Hospitality Industry Managerial Accounting

1
Hospitality Industry Managerial Accounting

• HRT 374
• Chapter 7
• Don St. Hilaire

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Chapter 7 Cost-Volume-Profit Analysis

• Define cost-volume-profit (CVP) analysis.
• A set of tools used to determine the revenues
  required at any desired profit level.
• Expresses relationships among fixed and variable
  costs, sales volume, and profit.
• Break-even analysis.
• Determine allowable fixed costs.
• Determine cash flow break-even point.

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Ch. 7 CVP Analysis

• State the major assumptions upon which CVP
  analysis is based.
• Fixed costs remain fixed.
• Variable costs fluctuate linearly with revenue.
• Revenues directly proportional to sales volume.
• Mixed costs can be divided into fixed and
  variable elements.

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Ch. 7 CVP Analysis - Major Assumptions cont.

• All costs can be assigned to operated
  departments.
• Only quantitative factors relevant - qualitative
  factors are not considered.

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Ch. 7 CVP Analysis

• State the CVP equation used for analyzing a
  single product or service operation.
• In SX - VX - F
• In net income, S selling price, X units
  sold V variable cost per unit F total fixed
  costs.
• X F/ (S-V) determines units sold at break-even

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Ch. 7 CVP Equation - Single Product cont.

• F SX- VX determines fixed costs at break-even
• S (F/X) V determines selling price at
  break-even
• V S - (F/X) determines variable cost per unit
  at break-even.

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Ch. 7 Break-even Reminders

• Reminder at break-even - At Variable income
  levels.
• As revenues increase - total fixed costs remain
  the same
• As revenues increase - fixed costs per unit
  decrease

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Ch. 7 Break-even Reminders cont.

• Reminder at break-even - At Variable income
  levels. Cont.
• As revenues increase - total variable costs
  increase.
• As revenues increase - variable costs per unit
  decrease.

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Ch. 7 Break-even Reminders cont.

• Reminder at break-even - At Variable income
  levels. Cont.
• After the break-even point is achieved, each
  additional 1 of sales generates the contribution
  margin in profit before taxes. For example, if
  the contribution margin is 25, after break-even
  , each additional dollar of sales contributes
  0.75 in profit before taxes.

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Ch. 7 Margin of Safety Sensitivity Analysis

• Margin of safety. - excess of budgeted or actual
  sales over sales at break-even.
• Sensitivity analysis.

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Ch. 7 - CVP Multiple Products or Services

• State the CVP equation used for analyzing a
  multiple product or service operation.
• R (F In)/ CMRw
• R revenue at desired profit level, F total
  fixed costs, In net income, CMRw weighted
  average contribution margin.

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Ch. 7 - Define contribution margin (CM)

• Contribution margin (CM). - sales less cost of
  sale the amount of sales revenue that is
  contributed toward fixed costs and/or profit.

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Ch. 7 - Define contribution margin ratio (CMR)

• Contribution margin ratio (CMR). - contribution
  margin divided by selling price the percentage
  of sales revenue that is contributed toward
  fixed costs and/or profits.

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Ch. 7 - Define weighted average contribution
margin ratio (CMRw)

• Weighted average contribution margin ratio
  (CMRw). - in a multiple-product situation, the
  average contribution margin for all operated
  departments that is weighted to reflect the
  relative contribution of each department.

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Ch. 7 - CVP - Income Taxes

• Specify how the CVP equation changes to account
  for income taxes.
• Ib In / (1 - t)
• R (Ib F)/ CMRw

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Ch. 7 - CVP - Graphs

• Discuss the nature of profit-volume graphs.
• Clear relationship between volume and profits.
• Revenues and costs not shown.
• Break-even point.

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Ch. 7 - CVP - Cash Flow

• State the equation used for cash flow CVP
  analysis.
• R ((Cfb (F - NCE) NECD)/ CMRw

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Ch. 7 - CVP - Operating Leverage

• Explain what is meant by operating leverage.
• Extent to which expenses are fixed, not variable.

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Ch. 7 - CVP - Operating Leverage cont.

• Effect of leverage on profits and losses.
• High level of fixed costs relative to variable
  costs (high operating leverage) a small increase
  in sales beyond break-even point results in large
  increase in net income failure to reach
  break-even points results in large net loss.
• High level of variable costs relative to fixed
  costs (low operating leverage) a mall increase
  in sales beyond break-even point results in small
  increase in net income failure to reach
  break-even point results in small net loss.