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Decision Making Regarding Cost

This document discusses cost-volume-profit analysis to aid in decision making. It provides graphs of fixed costs, variable costs, total costs, total revenue, and break-even point. The break-even point is calculated as 333 units where total revenue equals total costs. Contribution per unit is defined as the amount each unit sells for minus its variable cost, and is used to calculate total contribution and profit at different production levels. Margin of safety is the difference between budgeted and break-even sales, showing the extent planned sales exceed the break-even point. Cost-volume-profit analysis can help decide inventory levels, product lines, and make-versus-buy decisions.

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146 views15 pages

Decision Making Regarding Cost

This document discusses cost-volume-profit analysis to aid in decision making. It provides graphs of fixed costs, variable costs, total costs, total revenue, and break-even point. The break-even point is calculated as 333 units where total revenue equals total costs. Contribution per unit is defined as the amount each unit sells for minus its variable cost, and is used to calculate total contribution and profit at different production levels. Margin of safety is the difference between budgeted and break-even sales, showing the extent planned sales exceed the break-even point. Cost-volume-profit analysis can help decide inventory levels, product lines, and make-versus-buy decisions.

Uploaded by

helperforeu
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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DECISION MAKING

REGARDING COST

COST VOLUME PROFIT


ANALYSIS
FIXED COSTS in $

no of units fixed costs


0 3000
100 3000
200 3000
300 3000
400 3000
500 3000
fixed costs

8000
7000
6000
5000
cost in $

4000
3000
2000
1000
0
1 2 3 4 5 6
number of units(100s)
VARIABLE COSTS in $

no of units variable costs


0 0
100 500
200 1000
300 1500
400 2000
500 2500
VARIABLE COSTS

3000

2500

2000
cost ($)

1500

1000

500

0
1 2 3 4 5
number of units in 100s
RELATIONSHIP BETWEEN TOTAL COSTS & TOTAL REVENUES

number of units fixed costs total costs total revenue


100 3000 3500 1400
200 3000 4000 2800
300 3000 4500 4200
400 3000 5000 5600
500 3000 5500 7000
600 3000 6000 84000
Break-even chart showing Margin of safety

8000
7000
6000
5000 fixed costs
cost ($)

4000 total costs


3000 total revenue
2000
1000
0
1 2 3 4 5
number of units in 100s
CALCULATE BREAK-EVEN POINT

Total revenues = Total costs

Total revenues = Fixed costs + Total Variable costs

N x Sales revenue per unit = Fixed costs+(N x Variable cost per unit)

N x(Sales revenue per unit)–(N x Variable cost per unit)= Fixed costs

N ( Sales revenue per unit – Variable cost per unit ) = Fixed costs

N= Fixed costs . =333 units


Sales revenue per unit – Variable cost per unit
CONTRIBUTION
N= Fixed costs .
Sales revenue per unit – Variable cost per unit

Bottom part is the Contribution per Unit


Sales revenue per unit – Variable cost per unit
It is referred as contribution because sale
of each unit contributes to meeting fixed
cost
TOTAL CONTRIBUTION

= N ( Sales revenue per unit – Variable cost per unit )


PROFIT-VOLUME ANALYSIS

PROFIT-VOLUME ANALYSIS

8000
7000
Loss-------Profit ($)

6000
5000
fixed costs
4000
total revenue
3000
2000
1000
0
1 2 3 4 5 6
number of units in 100s
MARGIN OF SAFETY

The extent to which the planned level of sales lies


above the breakeven point

The difference between the budgeted sales


and the break-even sales
SITUATIONS WHICH WANT
DECISIONS
Deciding how many units of inventory to
buy?

Deciding whether to drop a product?

Deciding which product should be


produced more?

Deciding whether to make or buy a part or


a product?
SHORT TERM DECISION MAKING
1. Determining Relevant costs and
Relevant revenues

Incremental costs

1. Avoidable costs

2. Opportunity costs

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