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Cost volume profit: What is the impact on BE and MOS in event of environmental changes?
- 1. Click here to PLAY! Youll need 15 min
- 2. Define costs Differentiate between fixed and variable costs. Define and calculate profit and contribution margin. Define and calculate Breakeven Point (BP) and Margin of Safety (MOS). Calculate impact on BP and MOS when costs change. Calculate volume of sales needed to achieve targeted profit. 2 of 13
- 3. 3 of 13 Please help me! The price of fish has increased by $1,000. How will this impact my Breakeven Volume and Margin of Safety?
- 4. Retry TOTAL REVENUE (TR) = Unit Selling Price (USP) X Volume(Z) X 10,000 bowls TOTAL COSTS (TC) = Total Fixed Costs (TFC) + Total Variable Costs (TVC) Rental $5,000 Dishwasher fixed fee: $500 Fish $4,500 Meat $1,000 Utilities $4,000 The change is: a. Decrease from 10,000 to 5,000 b. Decrease from 5,000 to 4,000 d. Increase from 4,000 to 5,000 a. Decrease from 10,000 to 5,000 b. Decrease from 5,000 to 4,000 d. Increase from 4,000 to 5,000 c. No change!c. No change! Need a hint? 4 of 13 $ Vol (Z) Total Profit Total Cost Breakeven Point Actual Vol Margin of Safety Price of fish was $1,500 but now its gone up to $4,500. Whats the impact on my Breakeven Volume? X When costs increase, Breakeven vol. will increase so that the additional cost can be covered. Try again! Yay! Thats right! When you take the new total costs of $15,000 and divide that by $3, you will get the new breakeven of 5,000, which is an increase from the original breakeven of 4,000. Trust me! Theres a change! My original breakeven is actually 4,000 bowls! Please click on Need a hint? to refresh your memory!
- 5. Click to move segment along. 5 of 13 $ Vol (Z) New Total Cost Next Replay Originally, the breakeven vol. was 4,000 Then Variable Cost (Fish) increased from $1,500 to $4,500. This caused the Unit Variable Cost to Increase and the Total Cost line to pivot upwards creating a new breakeven vol. of 5,000. Total Cost Fixed Cost Variable CostNew Variable Cost Total Revenue 4,000 5,000 Breakeven Point
- 6. TOTAL REVENUE (TR) = Unit Selling Price (USP) X Volume(Z) X 10,000 bowls TOTAL COSTS (TC) = Total Fixed Costs (TFC) + Total Variable Costs (TVC) Rental $5,000 Dishwasher fixed fee: $500 Fish $4,500 Meat $1,000 Utilities $4,000 The change is: a. Decrease from 10,000 to 5,000 b. Increase from 5,000 to 10,000 d. Increase from 5,000 to 6,000 a. Decrease from 10,000 to 5,000 b. Increase from 5,000 to 10,000 d. Increase from 5,000 to 6,000 c. Decrease from 6,000 to 5,000 c. Decrease from 6,000 to 5,000 Need a hint? 6 of 13 $ Vol (Z) Total Profit Total Cost Breakeven Point Actual Vol Margin of Safety Price of fish was $1,500 but now its gone up to $4,500. Whats the impact on my Margin of Safety? X Are you sure an increase in costs will increase my Margin of Safety? An increase in costs is likely to reduce it instead. Try again! Are you sure an increase in costs will increase my Margin of Safety? An increase in costs is likely to reduce it instead. Try again! Thats right! My original breakeven was 4,000 but now it has gone up to 5,000. So my original margin of safety was 10,000 4,000 = 6,000. Now my margin of safety is 10,000 5,000 = 5,000 My original breakeven is actually 4,000 bowls and my original margin of safety is 6,000! Please click on Need a hint? to refresh your memory! Retry
- 7. Click to move segment along. 7 of 13 $ Vol (Z) New Total Cost Next Replay Originally, the Margin of Safety was 6,000. Then Variable Cost (Fish) increased from $1,500 to $4,500. This caused the Unit Variable Cost to Increase and the Total Cost line to pivot upwards creating a new Margin of Safety of 5,000. Total Cost Total Revenue 4,000 5,000 Breakeven Point Actual Vol Margin of Safety 6,0005,000
- 8. 8 of 13 Please help me! When the price of fish increased, my new Breakeven was 5,000 and my new Margin of Safety was 5,000. Now stall rental has also increased by $3,000. How will this further impact my Breakeven Volume and Margin of Safety?
- 9. TOTAL REVENUE (TR) = Unit Selling Price (USP) X Volume(Z) X 10,000 bowls TOTAL COSTS (TC) = Total Fixed Costs (TFC) + Total Variable Costs (TVC) Rental $8,000 Dishwasher fixed fee: $500 Fish $4,500 Meat $1,000 Utilities $4,000 The change is: a. Increase from 5,000 to 6,000 b. Decrease from 6,000 to 5,000 d. Increase from 6,000 to 10,000 a. Increase from 5,000 to 6,000 b. Decrease from 6,000 to 5,000 d. Increase from 6,000 to 10,000 c. No change!c. No change! Need a hint? 9 of 13 $ Vol (Z) Total Profit Total Cost Breakeven Point Actual Vol Margin of Safety Stall rental was $5,000 but now it has increased to $8,000. Whats the impact on my Breakeven Volume? X When costs increase, Breakeven vol. will increase so that the additional cost can be covered. Try again! 10,000 bowls is not my breakeven volume! Please click on Need a hint? to refresh your memory! Trust me! Theres a change! Yay! Thats right! When you take the new total costs of $18,000 and divide that by $3, you will get the new breakeven of 6,000, which is an increase from the breakeven of 5,000. Retry
- 10. Click to move segment along. 10 of 13 $ Vol (Z) Total Cost (after variable cost change) Next Replay After Variable Cost (Fish) increased from $1,500 to $4,500, the breakeven vol. changed from 4,000 to 5,000. Then Fixed Cost (Rental) increased from $5,000 to $8,000. This caused the Total Fixed Cost to Increase and the Total Cost line to shift upwards creating a new breakeven vol. of 6,000. Total Cost Fixed Cost Variable Cost New Variable Cost Total Revenue 4,000 5,000 Breakeven Point New Fixed Cost Total Cost (after variable cost and fixed cost change) 6,000
- 11. TOTAL REVENUE (TR) = Unit Selling Price (USP) X Volume(Z) X 10,000 bowls TOTAL COSTS (TC) = Total Fixed Costs (TFC) + Total Variable Costs (TVC) Rental $8,000 Dishwasher fixed fee: $500 Fish $4,500 Meat $1,000 Utilities $4,000 The change is: a. Increase from 4,000 to 5,000 b. Decrease from 5,000 to 4,000 d. Increase from 4,000 to 10,000 a. Increase from 4,000 to 5,000 b. Decrease from 5,000 to 4,000 d. Increase from 4,000 to 10,000 c. Decrease from 10,000 to 4,000 c. Decrease from 10,000 to 4,000 Need a hint? 11 of 13 $ Vol (Z) Total Profit Total Cost Breakeven Point Actual Vol Margin of Safety Stall rental was $5,000 but now it has increased to $8,000. Whats the impact on my Margin of Safety? X Thats right! My breakeven was 5,000 but now it has gone up to 6,000. My margin of safety was 10,000 5,000 = 5,000. Now my margin of safety is 10,000 6,000 = 4,000 Are you sure an increase in costs will increase my Margin of Safety? An increase in costs is likely to reduce it instead. Try again! My breakeven was 5,000. With the increase in rental my new breakeven was 6,000. How do I calculate my new Margin of Safety? Click Need a hint? if you need to see more. Are you sure an increase in costs will increase my Margin of Safety? An increase in costs is likely to reduce it instead. Try again! Retry
- 12. Click to move segment along. 12 of 13 $ Vol (Z) Total Cost (after variable cost change) Next Replay After Variable Cost (Fish) increased from $1,500 to $4,500, the margin of safety changed from 6,000 to 5,000. Then Fixed Cost (Rental) increased from $5,000 to $8,000. This caused the Total Fixed Cost to Increase and the Total Cost line to shift upwards creating a new margin of safety of 4,000. Total Cost Total Revenue 4,000 5,000 Breakeven Point Total Cost (after variable cost and fixed cost change) 6,000 Actual Vol Margin of Safety 5,0004,0006,000 10,000
- 13. I hope after this segment youve learnt: - How to calculate the impact on Breakeven when costs change. - How to calculate the impact on Margin of Safety when costs change. Click to attempt the quiz for Part 4. We will figure out how many bowls we need to sell in order to become millionaires! HERE