tailieunhanh - Lecture Survey of accounting (4/e) - Chapter 11: Cost behavior, operating leverage, and profitability analysis

In this chapter, you will be able to: Identify and describe fixed, variable, and mixed cost behavior; demonstrate the effects of operating leverage on profitability; prepare an income statement using the contribution margin approach;. | Chapter Eleven Cost Behavior, Operating Leverage, and Profitability Analysis © 2015 McGraw-Hill Education. 1 Fixed Cost Behavior Consider the following concert example where the band will be paid $48,000 regardless of the number of tickets sold. When activity . . . . 11-2 2 Fixed Cost Behavior $48,000 ÷ 3,000 Tickets = $ per Ticket 11-3 3 Operating Leverage A measure of the extent to which fixed costs are being used in an organization. Operating leverage is greatest in companies that have a high proportion of fixed costs in relation to variable costs. Consider the following concert example where all costs are fixed. Fixed Costs Small percentage change in revenue Large percentage change in profits 11-4 4 Operating Leverage When all costs are fixed, every additional sales dollar contributes one dollar to gross profit. 10% Revenue Increase 90% Gross Profit Increase 11-5 5 Shifting the cost structure from fixed to variable not only reduces risk but also the potential for profits. . | Chapter Eleven Cost Behavior, Operating Leverage, and Profitability Analysis © 2015 McGraw-Hill Education. 1 Fixed Cost Behavior Consider the following concert example where the band will be paid $48,000 regardless of the number of tickets sold. When activity . . . . 11-2 2 Fixed Cost Behavior $48,000 ÷ 3,000 Tickets = $ per Ticket 11-3 3 Operating Leverage A measure of the extent to which fixed costs are being used in an organization. Operating leverage is greatest in companies that have a high proportion of fixed costs in relation to variable costs. Consider the following concert example where all costs are fixed. Fixed Costs Small percentage change in revenue Large percentage change in profits 11-4 4 Operating Leverage When all costs are fixed, every additional sales dollar contributes one dollar to gross profit. 10% Revenue Increase 90% Gross Profit Increase 11-5 5 Shifting the cost structure from fixed to variable not only reduces risk but also the potential for profits. Risk and Reward Assessment 10% Revenue Increase 10% Gross Profit Increase 11-6 6 Risk and Reward Assessment Risk refers to the possibility that sacrifices may exceed benefits. Risk may be reduced by converting fixed costs into variable costs. Let’s see what happens to the concert example if the band receives $16 per ticket sold instead of a fixed $48,000. 11-7 7 The total variable cost increases in direct proportion to the number of tickets sold. Variable unit cost per ticket remains at $16 regardless of the number of tickets sold. Variable Cost Behavior 11-8 8 Variable Cost Behavior Total variable cost increases in direct proportion to the number of units sold. The behavior of variable cost per unit is contradictory to the word variable, because variable cost per unit remains constant regardless of how many units are sold. 11-9 9 Variable Cost Behavior When activity . . . Consider the concert example where a band receives $16 for each ticket sold. The more sold will increase the .