17 Asddtvel aNlSi! Ja Cost Structure analy Cost structure is the relative proportion of the variable and fixed costs. eee eae Aly 9 hal) ALS aga gat gt: dll JS @ Ifthe firm depends on human works to do activities, so the frim have High VC and low FC. aS GNSS y Alle 9 pte GIS Uh SS ages gaint 5 allan) le aia aS tll @ Ifthe firm depends on automated machines to do activities, so the firm have High FC and Low VC AUB othe NSS yale AGE BS) GS Gp pel GF AYE gle acta AS Cost Structure ructure (1 ructure (2) High % Variable Cost Low % Variable Cost Low % Fixed Cost High % Fixed Cost Better Better If Sales Decreases ( Slump ) If Sales Increases ( Vouge) J-28VI 9@ Structure I lia J-23VI 9@ Structure JI lia Clenoll gels > 8 coleroll obj Ul> 98 trend in sales (Cadi Ga plod 8) Clayall clad IF Sales Revenue is Increased: (High FC & Low VC) is Preferable IF Sales Revenue is Decreased: (Low FC & High VC) is Preferable18 BS dasLud! docicll 053 edged Jlio oul agbul Lie gad os Exercise: El-Nasr Mfg firm has two production lines A & B. Production line A depends on direct labor hours whereas production line B depends cn machines hours. The following is a contribution format income statement: Sales revenue 100,000 | 100% | 100,000 | 100% ve 60,000 | 60% | 30,000 | 30% cM 40,000 | 40% | 70,000 | 70% FC 30,000 60,000 Net operating income | 10,000 10,000 Required: @M Which production line has better cost structure if the sales revenue is expected to exceed L.E. 100,000 by 10% in the coming financial year. (2) Which production line has better cost structure if the sales revenue is expected to drop below L.E. 100,000 by 10% in the coming financial year. (3) What are the production lines’ break-even points? and what are their margins of safety ?The Solution 19 (1) If the expected sales revenue increased by 10%: Income statement Line A Line B Amount[ % |Amount|[ % Seles revenue (100,000x110%) [110,000 | 100% | 110,000 | 100% | (100,000x110%) vo (110,000 x 60%) 66,000 | 60% | 33,000 | 30% | (110,000 x 30%) cM 44,000 | 40%* | 77,000 | 70%* FC os Vax | 30,000 60,000 [ Net operating income 14,000 17,000 v * Production line B has better cost structure (high FC & low VC). uel Fixed ratio we 3S) olemall orbs Ue wd (2) If the expected sales revenue decreased by 10%: eee ee ree cerca Income statement {(100,000 x 90%) Sales revenue (100,000 x 90%) (90,000 x 30%) ve (90,000 x 60%) | 54,000 | 60% | 27,000 | 30% CM 36000 | 40% | 63,000. | 70% FC nad V al Tet operating income * Production line A has better cost structure (high VC & low FC). wsleVI Variable Cost JI she 5S) Glenoll slasil Ul> 58 (3) Production lines’ break-even points & margins of safety FC ‘CM ratio Break-even points in pounds Total current sales revenue (1) 100,000 | 100,000 Break-even points in pounds 75,000 | 85,714 Margin of safety in pounds (2) {25,000 | 14,286 Margin of safety ratio (2 + 1) 25% | 143% |20 Fearon, L evefage Joos gl Operating Leverage : Operating leverage is a measure of how sensitive met operating income is to percentage changes in sales. It is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits, Shull 8 48ill Gue ell pei Gas :( Sensitivity Japluall (lal y sill T # ORevabing Leverage _ “Terel Corbitouton Haran legvee ie nek income Cassa) Go Coe GM tll Gee LUV) Ga oat is lua pasting el) e Rye & eveent & Vesfee ; | chomge Hh = Changem X Ff Ry, | nek income Sales Levevage ' a21 Example: You are provided with the following data related to contribution income statement for RBC Company. Actual sales 500 Bikes Sales $ 250,000 Less: variable expenses 150,000 Contribution margin 100,000 Less: fixed expenses 80,000 Net income Required: 1- Compute the degree of operating leverage. 2- If sales changed to be $275,000 instead of $250,000. Compute how much net income (profit) will be. Solution 1- Degree of o $100,000 pera $20,000 = 5 Leverage 2- Percentage change in Sales = (275,000 — 250,000) + 250,000 = 10% 10% increase in sales (from 250,000 to 275,000) will result in an increase in the Net Income by: Percentage change in Sales x degree of Operating Leverage 10% x 5 =50% Net income will be: 20,000 + (50% x 20,000) = $30,00022 Example : XYZ company produced 500 bicycle with the following information: selling price per unit $ 500 variable expenses per unit — $ 300 Fixed cost $ 80,000 Required : 1) Compute Operating Leverage ? 2) what will be the operating profit if the sales increased by 10% ? Solution 500 unit Sales ($500) 250,000 (-) Variable expenses ($300) (150,000) = Contribution margin 100,000 (-) Fixed expenses 80,000 = Net operating income 20,000 . Contribution Margin 1) Operating Leverage=, ———_+—_. Net Profit 100,000 20,00023 2) Rr & Reveok 8 Veayee : = chagem X J uk, choy WW = wack income Sales Levevage Increase in Profit = % Change in Sales X Operating Leverage 2 10 % x 5 = 50% The Increase in Profit = 20,000 X 50% = 10,000 The New Profit = 20,000 + 10,000 = 30,00024 AlLicall (8 Gide Gye FSI gay Alle (8 (Multiple Products) In this case we must compute Average Contribution Margin for Bundle Effects of Sales Mix on CVP Products @& @®) Sales Price 200 100 VC/unit 120 70 Fixed cost 4,500 Sales mix 3 2 Note: products (A) and (B) are sold in a bundle Required: 1. Compute breakeven point for each product in units 2. Compute breakeven point for each product in U.S. Dollars 3. Compute target Sales for each product in units to earn $ 1,500 profit 4. Compute target Sales for each product in U.S. Dollars to earn $ 1,500 profit Solution(1) (2) (3) (4) Solution 25 Average CM for Bundle = CM/unit Sales Mix Average CM for Bundle ($ 200 - $ 120) _Product (X) $80 3 240 (§ 100 - $ 70) Product (Y) $30 2 60 Average CM for Bundle = $300 Fixed Cost _ $4,500 BP (for Bundle) in units = ‘cvevagu CM for Bundle CMforBundie ~ $300 7 15 Bundle BP for (X) in units = 15 x 3 = 45 units BP for (X) in units = 15x 2= 30 units BP for (X) in Value = 45 units x $ 200 = $ 9,000 BP for (Y) in Value = 30 units x $ 100 = $ 3,000 Fixed Cost + Target Profi 4,500 + 1,500 Sales (for Bundle) units = Fixed! Cost Target Profit: — $4500 41,500 © 59 Bundle average CM for Bundle $300 Sales for (X) in units = 20x3 = 60 units Sales for (Y) in units = 20 x 2 = 40 units Sales for (X) in Value = 60 units x $ 200 = $ 12,000 Sales for (Y) in Value = 40 units x $ 100 = $ 4,00026 Exercise (4): ™ company sells two products (X) and (Y). Sales price for (X) $10 and variable cost per unit $5, while sales price for (Y) $9 and variable cost per unit $5. The company sells 2 units of (X) with one unit of (Y), fixed cost $1000. Required: 1) How many units sold from (X) to achieve breakeven point? 2) How many units sold from (X) and (Y) to achieve $1520 target profit? Solution Average CM for Bundle CM/unit Sales Mix _ | Average CM for Bundle Pr x (§ 10- $5) $5 2 10 Product (Y) @ a 5) Hi 4 Average CM for Bundle = $14 BP (for Bundle) in units = ——P%ed Cost___ $1000 _ 94 Bungie average CMfor Bundle $14 BP for (X) in units = 71 x 2 = 142 units BP for (Y) in units = 71 x1= 71 units (2) _ Fixed Cost +Target Profit _ $1,000+1,520 _ Sales (for Bundle) in uni average CM for Bundle $14 = 180 Bundle Sales for (X) in units = 180 x2= 360 units Sales for (Y) in units = 180 x1= 180 units