Universidad Cuauhtémoc

Campus Aguascalientes

Cost Behavior &

Cost-Volume-Profit
Analysis
Análisis de Costos
Maestría en Administración
Cost Behavior
 Variable Cost
Jason Inc. produces stereo sound systems
under the brand name of J-Sound. The parts
for the stereo are purchased from an outside
supplier for $10 per unit (a variable cost).
 Variable Cost
Total Variable Cost Graph

$300,000
$250,000
Total Costs

$200,000
$150,000
$100,000
$50,000
0 10 20 30
Units Produced
(in thousands)
 Variable Cost
Unit Variable Cost Graph
$20
Cost per Unit $15

$10
$5
0 10 20 30
Units Produced
(000)
 Variable Cost
$300,000 $20

Cost per Unit

Total Costs

$250,000 $15
$200,000 $10
$150,000 $5
$100,000 0 10 20 30
$50,000
Units Produced (000)
0 10 20 30
Units Produced (000)
Number of Direct Total Direct
Units Materials Materials
Produced Cost per Unit Cost

5,000 units $10 $ 50,000

10,000 10 l00,000
15,000 10 150,000
20,000 10 200,000
25,000 10 250,000
30,000 10 300,000
 Fixed Costs
The production
supervisor for Minton
Inc.’s Los Angeles plant
is Lupita Marmolejo.
She is paid $75,000 per
year. The plant La Fleur
produces from 50,000 to
300,000 bottles of
perfume.
 Fixed Costs

Number of Total Salary Salary per

Bottles for Jane Bottle
Produced Sovissi Produced
50,000 bottles $75,000 $1.500
100,000 75,000 0.750
150,000 75,000 0.500
200,000 75,000 0.375
250,000 75,000 0.300
300,000 75,000 0.250
 Fixed Costs
Total Fixed Cost Graph Unit Fixed Cost Graph
$150,000 $1.50
Total Costs

Cost per Unit

$125,000 $1.25
$100,000 $1.00
$75,000 $.75
$50,000 $.50
$25,000 $.25
0 100 200 300 0 100 200 300
Bottles Produced (000) Units Produced (000)
Number of Total Salary Salary per
Bottles for Jane Bottle
Produced Sovissi Produced
50,000 bottles $75,000 $1.500
100,000 75,000 0.750
15,000 75,000 0.500
20,000 75,000 0.375
25,000 75,000 0.300
30,000 75,000 0.250
 Simpson Inc. manufactures
sails using rented equipment.
The rental charges are
$15,000 per year, plus $1 for
each machine hour used over
10,000 hours.
 Mixed Costs
Mixed costs are
Total Mixed Cost Graph
sometimes called
semivariable or
$45,000
$40,000 semifixed costs.
$35,000
Total Costs

$30,000
$25,000 Mixed costs are
$20,000 usually separated into
$15,000
$10,000
their fixed and
$5,000 variable components
0 10 20 30 40 for management
Total Machine Hours (000) analysis.
 Mixed Costs
The high-low method is a simple way
to separate mixed costs into their
fixed and variable components.
 High-Low Method
Actual costs incurred
ProductionTotal
(Units) Cost
What month has
June 1,000 $45,550
July 1,500 52,000 the highest level
August 2,100 61,500 of activity in
September 1,800 57,500 terms of cost?
October 750 41,250

Highest level of activity ($) minus

lowest level of activity ($)
Variable cost per unit =
Highest level of activity (n) minus
lowest level of activity (n)
 High-Low Method
Actual costs incurred
ProductionTotal
(Units) Cost
What month has
June 1,000 $45,550
July 1,500 52,000 the highest level
August 2,100 61,500 of activity in
September 1,800 57,500 terms of cost?
October 750 41,250

$61,500 minus lowest level of

activity ($)
Variable cost per unit =
Highest level of activity (n) minus
lowest level of activity (n)
 High-Low Method
Actual costs incurred
ProductionTotal
(Units) Cost
For the highest
June 1,000 $45,550
July 1,500 52,000 level of cost,
August 2,100 61,500 what is the level
September 1,800 57,500 of production?
October 750 41,250

$61,500 minus lowest level of

activity ($)
Variable cost per unit =
Highest
2,100level of activity
minus (n) minus
lowest level of
lowest activity
level of (n)
activity (n)
 High-Low Method
Actual costs incurred
ProductionTotal
(Units) Cost
What month has
June 1,000 $45,550
July 1,500 52,000 the lowest level of
August 2,100 61,500 activity in terms
September 1,800 57,500 of cost?
October 750 41,250

$61,500 minus lowest level of

$61,500 – $41,250
activity ($)
Variable cost per unit =
2,100 minus – 750level of
2,100lowest
activity (n)
 High-Low Method
Actual costs incurred
ProductionTotal
(Units) Cost
June 1,000 $45,550 What is the
July 1,500 52,000 variable cost per
August 2,100 61,500
September 1,800 57,500 unit?
October 750 41,250

$20,250
$57,500 – $41,250
Variable cost per unit = $15
1,350
2,100 – 750
 High-Low Method
Actual costs incurred
ProductionTotal Variable cost per unit = $15
(Units) Cost
June 1,000 $45,550 What is the total
July 1,500 52,000 fixed cost (using the
August 2,100 61,500
September 1,800 57,500 highest level)?
October 750 41,250

Total cost = (Variable cost per unit x Units of production)

+ Fixed cost
$61,500 = ($15 x 2,100) + Fixed cost
$61,500 = ($15 x 2,100) + $30,000
 High-Low Method
Actual costs incurred
ProductionTotal Variable cost per unit = $15
(Units) Cost
June 1,000 $45,550 The fixed cost is
July 1,500 52,000 the same at the
August 2,100 61,500
September 1,800 57,500 lowest level.
October 750 41,250

Total cost = (Variable cost per unit x Units of production)

+ Fixed cost
$41,250 = ($15 x 750) + Fixed cost
$41,250 = ($15 x 750) + $30,000
 Variable Costs Fixed Costs
Total Variable Costs Total Fixed Costs

Total Costs
Total Costs

Unit Costs increase

Unit costs remain the and decreases with
sameTotal
per Units
unit Produced
regardless Total Units level.
activity Produced
Review
of activity.
Total costs increase and Total
Unitcosts
Fixedremain
Costs the
decreases proportionately
Unit Variable Costs same regardless of
with activity level. activity.
Per Unit Cost

Total Units Produced Per Unit Cost

Total Units Produced

 Contribution Margin Income Statement

Sales (50,000 units) $1,000,000

The contribution
Variable costs 600,000 margin is
Contribution margin $ 400,000 available to cover
Fixed costs 300,000
Income from operations $ 100,000 the fixed costs
and income from
Contribution operations.
margin

Income from
FIXED
Operations
COSTS
 Contribution Margin Income Statement

Sales (50,000 units) $1,000,000

Variable costs 600,000
Contribution margin $ 400,000
Fixed costs 300,000
Income from operations $ 100,000

Income
Sales Variable Fixed
= + + from
costs costs
operations

Variable Contribution
Sales – =
costs margin
 Contribution Margin Ratio

Sales (50,000 units) $1,000,000 100%

Variable costs 600,000 60%
Contribution margin $ 400,000 40%
Fixed costs 300,000 30%
Income from operations $ 100,000 10%

Sales – Variable costs

Contribution margin ratio =
Sales
$1,000,000 – $600,000
Contribution margin ratio =
$1,000,000
Contribution margin ratio = 40%
 Contribution Margin Ratio

Sales (50,000 units) $1,000,000 100% $20

Variable costs 600,000 60% 12
Contribution margin $ 400,000 40% $ 8
Fixed costs 300,000 30%
Income from operations $ 100,000 10%

The contribution margin can be expressed three ways:

1. Total contribution margin in dollars.
3. Contribution margin ratio (percentage).
3. Unit contribution margin (dollars per unit).
What is the
break-even
point?

Revenues = Costs

Break-even
 Calculating the Break-Even Point

Sales (? units) $ ? $25

Variable costs ? 15
Contribution margin $ 90,000 $10
Fixed costs 90,000
Income from operations $ 0

At the break-even point, fixed

costs and the contribution
margin are equal.
 Calculating the Break-Even Point
In Units

Sales($25
Sales ($25xx?9,000)
units) $ $225,000
? $25
Variablecosts
Variable costs($15
($15xx?9,000)
units) 135,000
? 15
Contributionmargin
Contribution margin $ $90,000
90,000 $10
Fixedcosts
Fixed costs 90,000
90,000
Incomefrom
Income fromoperations
operations $ $ 00

$90,000
Fixed costs
Break-even sales (units) = 9,000 units
$10 margin
Unit contribution

PROOF!
 Calculating the Break-Even Point
In Units

Sales ($250 x ? units) $ ? $250

Variable costs ($145 x ? units) ? 145
Contribution margin $ ? $105
Fixed costs 840,000
Income from operations $ 0

$840,000
Fixed costs
Break-even sales (units) = 8,000 units
$105 margin
Unit contribution
The unit selling price is $250 and unit variable
cost is $145. Fixed costs are $840,000.
 Calculating the Break-Even Point
In Units

Sales ($25 x ?Next,

units) assume$ ? $250
variable
Variable costs ($15 x ?costs
units) is ? 145
150
Contribution margin by $5.
increased $ ? $105
$100
Fixed costs 840,000
Income from operations $ 0

$840,000
Fixed costs
Break-even sales (units) = 8,400 units
$100 margin
Unit contribution
The unit selling price is $250 and unit variable
cost is $145. Fixed costs are $840,000.
 Calculating the Break-Even Point
In Units

Sales $ ? $50
Variable costs ? 30
Contribution margin $ ? $20
Fixed costs $600,000
Income from operations $ 0

$600,000
Fixed costs
Break-even sales (units) = 30,000 units
$20 margin
Unit contribution
A firm currently sells their product at $50 per
unit and it has a related unit variable cost of
$30. The fixed costs are $600,000.
 Calculating the Break-Even Point
In Units
Management increases
Salesthe selling price from
$ ? $60
$50
Variable costs
$50 to $60. ? 30
Contribution margin $ ? $30
$20
Fixed costs $600,000
Income from operations $ 0

$600,000
Fixed costs
Break-even sales (units) = 20,000 units
$30 margin
Unit contribution
Summary of Effects of Changes on
Break-Even Point
 Target Profit In
Units

Sales (? units) $ ? $75

Variable costs ? 45
Contribution margin $ ? $30
Fixed costs 200,000
Income from operations $ 0

Fixed costs are estimated at $200,000, and the

desired profit is $100,000. The unit selling
price is $75 and the unit variable cost is $45.
The firm wishes to make a $100,000 profit.
 Target Profit In
Units

Target profit is
Sales (? units) $ ? $75here to refer
used
Variable costs ? 45
to “Income from
Contribution margin $ ? $30
Fixed costs 200,000 operations.”
Income from operations $ 0

Fixed costs + target

$200,000 profit
$100,000
Sales (units) = 10,000 units
Unit contribution
$30 margin
 Target Profit

Sales (10,000 units x $75) $750,000 $75

Variable costs (10,000 x $45) 450,000 45
Contribution margin $300,000 $30
Fixed costs 200,000
Income from operations $100,000

Proof that sales of 10,000 units

will provide a profit of $100,000.
Graphic Approach to
Cost-Volume-Profit
Analysis
 Cost-Volume-Profit Chart
$500 Total Sales
Sales and Costs ($000)

$450
$400
$350
$300
$250
$200
$150 Variable
$100 60% Costs
$ 50
0
1 2 3 4 5 6 7 8 9 10
Units of Sales (000)

Unit selling price $ 50

Unit variable cost 30
Unit contribution margin $ 20
Total fixed costs $100,000
 Cost-Volume-Profit Chart
$500
$450
Sales and Costs ($000)

$400 Contribution
$350 Margin
$300 40%
$250
$200
$150
$100 60%
$ 50
0
1 2 3 4 5 6 7 8 9 10
Units of Sales (000)

Unit selling price $ 50 100%

Unit variable cost 30 60%
Unit contribution margin $ 20 40%
Total fixed costs $100,000
 Cost-Volume-Profit Chart
$500 Total
$450
Sales and Costs ($000)

Costs
$400
$350 Fixed Costs
$300
$250
$200
$150
$100
$ 50
0
1 2 3 4 5 6 7 8 9 10
Units of Sales (000)

Unit selling price $ 50 100%

Unit variable cost 30 60%
Unit contribution margin $ 20 40%
Total fixed costs $100,000
 Cost-Volume-Profit Chart
$500
$450
Sales and Costs ($000)

$400
$350 Break-Even Point
$300
$250
$200
$150
$100
$ 50
0
1 2 3 4 5 6 7 8 9 10
Units of Sales (000)

Unit selling price $ 50 100%

Unit variable cost 30 60% $100,000
Unit contribution margin $ 20 40%
= 5,000 units
$20
Total fixed costs $100,000
 Cost-Volume-Profit Chart
$500
$450 Operating Profit Area
Sales and Costs ($000)

$400
$350
$300
$250 Operating Loss Area
$200
$150
$100
$ 50
0
Units of Sales (000)

Unit selling price $ 50 100%

Unit variable cost 30 60%
Unit contribution margin $ 20 40%
Total fixed costs $100,000
 $100
$75
Operating Profit

$50
(Loss) $000’s

$25
$ 0
$(25)
$(50) Relevant
$(75) range is
$(100)
1 2 3 4 5 6 7 8 10,000
9 10 units
Units of Sales (000’s)

Sales (10,000 units x $50) $500,000

Variable costs (10,000 units x $30) 300,000
Contribution margin (10,000 units x $20) $200,000
Fixed costs 100,000
Operating profit $100,000
 $100
$75 Profit Line
Operating Profit

$50 Operating
(Loss) $000’s

$25 profit
$ 0
$(25) Operating
Maximum
$(50) loss profit within
$(75) the relevant
$(100)
1 2 3 4 5 6 7 8 9 10 range.
Units of Sales (000’s)
Maximum loss is
equal (10,000
Sales to the total
units x $50) $500,000
fixed costs.
Variable costs (10,000 units x $30) 300,000
Contribution margin (10,000 units x $20) $200,000
Fixed costs 100,000
Operating profit $100,000
 $100
$75
Operating Profit

$50 Operating
(Loss) $000’s

$25 profit
$ 0
$(25) Operating
$(50) loss Break-Even Point
$(75)
$(100)
1 2 3 4 5 6 7 8 9 10
Units of Sales (000’s)

Sales (10,000 units x $50) $500,000

Variable costs (10,000 units x $30) 300,000
Contribution margin (10,000 units x $20) $200,000
Fixed costs 100,000
Operating profit $100,000
 Sales Mix
Considerations
Cascade Company sold 8,000 units of Product A
and 2,000 units of Product B during the past year.
Cascade Company’s fixed costs are $200,000.
Other relevant data are as follows:
Products
A B
Sales $ 90 $140
Variable costs 70 95
Contribution margin $ 20 $ 45
Sales mix 80% 20%
Sales Mix Considerations
Products
A B
Sales $ 90 $140
Variable costs 70 95
Contribution margin $ 20 $ 45
Sales mix 80% 20%
Product contribution
margin $16 $ 9

$25
Fixed costs, $200,000
Sales Mix Considerations
Products
Product contribution A B
margin $16 $ 9

$25
Break-even sales units
$200,000
$25

Fixed costs, $200,000

Sales Mix Considerations
Products
Product contribution A B
margin $16 $ 9

$25
Break-even sales units
$200,000
= 8,000 units
$25

Fixed costs, $200,000

Sales Mix Considerations
Products
Product contribution A B
margin $16 $ 9

$25
A: 8,000 units x Sales Mix (80%) = 6,400
B: 8,000 units x Sales Mix (20%) = 1,600
 Product A Product B Total
Sales:
6,400 units x $90 $576,000 $576,000
1,600 units x $140 $224,000 224,000
Total sales $576,000 $224,000 $800,000
Variable costs:
6,400 x $70 $448,000 $448,000
1,600 x $95 $152,000 152,000
Total variable costs $448,000 $152,000 $600,000
Contribution margin $128,000 $ 72,000 $200,000

Fixed costs 200,000

Income from operations Break-even point $ 0

PROOF
 Margin
of Safety
 Sales – Sales at break-even point
Margin of Safety =
Sales
$250,000 – $200,000
Margin of Safety =
$250,000
Margin of Safety = 20%

The margin of safety indicates the

possible decrease in sales that may occur
before an operating loss results.
 Universidad Cuauhtémoc
Campus Aguascalientes

Questions?

Análisis de Costos
Maestría en Administración