Chapter3Cost–volume–profitanalysisManagementAccountingforDecisionMakersTenthEdition
LEARNINGOUTCOMESYoushouldbeableto:Prepareabreak-evenchartanddeducethebreak-evenpointforsomeactivityDemonstratethewayinwhichmarginalanalysiscanbeusedwhenmakingshort-termdecisionsDiscusstheweaknessesofbreak-evenanalysisDistinguishbetweenfixedcostandvariablecostandusethisdistinctiontoexplaintherelationshipbetweencost,volumeofactivityandprofit
ThebehaviourofcostsRemainconstant(fixed)whenchangesoccurtothevolumeofactivityVaryaccordingtothevolumeofactivityCostsmaybeclassifiedas:FixedVariable
Cost(￡)Volumeofactivity(unitsofoutput)F0Figure3.1Graphoffixedcostagainstvolumeofactivity
Rentcost(￡)VolumeofactivityR0Figure3.2Graphofrentcostagainstthevolumeofactivity
Cost(￡)Volumeofactivity0Figure3.3Graphofvariablecostagainstthevolumeofactivity
Electricitycost
(￡)Volumeofactivity0TheslopeofthislinegivesthevariablecostperunitofactivityFixedcost
elementFigure3.4Graphofelectricitycostagainstthevolumeofactivity
Cost(￡)Volumeofactivity(unitsofoutput)0FTotalcostFixedcostVariablecostFigure3.5Graphoftotalcostagainstvolumeofactivity
Figure3.6Abreak-evenchartRevenue/Cost(￡)Volumeofactivity(unitsofoutput)0FTotalcostFixedcostVariablecostBreak-evenpointTotalsalesrevenuePROFITLOSS
Calculatingthebreak-evenpointFixedcost
Salesrevenueperunit?Variablecostsperunitb=
Break-evenLoadfactor%6040ercent2019839620162015728893722018201773949573Figure3.8Break-evenandloadfactorsatRyanairSource:BasedoninformationcontainedintheRyanairHoldingsplcAnnualReport2019.
Contributionmarginratio(CMR)Contribution×100%
SalesrevenueCMR=
Figure3.9aBreak-evenchartforCottageIndustriesLtd’sbasket-makingactivitieswithoutthemachineFixedcostsRevenue/Cost(￡000)Volumeofactivity(nu