capacity, managers
often must decide which orders to accept.
 The contribution margin technique also applies here, because the product to be
emphasized or the order to be accepted is the one that makes the biggest total profit
contribution per unit of the limiting factor.
 Fixed cost are usually unaffected by such choices.

In such kind of decision, the contribution margin technique must be used wisely.
Managers sometimes mistakenly favor those products with the biggest contribution margin
or gross margin per sales birr, without regard to scarce resources.

Example (1): Wajo Company has two product: a plain cellular phone and a fancier cellular
phone with many special features. Unit data follow:
Plain Phone Fancy Phone
Selling price Br.80 Br.120
Variable costs 64 84
Contribution margin Br.16 Br.36
Contribution margin ratio 20% ((S-VC)/S) 30%
(1-VC/Sales)

Instructions:
a) Which product is more profitable? On which should the firm spend its resources?
Assume that sales are restricted by demand for only a limited number of phones.
b) Now suppose that annual demand for phones of both types is more than the company
can produce in the next year and the major constraint is the availability of time on a
processing machine. Plain Phone requires one hour of processing on the machine,
Fancy Phone requires three hours of processing. Which product is more
profitable? Assume that only 10, 000 machine hours of capacity are available.
Solution:

a) Under this circumstance, the limiting factor is units of sale. Thus, the more profitable
product is the one with the higher contribution margin per unit. The fancier cellular
 21

phone appears to be more profitable than the plain phone. It has Br.36 per unit
contribution margin as compared to Br.16 per unit for the plain model, and it has a 30%
CM ratio as compared to 20% for the plain model.
b) To maximize total contribution margin, a firm should not necessarily promote those
products that have the highest contribution margins. Rather, total contribution margin
will be maximized by promoting those products or accepting those that provide the
highest unit contribution margin in relation to scarce resources of the firm.

In requirement (b) above, for instance, the productive capacity is the limiting factor/ scarce
resource because only 10, 000 hours of capacity is available. To answer this question, the
manager should look at the contribution per unit of the scarce resource. This figure is
computed by dividing the contribution margin for a unit of product by the amount of the
scarce resource it requires. These calculations are carried out below for the plain and fancy
phones.

Model
Plain Phone Fancy Phone
Contribution margin (CM) per unit Br.16 Br.36
(a)
Machine hours required per unit 1 hour 3 hours
(b)
CM per unit of the scarce resource Br.16 per machine Br. 12 per machine hour
(a÷b) hour

With this data in hand, it is easy to decide which product is less profitable and should be de-
emphasized. Each hours of processing time on the machine that is devoted to the plain phone
results in an increase of Br.16 in contribution margin and profits. The comparable figure for
the fancier phone is only Br.12 per hour. Therefore, the plain model should be emphasized in this
situation. Even though the fancier model has the larger per unit contribution margin and the
larger CM ratio, the plain model provides the larger contribution margin in relation to scarce
resource.
2.3.2. Product Decision
The concept of relevance is also applicable for production decisions like- make or buys a
component part, sell or process further joint products, and keep or replace equipment. As a
matter of fact, you may find it would be helpful to refresh your memory concerning relevance.
What costs are relevant in decision-making? The answer is easy. Any future cost that makes
a difference between decisions alternative is relevant for decision purpose. All costs are
considered relevant, except

a) Sunk costs. A sunk cost is a cost that has already been incurred and that cannot be avoided
regardless of which course of action a manager may decide to take. As such, sunk costs have no
relevance to future events and must be ignored in decision-making.
b) Future costs that do not differ between the alternatives at hand.

Relevant costs are avoidable costs. An avoidable cost can be defined as cost that can be
eliminated as a result of choosing one alternative over another in a decision-making situation.
 22

In management accounting, the term avoidable is synonymous with differential cost. These
terms are frequently used interchangeably. To identify the costs that are avoidable (differential)
in a particular decision situation, the manager’s approach to cost analysis should include the
following steps:
 Assemble all of the costs associated with each alternative being considered.
 Eliminate those costs that are sunk.
 Eliminate those that do not differ between alternatives.
 Make a decision based on the remaining costs. These costs will be the differential or
avoidable costs, and hence the costs relevant to the decision to be made.

2.4. Alternative Choice Decision

2.4.1. Make or Buy Decisions
 Managers in manufacturing companies are often faced with the problem whether to
manufacture a component used in manufacturing a product or to purchase from the outside.
Production of such basic materials as screws, nails, washers, sheet metal and so on is not
usually economical owing to specialization and returns to scale. These materials can almost
always be acquired more cheaply from outside suppliers. But for many materials, such as
subassemblies and special parts, it is not always clear which is least costly means of
acquisition. The cost and management accounting system assist managers in arriving at a
correct decision by presenting suitable analysis of the cost of production and comparing it
with the purchase price of the product.
 In make or buy decisions, the appropriate means of analysis is to compare the relevant cost
of buying the part with the relevant cost of making the part. Here relevant cost of buying the
component is typically the amount paid to supplier. It may also include transportation costs
incurred to get the component to the company’s plant and costs incurred to process the part
upon receipt.
 The relevant cost of making the component is often the variable costs incurred to produce
the component. In some cases, however, the company will need to acquire special equipment
to produce the product or will hire additional supervisory personnel to assist with making
the product. These incremental fixed costs will be part of the relevant cost of making the
part. The alternative chosen-make or buy is typically the one with the lowest cost.
 In the final decision regarding make or buy qualitative factors, besides the quantitative
data, should be considered as part of the decision.
In make or buy decision, the following qualitative factors, besides the quantitative
considerations may favor the decision to “buy”:
 Advantage of long-term relationship with suppliers.
 Possibility of shortage of material or labor for making the component.
 Uninterrupted supply of requisite quality from reliable suppliers.
 The internal demand for the product under consideration is small and, as such, it is no
use to set up manufacturing facilities for it and so forth.
On the contrary, the following qualitative factors may favor the decision “to
make”:
 The quality of the product is decided to be controlled.
 23

 If the purchase price is likely to rise due to increased demand in the market, it becomes
uneconomical to buy.
 Where the technical know-how is to be kept secret and not to be passed on to the
suppliers and so on.
Example (1) : Great Company manufactures 60, 000 units of part XL-40 each year for use on its
production line. The following are the costs of making part XL-40:

Total Costs Cost per

60, 000 units unit
Direct material Br. 480, 000 Br.8
Direct labor 360, 000 6
Variable factory overhead (FOH) 180, 000 3
Fixed FOH 360, 000 6
Total manufacturing costs Br. 1, 380, 000 Br.23

 Another manufacturer has offered to sell the same part to Great for Br.21 each. The fixed
overhead consists of depreciation, property taxes, insurance, and supervisory salaries. The
entire fixed overhead would continue if the Great Company bought the component except
that the cost of Br. 120, 000 pertaining to some supervisory and custodial personnel could
be avoided.
Instructions:
a) Should the parts be made or bought? Assume that the capacity now used to make parts
internally will become idle if the pats are purchased?
b) Assume that the capacity now used to make parts will be either (i) be rented to nearby
manufacturer for Br. 60, 000 for the year or (ii) be used to make another product that
will yield a profit contribution of Br. 250,000 per year. Should the company purchase
them from the outside supplier?
Solutions:

a) To approach the decision from a financial point of view, (which CONSIDERS Net
relevant costs) the manager must focus on the relevant or differential costs. The
differential cost can be obtained by eliminating from the cost data those costs that are
not avoidable –that is, by eliminating the sunk costs and the future costs that will
continue regardless of whether the parts XL-40 are produced internally or purchased
from outside.

Thus, the relevant cost computation follows:

COST TO MAKE COST TO BUY
Per Unit Total Per Unit Total
Direct materials Br.8.00 Br.480, 000
Direct labor 6.00 360, 000
Variable FOH 3.00 180, 000
Fixed FOH, avoidable 2.00 120, 000 (Here the 240,000 Fixed FOH will
continue sustain/exist weather you produce/make or buy, and therefore is not relevant
information.)
Total cost Br. 19.00 Br. 1, 140, 000 Br.21.00 Br.1, 260, 000
 24

Here above, the analysis shows that the variable costs of producing the part XL-40 (materials,
labor, and variable overhead) are differential costs. All these variable costs, therefore, can be
avoided or eliminated by buying the part from the outside supplier.
Again, are only the variable costs relevant? No. Perhaps Br. 120, 000 of the total fixed factory
overhead cost is avoidable by purchasing the component part from outside, then it too will be a
differential cost and relevant to the decision. Therefore, the decision should be made by
comparing the total of all variable costs and the avoidable fixed factory overhead against the
total purchase price- that is, cost to buy.
Recommendation: Great Company should reject the outside supplier’s offer because it costs
Br.2 less per unit to continue to make the part XL-40. This is a total of Br.120, 000 net
advantages.
Relevant Costs Per Unit
Cost to buy Br.21.00
Cost to make 19.00
Advantage of making the part internally Br. 2.00
Total advantage = Br. 2.00 x 60, 000 units = Br. 120, 000

b) If the space now is used to produce the part would otherwise be idle, then Great should
continue to produce its own XL-40and the supplier’s offer should be rejected, as stated
above. Idle space that has no alternative use has an opportunity cost of zero.
But what if the space now being used to produce the part would not sit idle rather could be used
for some other purpose? In that case, the space would have an opportunity cost that would have
to be considered in assessing the desirability of the supplier’s offer. What would this opportunity
cost be? It would be the segment margin that could be derived from the best alternative use of
the space. Therefore, the use of the idle facilities may change our previous decision in
requirement (a) above.
Assuming the space now being used to produce part XL-40 would be
i) Rented to a nearby manufacture for Br. 60, 000 per annum or
ii) Used to produce other product that contributes a profit of Br. 250, 000 per year,
the relevant cost computation follows:

Make Buy and Buy and Buy and

Leave Rent out Produce
Facility Idle Other
Product
Cost to obtain parts Br. 1, 140,000 Br. 1, 260, 000 Br.1, 260, 000 Br. 1, 260, 000
Contribution from other - - (250, 000)
products
Rent revenue - - (60, 000) -
Net relevant costs Br. 1, 140, 000 Br. 1, 260, 000 Br.1, 200, 000 Br.1, 010, 000

Great company would be better off through accepting the supplier’s offer and using the
available facility to produce the new product line. This move has the least net relevant cost of
Br. 1,010,000.
25