Cost-Volume-Profit Analysis

Objective 1
• Identify how changes in volume affect costs.

Types of Costs

Variable Fixed Mixed

Total Variable Cost
Total variable costs change when activity changes.
Total Long Distance Telephone Bill

Your total long distance telephone bill is based on how many minutes you talk.

Minutes Talked

Variable Cost Per Unit
Variable costs per unit do not change as activity increases.
Per Minute Telephone Charge Minutes Talked

The cost per long distance minute talked is constant. For example, 10 cents per minute.

Variable Costs Example
Consider Grand Canyon Railway. • Assume that breakfast costs Grand Canyon Railway $3 per person. • If the railroad carries 2,000 passengers, it will spend $6,000 for breakfast services.

Variable Costs Example
Total Variable Costs (thousands)

$24 – $18 – $12 – $6 – – – – – 0 1 2 3 4 5

Volume (Thousands of passengers)

Total Fixed Cost
Total fixed costs remain unchanged when activity changes.
Your monthly basic telephone bill probably does not change when you make more local calls.
Monthly Basic Telephone Bill Number of Local Calls

Mixed Costs
• Contain fixed portion that is incurred even when facility is unused & variable portion that increases with usage. • Example: monthly electric utility charge
– Fixed service fee – Variable charge per kilowatt hour used

Mixed Costs

Total Utility Cost

Variable Utility Charge Fixed Monthly Utility Charge Activity (Kilowatt Hours)

Relevant Range...
…is a band of volume in which a specific relationship exists between cost and volume. • Outside the relevant range, the cost either increases or decreases. • A fixed cost is fixed only within a given relevant range and a given time span.

Relevant Range
$160,000 – Fixed Costs $120,000 – $80,000 – $40,000 Relevant Range

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–

0

5,000 10,000 15,000