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4

LEARNING OBJECTIVES

1 Identify common cost behavior patterns. 2 Estimate the relation between cost and activity

using account analysis and the high-low method.

3 Perform cost-volume-profit analysis for single

products.

4 Perform cost-volume-profit analysis for multiple

products.

5 Discuss the effect of operating leverage. 6 Use the contribution margin per unit of the

constraint to analyze situations involving a resource constraint.

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M

ary Stuart is the vice president of operations for CodeConnect, a company that manufactures and sells bar code readers. As a senior manager, she must answer a variety of questions dealing with planning, control, and decision making. Consider the following questions that Mary has faced: Planning: Last year, CodeConnect sold 20,000 bar code readers at $200 per unit. The cost of

manufacturing these items was $2,940,000, and selling and administrative costs were $800,000. Total profit was $260,000. In the coming year, the company expects to sell 25,000 units. What level of profit should be in the budget for the coming year? Control: In April, production costs were $250,000. In May, costs increased to $265,000, but production also increased from 1,750 units in April

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to 2,000 units in May. Did the manager responsible for production costs do a good job of controlling costs in May? Decision making: The current price for a bar code reader is $200 per unit. If the price is increased to $225 per unit, sales will drop from 20,000 to 17,000. Should the price be increased? The answer to each of these questions depends on how costs and, therefore, profit change when volume changes. The analysis of how costs and profit change when volume changes is referred to as cost-volume-profit (C-V-P)...