Breakeven Analysis: The Definitive Guide to Cost-Volume-Profit Analysis, Second Edition

174 Pages·2014·5.62 MB·English

by  Cafferky

THE BUSINESS Breakeven Analysis C Managerial Accounting Collection
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reference materials for explanations, and examples. This new edition offers a
students expecting to tackle wide range of topics, from calculating basic breakeven, The Defi nitive Guide to
management and leadership
to dealing with multiple products, mixed costs, chang-
challenges during their
ing costs, and changing prices.
professional careers. Cost-Volume-Profi t
Michael E. Cafferky is the Ruth McKee Chair for Entre-
POLICIES BUILT
BY LIBRARIANS preneurship and Business Ethics at Southern Adventist Analysis
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Michael E. Cafferky
The Digital Libraries are a Association.
comprehensive, cost-eff ective
Jon Wentworth is on the faculty of the School of Jon Wentworth
way to deliver practical
Business and Management at Southern Adventist Uni-
treatments of important
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student and faculty member. ment to Student Success. He was previously the chair
of the accounting department at Klabat University in
Indonesia. He received an MBA from the University
of Tennessee and a Master of Taxation from Georgia
For further information, a
State University. He holds a Tennessee Certifi ed Public
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www.businessexpertpress.com/librarians Managerial Accounting Collection
Kenneth A. Merchant, Editor
ISBN: 978-1-63157-091-9
Breakeven Analysis

Breakeven Analysis
The Definitive Guide to
Cost-Volume-Profit Analysis
Second Edition
Michael E. Cafferky and Jon Wentworth
Breakeven Analysis: The Defi nitive Guide to Cost-Volume-Profi t Analysis,
Second Edition
Copyright © Business Expert Press, LLC, 2014.
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form or by any
means—electronic, mechanical, photocopy, recording, or any other
except for brief quotations, not to exceed 400 words, without the
prior permission of the publisher.
First published in 2010 by
Business Expert Press, LLC
222 East 46th Street, New York, NY 10017
www.businessexpertpress.com
ISBN-13: 978-1-63157-091-9 (paperback)
ISBN-13: 978-1-63157-092-6 (e-book)
Business Expert Press Managerial Accounting Collection
Collection ISSN: 2152-7113 (print)
Collection ISSN: 2152-7121 (electronic)
Cover and interior design by Exeter Premedia Services Private Ltd,
Chennai, India
First edition: 2010
Second edition: 2014
10 9 8 7 6 5 4 3 2 1
Printed in the United States of America.
Abstract
This book is a comprehensive collection of cost-volume-profit applica-
tions. Business professionals, entrepreneurs, business professors, and
undergraduate and graduate business students will benefit from this one-
stop how-to book of formulas, explanations, and examples. The user will
find a wide range of topics, from calculating basic breakeven, to deal-
ing with multiple products, mixed costs, changing costs, and changing
prices.
Keywords
Annuity factor, breakeven (BE), cash flow, coefficient of determination,
common stock dividend (CD), common stockholders, contribution mar-
gin (CM), contribution margin ratio, cost of capital, cost of goods sold
(COGS), cost-volume-profit (CVP) analysis, demand, fixed costs (FC),
high-low method, income statement, income tax, least squares method,
multiple regression, net present value (NPV), operating leverage, polyno-
mial, preferred stock dividend (PD), preferred stockholders, price elastic-
ity of demand, quadratic formula, scattergraph, target profit, total cost,
total revenue, unit selling price (SP), unit variable costs (VC), weighted
average contribution margin, weighted average selling price

Contents
Preface ............................................... ix
Chapter 1 Introduction .................................1
Chapter 2 Total Cost Method ............................5
Chapter 3 Contribution Margin Method ...................11
Chapter 4 Target Profit Method ..........................17
Chapter 5 Cost of Goods Sold Method ....................21
Chapter 6 Modified Breakeven Analysis:
Factoring Estimates of Demand ..................29
Chapter 7 Dealing With Changes in Product
Mix Using Weighted Averages ...................41
Chapter 8 High-Low Method. . . . . . . . . . . . . . . . . . . . . . . . . . . .51
Chapter 9 Least Squares Method .........................57
Chapter 10 Changing Costs ..............................65
Chapter 11 Changing Prices ..............................75
Chapter 12 Selling Price at Various Volumes .................85
Chapter 13 Multiple Breakeven Points ......................89
Chapter 14 Net Present Value Method ......................93
Chapter 15 Quadratic Equation ..........................105
Chapter 16 Tax Effects on Cost-Volume-Profit ...............115
Appendix A Glossary ...................................119
Appendix B Limitations and Criticisms .....................127
Appendix C A Short Genealogy of Breakeven Analysis .........131
viii CONtENtS
Appendix D Using Breakeven Thinking to Decide
Whether to Start a Business ....................135
Appendix E Annuity Table ..............................141
Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .143
References ............................................147
Index ...............................................153
Preface
Seldom does a manager go more than a month or two without employ-
ing the thinking patterns that are at the foundation of this book. In some
rapidly changing organizations, breakeven calculations will be used as
fodder for discussions, debates, and ultimately decisions on a daily or
weekly basis.
Today’s managers are far more sophisticated than those of a generation
ago, but the need for cost-volume-profit thinking and breakeven decision-
making tools has not gone away. Advances in cost accounting; the use of
activity-based costing; the use of many performance-improvement tools
such as identifying and removing constraints, optimizing logistics, and
inventory management all lead down two interrelated pathways: value
improvement and cost reduction.
Many existing companies have already picked the low-hanging fruit
of performance improvement. With each passing year the gains from
squeezing costs out of current systems become more and more difficult to
achieve. These efforts have an impact on the breakeven point of the orga-
nization. New companies, their managers learning fast from competitors,
begin with the need to know where the breakeven point is. Breakeven
thinking becomes second nature to seasoned managers who are faced
with the ever-present need to fend off the onslaughts of competitors who
are finding more efficient ways of doing business.
Who This Book Is Designed For
We start with the assumption that the users of this book will vary in their
degrees of sophistication in terms of cost-volume-profit analysis. Some
readers will have no business school background but have worked their
way up to middle or senior management learning business concepts pri-
marily in the context of their organization and industry. We take these
readers from the basic concepts up through the advanced approaches.
Some of these managers work in nonprofit organizations and government