Profit Center Analysis Jack Davis, CPA, MBA SDSU-CES, Area Management Specialist Profits squeezed? вЂў Everyone knows their costs, donвЂ™t they? вЂў Do you know how these costs behave? Word List вЂў Cost Behavior вЂў Variable Costs. вЂ“ Variable Costs per unit are constant. вЂў Fixed Costs. вЂ“ Fixed costs per unit vary with production level. вЂў Mixed Costs. вЂ“ Semi-variable costs change in total with changes in production level, but not proportionately. Terms to Recognize вЂў Cost volume profit analysis вЂ“ Profit = Sales (S) вЂ“ Variable Costs (VC) вЂ“ Fixed Costs (FC) вЂў Contribution Margin вЂ“ Sales -- Variable Costs вЂ“ Contribution Margin Ratio вЂў (Sales вЂ“ Variable Costs)Г· Sales Breakeven Point вЂў Sales (in dollars) = Fixed Costs / Contribution margin ratio вЂў Sales (units) = Fixed Costs / Contribution margin per unit Cost or Revenue ($) Quantity Produced Break-Even Diagram Cost or Revenue ($) Quantity Produced Break-Even Diagram Break Even Quantity Break Even Quantity Profit / Loss Corridor Variable Costs Cost or Revenue ($) Fixed Cost Quantity Produced Break-Even Diagram Fixed Cost Break Even Quantity Increased Fixed Costs Break Even Quantity Break-Even Diagram Profit / Loss Corridor Variable Costs Cost or Revenue ($) Fixed Cost Quantity Produced Management Hubs вЂў Profit Centers. вЂ“ Subunit that has responsibility for generating revenue as well as for controlling costs. вЂў Cost Centers. вЂ“ Subunit that has responsibility for controlling costs but does not sell product. i.e. service departments. Cost Allocation Cost Objective Cost Pools Allocation base Relates the cost pool to the cost objective Profit Center Analysis вЂў Organize business into subunits, profit center & cost centers. вЂў Track variable costs to profit centers. вЂ“ Control escalators вЂў Allocate asset use to subunits. вЂў Evaluate on contribution margin and amount of capital invested. Cost-Volume-Profit Diagnostics Differential Analysis вЂў Decision method to chose among alternative courses of action. вЂ“ Additional Processing вЂ“ Make or buy вЂ“ Drop enterprise вЂў Outsourcing вЂў Core competencies Vocabulary вЂў Differential costs and revenue вЂ“ The additional cost or revenue incurred when one alternative is chosen over another. вЂў Sunk cost. вЂ“ Costs that are already incurred & not reversible. вЂў Opportunity Costs. вЂ“ The benefit given up by selecting one alternative over another. i.e. Interest on stored grain. Process or Sell Sell Revenue Less: Prior Costs Add. Costs Gain (loss) Additional Processing Differential Rev. & Costs Produce or Purchase Make Cost to Buy Variable Costs Fixed Costs Total Buy Savings (Costs) ( ) Differential Analysis Discontinued Operations вЂў Cost allocation death spiral. вЂ“ What will happen to common costs if enterprise is dropped? вЂ“ They are allocated over remaining enterprises. Which may make those enterprises seem unprofitable.