CH 05
CH 05
CH 05
Eighth Edition
Chapter 5
Cost-Volume-Profit
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Chapter Outline
Learning Objectives
LO 1 Explain variable, fixed, and mixed costs and the relevant
range.
LO 2 Apply the high-low method to determine the components of
mixed costs.
LO 3 Prepare a CVP income statement to determine contribution
margin.
LO 4 Compute the break-even point using three approaches.
LO 5 Determine the sales required to earn target net income and
determine margin of safety.
LEARNING OBJECTIVE 1
Explain variable, fixed, and mixed costs and the relevant
range.
LEARNING OBJECTIVE 2
Apply the high-low method to determine the
components of mixed costs.
Change in
Total Costs at High ÷ High minus Low = Variable Cost
versus Low Activity Level Activity Level per Unit
Fixed $ 8,000
Variable ($1.10× 45,000) 49,500
$57,500
(a) Compute the variable- and fixed-cost elements using this method.
(b) Using the information from part (a), write the cost formula.
(c) Estimate the total cost if the company produces 8,000 units.
LO 2 Copyright ©2018 John Wiley & Sons, Inc. 31
Do It! 2: High-Low Method (2 of 4)
Units Produced Total Cost
March 9,800 $14,740
April 8,500 13,250
May 7,000 11,100
June 7,600 12,000
July 8,100 12,460
(a) Compute the variable- and fixed-cost elements using this method.
($14, 740 $11,100)
Variable cost: $1.30 per unit
(9,800 7, 000)
Fixed cost: $14,740 − $12,740 ($1.30 × 9,800 units) = $2,000
or $11,100 − $9,100 ($1.30 × 7,000) = $2,000
LO 2 Copyright ©2018 John Wiley & Sons, Inc. 32
Do It! 2: High-Low Method (3 of 4)
Units Produced Total Cost
March 9,800 $14,740
April 8,500 13,250
May 7,000 11,100
June 7,600 12,000
July 8,100 12,460
(b) Using the information from your answer to part (a), write
the cost formula.
Cost = $2,000 + ($1.30 × units produced)
(c) Estimate the total cost if the company produces 8,000 units.
Total cost (8,000 units):
$2,000 + $10,400 ($1.30 × 8,000) = $12,400
LEARNING OBJECTIVE 3
Prepare a CVP income statement to determine
contribution margin.
LEARNING OBJECTIVE 4
Computation of
break-even point
in units.
LEARNING OBJECTIVE 5
Determine the sales required to earn target net income
and determine margin of safety
Fixed Costs +
Unit Contribution margin Sales in Units
Target Net In come
Fixed Costs +
Contribution margin Ratio Sales in Dollars
Target Net Income
b) the margin of safety and margin of safety ratio assuming actual sales
are $1,382,400; and