1. Universidad Cuauhtémoc
Campus Aguascalientes
Cost Behavior &
Cost-Volume-Profit
Analysis
Análisis de Costos
Maestría en Administración

2. Cost Behavior

3. Jason Inc. produces stereo sound systems
under the brand name of J-Sound. The parts
for the stereo are purchased from an outside
supplier for $10 per unit (a variable cost).
Variable Cost

4. Total Variable Cost Graph
TotalCosts
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
10 20 300
Units Produced
(in thousands)
Variable Cost

5. Unit Variable Cost Graph
$20
$15
$10
$5
0
CostperUnit
10 20 30
Units Produced
(000)
Variable Cost

6. TotalCosts
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
10 20 300
$20
$15
$10
$5
0
CostperUnit
10 20 30
Number of
Units
Produced
Units Produced (000)
Units Produced (000)
Direct
Materials
Cost per Unit
Total Direct
Materials
Cost
5,000 units $10 $ 50,000
10,000 10 l00,000
15,000 10 150,000
20,000 10 200,000
25,000 10 250,000
30,000 10 300,000
Variable Cost

7. The production
supervisor for Minton
Inc.’s Los Angeles plant
is Lupita Marmolejo.
She is paid $75,000 per
year. The plant
produces from 50,000 to
300,000 bottles of
perfume.
La Fleur
Fixed Costs

8. Number of
Bottles
Produced
Total Salary
for Jane
Sovissi
50,000 bottles $75,000 $1.500
100,000 75,000 0.750
150,000 75,000 0.500
200,000 75,000 0.375
250,000 75,000 0.300
300,000 75,000 0.250
Salary per
Bottle
Produced
Fixed Costs

9. Fixed Costs
Total Fixed Cost GraphTotalCosts
$150,000
$125,000
$100,000
$75,000
$50,000
$25,000
100 200 3000
Unit Fixed Cost Graph
Bottles Produced (000)
Number of
Bottles
Produced
CostperUnit
$1.50
$1.25
$1.00
$.75
$.50
$.25
100 200 3000
Units Produced (000)
Total Salary
for Jane
Sovissi
50,000 bottles $75,000 $1.500
100,000 75,000 0.750
15,000 75,000 0.500
20,000 75,000 0.375
25,000 75,000 0.300
30,000 75,000 0.250
Salary per
Bottle
Produced

10. Simpson Inc. manufactures
sails using rented equipment.
The rental charges are
$15,000 per year, plus $1 for
each machine hour used over
10,000 hours.

11. Mixed Costs
Total Mixed Cost Graph
TotalCosts
0
Total Machine Hours (000)
$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
10 20 30 40
Mixed costs are
usually separated into
their fixed and
variable components
for management
analysis.
Mixed costs are
sometimes called
semivariable or
semifixed costs.

12. The high-low method is a simple way
to separate mixed costs into their
fixed and variable components.
Mixed Costs

13. Actual costs incurred
ProductionTotal
(Units) Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,800 57,500
October 750 41,250
High-Low Method
Variable cost per unit =
Highest level of activity ($) minus
lowest level of activity ($)
Highest level of activity (n) minus
lowest level of activity (n)
What month has
the highest level
of activity in
terms of cost?

14. Actual costs incurred
ProductionTotal
(Units) Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,800 57,500
October 750 41,250
Variable cost per unit =
$61,500 minus lowest level of
activity ($)
What month has
the highest level
of activity in
terms of cost?
Highest level of activity (n) minus
lowest level of activity (n)
High-Low Method

15. Actual costs incurred
ProductionTotal
(Units) Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,800 57,500
October 750 41,250
Variable cost per unit =
$61,500 minus lowest level of
activity ($)
For the highest
level of cost,
what is the level
of production?
Highest level of activity (n) minus
lowest level of activity (n)
2,100 minus lowest level of
activity (n)
High-Low Method

16. Actual costs incurred
ProductionTotal
(Units) Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,800 57,500
October 750 41,250
Variable cost per unit =
$61,500 minus lowest level of
activity ($)
What month has
the lowest level of
activity in terms
of cost?
$61,500 – $41,250
2,100 minus lowest level of
activity (n)
2,100 – 750
High-Low Method

17. 2,100 – 750
Actual costs incurred
ProductionTotal
(Units) Cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,800 57,500
October 750 41,250
What is the
variable cost per
unit?
$57,500 – $41,250
High-Low Method
$20,250
1,350
Variable cost per unit = $15

18. Actual costs incurred
ProductionTotal
(Units) Cost
Variable cost per unit = $15
What is the total
fixed cost (using the
highest level)?
Total cost = (Variable cost per unit x Units of production)
+ Fixed cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,800 57,500
October 750 41,250
$61,500 = ($15 x 2,100) + Fixed cost
$61,500 = ($15 x 2,100) + $30,000
High-Low Method

19. Actual costs incurred
ProductionTotal
(Units) Cost
Variable cost per unit = $15
The fixed cost is
the same at the
lowest level.
Total cost = (Variable cost per unit x Units of production)
+ Fixed cost
June 1,000 $45,550
July 1,500 52,000
August 2,100 61,500
September 1,800 57,500
October 750 41,250
$41,250 = ($15 x 750) + Fixed cost
$41,250 = ($15 x 750) + $30,000
High-Low Method

20. Variable Costs
Total Fixed Costs
Total Units Produced
TotalCosts
Total Units Produced
PerUnitCost
Total Variable Costs
Total Units Produced
Unit Variable Costs
Total Units Produced
TotalCosts
PerUnitCost
Fixed Costs
Review
Unit Fixed CostsTotal costs remain the
same regardless of
activity.
Unit Costs increase
and decreases with
activity level.
Total costs increase and
decreases proportionately
with activity level.
Unit costs remain the
same per unit regardless
of activity.

22. Contribution Margin Income Statement
Sales (50,000 units) $1,000,000
Variable costs 600,000
Contribution margin $ 400,000
Fixed costs 300,000
Income from operations $ 100,000
The contribution
margin is
available to cover
the fixed costs
and income from
operations.
FIXED
COSTS
Contribution
margin
Income from
Operations

23. Contribution Margin Income Statement
Sales Variable
costs
Fixed
costs
Income
from
operations
= + +
Sales
Variable
costs
Contribution
margin
– =
Sales (50,000 units) $1,000,000
Variable costs 600,000
Contribution margin $ 400,000
Fixed costs 300,000
Income from operations $ 100,000

24. Contribution Margin Ratio
100%
60%
40%
30%
10%
Contribution margin ratio =
Sales – Variable costs
Sales
Contribution margin ratio =
$1,000,000 – $600,000
$1,000,000
Contribution margin ratio = 40%
Sales (50,000 units) $1,000,000
Variable costs 600,000
Contribution margin $ 400,000
Fixed costs 300,000
Income from operations $ 100,000

25. 100%
60%
40%
30%
10%
The contribution margin can be expressed three ways:
1. Total contribution margin in dollars.
3. Contribution margin ratio (percentage).
3. Unit contribution margin (dollars per unit).
$20
12
$ 8
Sales (50,000 units) $1,000,000
Variable costs 600,000
Contribution margin $ 400,000
Fixed costs 300,000
Income from operations $ 100,000
Contribution Margin Ratio

26. What is the
break-even
point?
Revenues Costs=
Break-even

27. Calculating the Break-Even Point
At the break-even point, fixed
costs and the contribution
margin are equal.
Sales (? units) $ ?
Variable costs ?
Contribution margin $ 90,000
Fixed costs 90,000
Income from operations $ 0
$25
15
$10

28. Sales ($25 x ? units) $ ?
Variable costs ($15 x ? units) ?
Contribution margin $ 90,000
Fixed costs 90,000
Income from operations $ 0
$25
15
$10
Break-even sales (units) =
Unit contribution margin
Fixed costs$90,000
$10
9,000 units
Sales ($25 x 9,000) $225,000
Variable costs ($15 x 9,000) 135,000
Contribution margin $ 90,000
Fixed costs 90,000
Income from operations $ 0
PROOF!
Calculating the Break-Even Point
In Units

29. Sales ($250 x ? units) $ ?
Variable costs ($145 x ? units) ?
Contribution margin $ ?
Fixed costs 840,000
Income from operations $ 0
$250
145
$105
Break-even sales (units) =
Unit contribution margin
Fixed costs$840,000
$105
8,000 units
Calculating the Break-Even Point
In Units
The unit selling price is $250 and unit variable
cost is $145. Fixed costs are $840,000.

30. Sales ($25 x ? units) $ ?
Variable costs ($15 x ? units) ?
Contribution margin $ ?
Fixed costs 840,000
Income from operations $ 0
$250
145
$105
Break-even sales (units) =
Unit contribution margin
Fixed costs$840,000
$100
8,400 units
$250
150
$100
Next, assume
variable costs is
increased by $5.
Calculating the Break-Even Point
In Units
The unit selling price is $250 and unit variable
cost is $145. Fixed costs are $840,000.

31. Sales $ ?
Variable costs ?
Contribution margin $ ?
Fixed costs $600,000
Income from operations $ 0
Break-even sales (units) =
Unit contribution margin
Fixed costs$600,000
$20
30,000 units
$50
30
$20
Calculating the Break-Even Point
In Units
A firm currently sells their product at $50 per
unit and it has a related unit variable cost of
$30. The fixed costs are $600,000.

32. Sales $ ?
Variable costs ?
Contribution margin $ ?
Fixed costs $600,000
Income from operations $ 0
Break-even sales (units) =
Unit contribution margin
Fixed costs$600,000
$30
20,000 units
$50
30
$20
$60
30
$30
Calculating the Break-Even Point
In Units
Management increases
the selling price from
$50 to $60.

33. Summary of Effects of Changes on
Break-Even Point

34. Target Profit
Fixed costs are estimated at $200,000, and the
desired profit is $100,000. The unit selling
price is $75 and the unit variable cost is $45.
The firm wishes to make a $100,000 profit.
Sales (? units) $ ?
Variable costs ?
Contribution margin $ ?
Fixed costs 200,000
Income from operations $ 0
$75
45
$30
In
Units

35. Sales (? units) $ ?
Variable costs ?
Contribution margin $ ?
Fixed costs 200,000
Income from operations $ 0
Sales (units) =
Unit contribution margin
Fixed costs + target profit$200,000 + $100,000
$30
10,000 units
Target Profit In
Units
$75
45
$30
Target profit is
used here to refer
to “Income from
operations.”

36. $75
45
$30
Sales (10,000 units x $75) $750,000
Variable costs (10,000 x $45) 450,000
Contribution margin $300,000
Fixed costs 200,000
Income from operations $100,000
Proof that sales of 10,000 units
will provide a profit of $100,000.
Target Profit

37. Graphic Approach to
Cost-Volume-Profit
Analysis

38. Cost-Volume-Profit Chart
SalesandCosts($000)
0
Units of Sales (000)
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Unit selling price $ 50
Unit variable cost 30
Unit contribution margin $ 20
Total fixed costs $100,000
60%
Total Sales
Variable
Costs
1 2 3 4 5 6 7 8 9 10

39. Cost-Volume-Profit Chart
SalesandCosts($000)
0
Units of Sales (000)
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Unit selling price $ 50
Unit variable cost 30
Unit contribution margin $ 20
Total fixed costs $100,000
60%
40%
Contribution
Margin
100%
60%
40%
1 2 3 4 5 6 7 8 9 10

40. Cost-Volume-Profit Chart
SalesandCosts($000)
0
Units of Sales (000)
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Unit selling price $ 50
Unit variable cost 30
Unit contribution margin $ 20
Total fixed costs $100,000
Fixed Costs
100%
60%
40%
Total
Costs
1 2 3 4 5 6 7 8 9 10

41. Cost-Volume-Profit Chart
SalesandCosts($000)
0
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
1 2 3 4 5 6 7 8 9 10
Break-Even Point
Units of Sales (000)
Unit selling price $ 50
Unit variable cost 30
Unit contribution margin $ 20
Total fixed costs $100,000
100%
60%
40%
$100,000
$20
= 5,000 units

42. Cost-Volume-Profit Chart
SalesandCosts($000)
0
Units of Sales (000)
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Unit selling price $ 50
Unit variable cost 30
Unit contribution margin $ 20
Total fixed costs $100,000
100%
60%
40%
Operating Profit Area
Operating Loss Area

44. $100
$75
$50
$25
$ 0
$(25)
$(50)
$(75)
$(100)
Sales (10,000 units x $50) $500,000
Variable costs (10,000 units x $30) 300,000
Contribution margin (10,000 units x $20) $200,000
Fixed costs 100,000
Operating profit $100,000
Units of Sales (000’s)
1 2 3 4 5 6 7 8 9 10
Relevant
range is
10,000 units
OperatingProfit
(Loss)$000’s

45. Units of Sales (000’s)
1 2 3 4 5 6 7 8 9 10
Maximum loss is
equal to the total
fixed costs.
Profit Line
Operating
loss
Operating
profit
$100
$75
$50
$25
$ 0
$(25)
$(50)
$(75)
$(100)
Sales (10,000 units x $50) $500,000
Variable costs (10,000 units x $30) 300,000
Contribution margin (10,000 units x $20) $200,000
Fixed costs 100,000
Operating profit $100,000
Maximum
profit within
the relevant
range.
OperatingProfit
(Loss)$000’s

46. OperatingProfit
(Loss)$000’s
Units of Sales (000’s)
1 2 3 4 5 6 7 8 9 10
Operating
loss
Operating
profit
Break-Even Point
Sales (10,000 units x $50) $500,000
Variable costs (10,000 units x $30) 300,000
Contribution margin (10,000 units x $20) $200,000
Fixed costs 100,000
Operating profit $100,000
$100
$75
$50
$25
$ 0
$(25)
$(50)
$(75)
$(100)

47. Sales Mix
Considerations

48. Cascade Company sold 8,000 units of Product A
and 2,000 units of Product B during the past year.
Cascade Company’s fixed costs are $200,000.
Other relevant data are as follows:
Sales $ 90 $140
Variable costs 70 95
Contribution margin $ 20 $ 45
Sales mix 80% 20%
Products
A B

49. Sales $ 90 $140
Variable costs 70 95
Contribution margin $ 20 $ 45
Sales mix 80% 20%
Sales Mix Considerations
Products
A B
Product contribution
margin $16 $ 9
$25
Fixed costs, $200,000

50. Sales Mix Considerations
Products
A BProduct contribution
margin $16 $ 9
$25
Break-even sales units
$200,000
$25
Fixed costs, $200,000

51. Sales Mix Considerations
Products
A BProduct contribution
margin $16 $ 9
$25
Break-even sales units
$200,000
$25
Fixed costs, $200,000
= 8,000 units

52. Sales Mix Considerations
Products
A BProduct contribution
margin $16 $ 9
$25
A: 8,000 units x Sales Mix (80%) = 6,400
B: 8,000 units x Sales Mix (20%) = 1,600

53. PROOF
Product A Product B Total
Sales:
6,400 units x $90 $576,000 $576,000
1,600 units x $140 $224,000 224,000
Total sales $576,000 $224,000 $800,000
Variable costs:
6,400 x $70 $448,000 $448,000
1,600 x $95 $152,000 152,000
Total variable costs $448,000 $152,000 $600,000
Contribution margin $128,000 $ 72,000 $200,000
Fixed costs 200,000
Income from operations $ 0Break-even point

54. Margin
of Safety

55. Margin of Safety =
Sales – Sales at break-even point
Sales
The margin of safety indicates the
possible decrease in sales that may occur
before an operating loss results.
Margin of Safety =
$250,000 – $200,000
$250,000
Margin of Safety = 20%

56. Universidad Cuauhtémoc
Campus Aguascalientes
Questions?
Análisis de Costos
Maestría en Administración