Transcript A) Cost-volume-profit analysis

BA 215
Agenda for Lecture 5
• Cost-Volume-Profit Analysis
• Break
• Profit Planning with Constraints
Cost-Volume-Profit Analysis
• Contribution Margin
• The Basic Profit Equation
• Break-even Analysis
• Solving for targeted profits
Contribution Margin
• Contribution Margin
 total sales revenue -
total variable costs
• Unit Contribution Margin
 unit sales price unit variable costs
The Basic Profit Equation
profit = sales - costs
The Basic Profit Equation
profit = sales - costs
 profit = sales - variable costs - fixed costs
The Basic Profit Equation
profit = sales - costs
 profit = sales - variable costs - fixed costs
 profit + fixed costs = sales - variable costs
The Basic Profit Equation
profit = sales - costs
 profit = sales - variable costs - fixed costs
 profit + fixed costs = sales - variable costs
 profit + fixed costs = # of units x
(unit selling price - unit variable cost)
The Basic Profit Equation
profit = sales - costs
 profit = sales - variable costs - fixed costs
 profit + fixed costs = sales - variable costs
 profit + fixed costs = # of units x
(unit selling price - unit variable cost)
 P + FC = Q x (SP - VC)
Break-Even Analysis
 P + FC = Q x (SP - VC)
Set profit = 0, plug in total fixed costs, unit
selling price and unit variable cost, and
solve for # of units. This is break-even
analysis.
 FC = Q x (SP - VC)
Target Dollar Profits
 P + FC = Q x (SP - VC)
Plug in for profits, total fixed costs, unit
selling price and unit variable cost, and
solve for # of units (Q). This calculates
unit sales to achieve a targeted profit.
Target Selling Prices
 P + FC = Q x (SP - VC)
Plug in for profits, total fixed costs, unit
variable cost, and sales volume, and solve
for targeted selling price. This calculates
the unit sales price to achieve a targeted
profit.
BA 215
Agenda for Lecture 5
• Cost-Volume-Profit Analysis
• Break
• Profit Planning with Constraints
BA 215
Agenda for Lecture 5
• Cost-Volume-Profit Analysis
• Break
• Profit Planning with Constraints
Maximizing Profits when there
are Constrained Resources
• The solution is to maximize the
contribution margin per unit of
the constraint.
Due to a kitchen fire, the Albuquerque Baking
Company has only one working oven for the next
several weeks. The company makes pies and cookies.
The oven can hold four pies or two dozen cookies.
The pies require 60 minutes to bake. The cookies
require 12 minutes to bake. Since the pies and
cookies bake at different temperatures, they cannot
be baked at the same time. Pies sell for $9 each. A
dozen cookies sell for $5. The ingredients to make
each pie cost $3. The ingredients to make a dozen
cookies cost $2.
Question: Should the Albuquerque Baking Company
use its one functional oven to make cookies, pies, or
some combination?
Joe can stock his cooler with beer, soda or juice, and
sell everything in it at the beach on a hot Saturday in
June. The beer costs $1 per bottle, and he can sell
beer for $2 per bottle. The soda costs $0.25 per can,
and he can sell soda for $1.50 per can. The juice costs
$1.25 per carton, and he can sell each carton for
$1.75. The cooler has a capacity of 12 cubic feet. Each
cubic foot can hold 16 juice cartons, six soda cans, or
eight bottles of beer.
Question: What should Joe do in order to maximize
his profits?