HFT 3431

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HFT 3431

• Chapter 7
• Cost-Volume-Profit Analysis

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Cost Volume Profit Analysis

• What Is the Break-Even Point?
• What Is the Profit at Occupancy Percentages Above
  Break-Even?
• How Do Increases in Fixed Charges Affect
  Break-Even?
• How Many More Rooms Must Be Sold to Recover Cost
  Increases?

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Cost Volume Profit Analysis

• How Many Rooms Must Be Sold to Reach a Certain
  Profit?
• What Is the Effect of Profits When Prices,
  Variable Costs, and Fixed Costs Change?
• How Do Labor Rate Changes Affect Profits?

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Cost-Volume Profit Assumptions

• Fixed Costs Remain Constant During the Period
  Being Analyzed.
• Variable Costs Fluctuate in a Linear Fashion With
  Revenues.
• Variable Costs Are Constant on a Per Unit Basis.

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Cost-Volume Profit Assumptions

• Productivity Remains Constant.
• Revenues Are Proportional to Variable Costs.
• There Are No Volume Discounts.

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Cost-Volume Profit Assumptions

• All Costs Can Be Broken Down Into Their Fixed and
  Variable Components.
• Joint Costs Are Not Eliminated When One
  Department Is.

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CVP Basic Formula

• How Much Should Be Charged to Break-Even?
• 10 Room Motel
• Variable Costs Are 5 Per Room
• Fixed Costs Are 2,500

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CVP Basic Formula

• 250 Rooms Will Be Sold
• SP VC Per Room (Fixed Costs / Number Rooms
  Sold)
• SP 5 ( 2,500 / 250)
• SP 15 Per Room

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Most Common Expression of CVP Analysis Is a Graph
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Most Common Expression of CVP Analysis Is a Graph
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Most Common Expression of CVP Analysis Is a Graph
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Most Common Expression of CVP Analysis Is a Graph
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Most Common Expression of CVP Analysis Is a Graph
Loss but cover FC
Profit
Breakeven
Loss
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CVP Basic Formula

• How Much Should Be Charged to Earn 2,000 in a 30
  Day Period?
• 10 Room Motel
• Variable Costs Are 5 Per Room
• Fixed Costs Are 2,500

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CVP Basic Formula

• 250 Rooms Will Be Sold
• SP VC Per Room (Profit FC) / Number Rooms
  Sold
• SP 5 ( 2,000 2,500) / 250
• SP 23 Per Room

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Most Common Expression of CVP Analysis Is a Graph
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CVP Formula for Single Product Analysis

• I Net Income
• S Selling Price
• X Units Sold
• V Variable Costs Per Unit
• F Total Fixed Costs (Plus Profit)

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CVP Formula for Single Product Analysis

• SX Total Revenue
• VX Total Variable Costs
• Basic Formula for Break-Even (Income Equals 0)
• 0 SX - VX - F

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Break-Even Formula Variations

• Units Sold at Break-Even
• X F / (S - V)
• Fixed Costs at Break-Even
• F SX - VX
• Selling Price at Break-Even
• S (F / X) V

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Break-Even Formula Variations

• Variable Cost Per Unit at Break-Even V S - (F /
  X)
• Most Hospitality Operations Sell Multiple
  Products. Therefore, We Need Additional Tools.

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Contribution Margin

• Contribution Margin (CM) Is the Selling Price, or
  Sales, Minus the Variable Cost(s).
• Contribution Margin Percentage (Ratio) Is the CM
  Divided by the Selling Price (or Sales).

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Contribution Margin

• To Get Break-Even in Units, Divide the Fixed
  Costs by the Contribution Margin.
• To Get Break-Even in Sales Dollars, Divide the
  Fixed Costs by the Contribution Margin Percentage.

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Contribution Margin

• Since Our Products Have Different CM, We Use CM
  Percent (Weighted) a Lot.

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Weighted Contribution Margin Percent

• The Contribution Margin Percent, or Contribution
  Margin Ratio (CMR) Says That the Amount Available
  to Cover Fixed Costs Is the CMR Times the Sales
  Dollars.

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Weighted Contribution Margin Percent

• The Weighted CMR Is Computed As Follows
• (Total Revenue - Total Variable Costs) / Total
  Revenue

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Weighted Contribution Margin Percent

• Another Way of Looking at it is to Take the Sales
  Mix Percentage for Each Area (Which in Total Must
  Add up to 100) and Multiply That Percentage by
  the CMR for the Particular Area. Then Add All
  Results to Get the Weighted CMR.

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Weighted Contribution Margin Percent

• Divide the Weighted CMR Into the Fixed Costs (and
  Profit if Applicable) and the Result is the
  Required Sales Level.

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Margin of Safety

• Excess of Budgeted or Actual Sales Over Sales at
  Break-Even
• Expressed in Units or Dollars

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Sensitivity Analysis

• Study of the Sensitivity of Dependent Variables
  to Changes in Independent Variables
• Looks at the Incremental Number of Units Required
  to Sold to Cover Additional Costs

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Operating Leverage

• Extent to Which Expenses Are Fixed Rather Than
  Variable
• Highly Levered When Fixed Costs to Variable Costs
  Is High
• Highly Levered Means a Small Increase in Sales
  Yields a Large Profit (Above Break-Even)

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Assignment

• None