Cost Volume Profit Analysis

Managers constantly monitor (selling price, sales volume, sales, & costs) of their
organizations to find out that these factors will produce desired levels of profit. Cost-Volume-
Profit (CVP) analysis, In fact, this is the most powerful tool that managers have at their
command. It is helpful in understanding the relationships among cost, volume and profit. A
manager can find out a BEP (Break-Even-Point) which indicates a minimum production level
to avoid losses. CVP goes further and shows how much to produce to earn a certain amount
of profit. Also, CVP identifies the likely changes in profit whenever a key-factor changes
such as price, cost and quantity.

What is Break-Even-Point?
As the name implies, it is a point where there is no profit or no loss situation. The sales would
equal total costs. It is like zero cash balance. Cash receipts and cash payments are the same.
There is neither any cash surplus nor any cash deficit.

The components of Cost-Volume-Profit Analysis are:

• Level or volume of activity

• Unit Selling Prices
• Variable cost per unit
• Total fixed costs
• Sales mix

Assumption underlying CVP analysis

CVP analysis is an extension of BEP. Both assume:

• Constant sales price;

• Constant variable cost per unit;
• Constant total fixed cost
• Constant sales mix;
• Units sold equal units produced.

FORMULAS:

1) Sales = Fixed cost + variable cost + Profit

2) Cost = Fixed cost + variable cost

OR Cost = Fixed cost + variable cost/unit x units sold

3) B.E sales in units = FC/ Cm/units

4) BE sales in amount = FC/ cm Ratio

 5) Sales for Target Profit before tax = FC+ TP/ cm/unit

6) Sales for Target Profit after tax = FC + TP/1-TR / cm/units

7) Safety margin = unit sold – unit sold for BE

OR Safety margin = sales for TP – Sales for BE

8) OPL = CM / NI

Example # 1

Sales (10000 units) $ 150,000

Variable costs 70,000

Contribution Margin 80,000

Fixed costs 50,000

Net Income $ 30,000

Required:

1) Units sold for BE

2) BE sales in amount 4) Units sold for TP after tax of 50,000 (If Tax
rate 50%)
3) Units sold for TP before tax of 50,000
5) Safety Margin

Example # 2

Sales (20000 units) $ 200,000

Variable costs 80,000

Contribution Margin 120,000

Fixed costs 70,000

Net Income $ 50,000

Required:

1) Units sold for BE 4) How many Units sold for TP after tax of
80,000 if tax rate is 40%
2) Safety Margin
5) How many Units are sold. If TP is 20% of
sales
3) How many Units sold for TP before tax of
80,000
Example # 3

Company Sales Variable cost % of sales Fixed Cost

X $ 408, 000 40 $ 180,000
Y 200,000 60 50,000
Z 140,000 30 84,000

Required:

1) Prepare income statement with a contribution margin format for each of three companies.

2) Compute the break-even point for each company.

Example # 4

Sales (50,000 units) $ 600,000

Variable costs 360,000

Contribution Margin 240,000

Fixed costs 180,000

Net Income $ 60,000

Required:

1) Compute BE point. 3) Graph the break even point

2) Compute safety margin in dollar amount &

as a percentage of sale.

Example # 5

Sales (120,000 units) $ 1080,000

V.COGS

DM $ 240,000

DL 180,000

V.MOH 60,000

V. S. Exp 100,000

V. Adm. Exp 140,000 720,000

Contribution Margin $ 360,000

Required:

1) Calculate the contribution margin per unit. 2) Calculate the BE point in units & amount.
3) Calculation the margin of safety.

Example # 6

Company No of units sold Selling price per Variable cost Fixed cost
unit per unit
X 28,000 $5 $4 $ 20,000
Y 40,000 10 6 150,000
Z 80,000 12 8 280,000

Required:

1) Prepare income statement with a contribution margin format for each of three companies.

2) Compute the break-even point for each company.

3) How many units must be sold by each company to earn a before tax profit of 10% of sales?s

Example # 7 Break Even for Multiple Products

A B C
No of units 10,000 7,000 3,000
Sp/unit 30 50 100
Vc/unit 18 28 55
Cm/unit 12 22 45

Fixed Cost $ 300,000

Required:

1) Calculate the break even point in total units.

2) Calculate the break even point in units and fixed cost for each individual product.

Example # 8 Break Even for Multiple Products

Toy R Toy S Toy T

Sales 240,000 40,000 120,000
Sp/unit 8 8 8
Variable cost 180,000 20,000 96,000

Fixed Cost $ 74,880

Required:

1) Calculate the break even point in total units and sales dollars.

2) Calculate the break even point in units, sales dollars and fixed cost for each individual toy.
3) Assume that the sales level remains the same as above, but the sales mix changes to 30%,
40%, 30%, for Toy R, Toy S and Toy T, respectively. In addition fixed cost increases to $
80,400.calculate the new break-even point in total sales dollars and in units for each individual
toy.

Example # 9 Break Even for Multiple Products

Product A Product B Product C

Sp/unit 60 40 32
Vc/unit 40 24 20
Cm/unit 20 16 12

Fixed Cost $ 410,000

Required:

1) Assume that the mix of sales units for the different types of shoes is 30, 50 & 20% for A, B &
C, respectively. Calculate the break-even point in pairs and dollars for each product.

2) Assume that the mix changes to 50, 30 & 20% for A, B & C, .Calculate the new break-even
point in pairs and dollars for each product.

Example # 10 Manual labor vs. Machine work

A B C
Sales 100 100 100
Variable cost 60 40 20
Contribution margin 40 60 80
Fixed cost 30 50 70
Net income 10 10 10

Required:

1) Indicate the types of company

2) Determine operating leverage factor

Note:

• If we want to find fixed cost than distributed units of BE multiply by CM/unit of each
product.

• Secondly if we want to check sales in dollars than distributed units of BE multiply by

sp/unit of each product.