HOW IS CVP ANALYSIS USED FOR SENSITIVITY ANALYSIS?

Một phần của tài liệu Horngren financial managerial accounting 6th by nobles 3 (Trang 129 - 133)

Managers often want to predict how changes in sales price, costs, or volume affect their profits. Managers can use CVP relationships to conduct sensitivity analysis. Sensitivity analysis is a “what if ” technique that estimates profit or loss results if sales price, costs, volume, or underlying assumptions change. Sensitivity analysis allows managers to see how various business strategies will affect how much profit the company will make and, thus, empowers managers with better information for decision making. Let’s see how Smart Touch Learning can use CVP analysis to estimate the effects of some changes in its busi- ness environment.

Changes in the Sales Price

Competition in the touch screen tablet computer business is so fierce that Smart Touch Learning believes it must cut the sales price to $475 per tablet to maintain market share.

Suppose the company’s variable costs remain $275 per tablet and fixed costs stay at $13,500.

How will the lower sales price affect the breakeven point?

Using the contribution margin approach, the results are as follows:

Required sales in units = Fixed costs + Target profit Contribution margin per unit

= (+13,500 + +0)

(+475 per unit - +275 per unit)

= 68 units*

With the original $500 sales price, Smart Touch Learning’s breakeven point was 60 tablets.

With the new lower sales price of $475 per tablet, the breakeven point increases to 68 tablets. The lower sales price means that each tablet contributes less toward fixed costs,

Learning Objective 4 Use CVP analysis to perform

sensitivity analysis

Sensitivity Analysis A “what if” technique that estimates profit or loss results if sales price, costs, volume, or underlying assumptions change.

*Actual result of 67.5 units rounded up to the next full unit as it is not possible to sell partial tablets.

so the company must sell more tablets to break even. Additionally, each unit sold beyond the breakeven point will contribute less to profits due to the lower contribution margin per unit.

Changes in Variable Costs

Return to Smart Touch Learning’s original data, disregarding the change made in sales price in the previous example. Assume that one of the company’s suppliers raises prices, which increases the variable cost for each tablet to $285 (instead of the original $275).

Smart Touch Learning decides it cannot pass this increase on to its customers, so the company holds the price at the original $500 per tablet. Fixed costs remain at $13,500.

How many tablets must Smart Touch Learning sell to break even after the supplier raises prices?

Required sales in units = Fixed cost + Target profit Contribution margin per unit

= (+13,500 + +0)

(+500 per unit - +285 per unit)

= 63 units*

Higher variable costs per tablet reduce Smart Touch Learning’s contribution margin per unit from $225 per tablet to $215 per tablet. As a result, the company must sell more tablets to break even—63 rather than the original 60. This analysis shows why managers are particularly concerned with controlling costs during an economic downturn. Increases in costs raise the breakeven point, and a higher breakeven point can lead to problems if demand falls due to a recession.

Of course, a decrease in variable costs would have the opposite effect. Lower variable costs increase the contribution margin on each tablet and, therefore, lower the breakeven point.

Changes in Fixed Costs

Return to Smart Touch Learning’s original data, disregarding the changes made in the previ- ous two examples. The company is considering spending an additional $3,000 on Web site banner ads. This would increase fixed costs from $13,500 to $16,500. If the tablets are sold at the original price of $500 each and variable costs remain at $275 per tablet, what is the new breakeven point?

Required sales in units= Fixed costs + Target profit Contribution margin per unit

= (+16,500 + +0)

(+500 per unit - +275 per unit)

= 74 units*

*rounded up to next full unit

*rounded up to next full unit

Using Sensitivity Analysis

Managers usually prefer a lower breakeven point to a higher one, but do not overemphasize this one aspect of CVP analysis. Even though Smart Touch Learning has a breakeven point of 60 units and each of the previous examples increased the breakeven point, management wants to do more than break even. Consider the following two scenarios:

Sales

Volume Contribution

Margin per Unit Total Contribution

Margin Total Fixed

Costs Operating Income

Scenario 1 100 units $ 15 $ 1,500 $ 1,000 $ 500

200 15 3,000 1,000 2,000

300 15 4,500 1,000 3,500

400 15 6,000 1,000 5,000

Scenario 2 100 units $ 25 $ 2,500 1,000 $ 1,500

200 25 5,000 1,000 4,000

300 25 7,500 1,000 6,500

400 25 10,000 1,000 9,000

Notice how much operating income increased in Scenario 2 compared to Scenario 1 when the sales volume increased. The only difference between the two scenarios is a difference in contribution margin. Remember, contribution margin is the amount that contributes to covering the fixed costs and then to providing operating income. In both sce- narios, fixed costs are covered when sales are 100 units. Therefore, in Scenario 1, each increase in sales of 100 units increased operating income by $1,500 (100 units * $15 contribution margin per unit). In Scenario 2, each increase in sales of 100 units increased operating income by $2,500 (100 units * $25 contribution margin per unit).

Managers can use contribution margin to predict the change in operating income when volume changes. In the short term, managers may not be able to reduce fixed costs to increase operating income, but they may be able to increase contribution margin. The two components of contribution margin are sales price per unit and variable costs per unit.

Therefore, an increase in contribution margin can be created by an increase in sales price per unit, a decrease in variable costs per unit, or a combination of the two.

Exhibit20-9 | Effects of Changes in Sales Price, Variable Costs, and Fixed Costs

RESULT CAUSE

Change

Sales price per unit increases Sales price per unit decreases Variable cost per unit increases Variable cost per unit decreases Total fixed cost increases Total fixed cost decreases

EFFECT

Decreases Decreases Increases No effect No effect Increases

Contribution Margin per Unit

Decreases Increases Increases Decreases Increases Decreases Breakeven Point

Cost Behavior Versus Management Behavior

One of the CVP assumptions mentioned earlier in the chapter is that the only factor that affects total costs is a change in volume, which increases or decreases variable and mixed costs. However, research in the last few years has shown that this is not always the case and that costs are often asymmetrical. That is, costs increase more when sales volume is increasing than costs decrease when sales volume is decreasing, a phenomenon known as cost stickiness. For example, as sales increase, managers will hire more workers, which increases the variable cost of labor. However, when sales decrease, managers are reluctant to lay off workers, especially if the sales decline is expected to be temporary, and instead find alternate activities for the workers. Therefore, the decrease in sales is greater than the proportionate decrease in costs. Managers need to be aware that their decisions, such as not laying off workers, may cause costs to behave differently than expected from their CVP analysis. Exhibit 20-10 illustrates an example of cost stickiness. Notice how the slope of the Total Costs line did not decrease at the same rate when sales decreased as it increased when sales increased.

Cost Stickiness

The asymmetrical change in costs when there is a decrease in the volume of activity.

Exhibit20-10 | Example of Cost Stickiness

Month Sales Total Costs

Total Costs as a Percent of Sales

Jan. $ 200 $ 100 50%

Feb. 400 200 50%

Mar. 600 300 50%

Apr. 800 400 50%

May 1,000 500 50%

Jun. 800 450 56%

Jul. 600 400 67%

Aug. 400 350 88%

Sep. 200 300 150%

$1,200

$1,000

$800

$600

$400

$200

$0 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep.

Sales Total Costs

Try It!

A furniture manufacturer specializes in wood tables. The tables sell for $100 per unit and incur $40 per unit in variable costs. The company has $6,000 in fixed costs per month. Calculate the breakeven point in units under each independent scenario.

14. Variable costs increase by $10 per unit.

15. Fixed costs decrease by $600.

16. Sales price increases by 10%.

Check your answers online in MyAccountingLab or at http://www.pearsonhighered.com/Horngren.

Một phần của tài liệu Horngren financial managerial accounting 6th by nobles 3 (Trang 129 - 133)

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