Cost Volume

Profit

Your future,
your effort

CVP
Sales
Less VC
= Cont.Margin
Less FC
=Net Profit

Income
Statement

Sales
Less COGS
= Gross Profit
Less
OperatingExpense
= Net Profit
Contribution margin is an amount to
cover the fixed cost.

Break-even Point
Total expense= Total
revenues
Profit is
zero
EXAMPLE :
-VC 7,000
CM 3,000
-FC 3,000
Net income

Sales

10,000

3 methods for calculating

Break-even Point
1.
2.

3.

Equation method
BREAK-EVEN
POINT IN UNITS
Contribution Margin Method
Contribution Margin ratio method
DOLLARS

IN SALES

 Equation Approach
Profit = SP(X) VC(X) FC
In Break-even, the profit is zero
SP : Selling Price per unit
X : Sales units
VC: Variable costs per unit
FC : Fixed costs

 Contribution Margin Approach

Break-even point in units =
FixedExpense
Contribution
Margin

Unit Contribution Margin= SP VC

Unit

 Contribution Margin Ratio

Method
CM Ratio = Contribution Margin
Sales
BEP in sales dollars : Fixed
Expense
CM Ratio

Example
SUNmks sells its safety wear clothing for $80.
The variable costs are $60 and fixed costs are
$1,000. How many safety clothes that SUNmks
Ltd needs to sell to break even? Calculate also
the break-even point in sales dollars!
BEP in units =
$1,000
= 50 units
$80- $60
BEP in sales dollars =
$1,000 = $1,000 =
$4,000
($80-$60)/$80
25%

The Graph
Sales
$6,400

Profit area
Break-even point

Total revenue
Total Costs

$4,000
Variable cost
Loss area
Fixed Cost

$2,800
$1,000
35

50

80

Units sold

 The

lower the break-even

point, the easier it is to achieve sales goals.
Break-even point = from 50units to 40 units
It can be done by :

Increase the sales price $85

40 = 1,000 SP= $85/unit
-Reducing Fixed Cost
SP-$60
40=
FC
FC=$800
$80-$60
-Reducing the Variable cost to
$55/unit
40 = 1,000 VC=$55/unit
80-VC

Target Net Income

How

much do u want to earn ?

For ex: SUNmks Ltd wants to earn $800 profit,

~how many safety clothes that they need to sell ?
Sales Units = Fixed Cost +Target Profit
Contribution margin
= 1,000+800 = 90 units
20
~ What dollar sales are needed to achieve its
target profit?
Sales Dollars = Fixed cost+Target Profit
CM Ratio
= $1,000+$800 = $7,200
25%

SENSITIVITY AND UNCERTAINTY

ANALYSIS
Assumed

that SUNmks Ltd considered to reduce

selling price of its surf clothes from $80 to $72 to
encourage sales. It is expected that sales can
increase from 90 units to $120 units. Variable cost
per unit is $60 and fixed cost is $1,000
Should SUNmks Ltd decrease its selling price to
$75?
Current sales(90 units)
Proposed Sales
(120u)

Sales

$80x90 units= $7,200

$72x120units= $8,640

Less VC

$60x90 units= $5,400

$60x120units= $7,200

Cont.Margin

$1,800

$1,440

Less FC

$1,000

$1,000

Operating profit

$800

$440

Margin Of Safety
The Margin of Safety refers to the difference between
actual sales and break-even sales.
The word margin refers to the amount in dollars or
units above break-even point.
In previous example, break-even sales is 50units or
$4,000 while the actual sales is 90 units or $7,200. So,
Safety margin in dollars=Sales Actual- Break-even Sales
= $7,200-$4,000
= $3,200
Safety Margin in units = Unit Sales Actual- Unit Sales BE
= 90-50
= 40 units

Operating Leverage
Measures

how a percentage change in

sales will affect profit

OPERATING

LEVERAGE=
Contribution Margin
Profit

SALES MIX( MULTIPLE PRODUCTS)

Descri Sellin
Unit
Unit Numb
ption
g
Variab Contri er of
Price
le
bution clothe
cost
Margi
s
n
SAFETY
Clothing
SAFETY
SHOES

% of
Total

$65

$48

$17

100

40%

$80

$60

$20

150

60%

250

100%

Total Sold

Descriptio Cont.Marg
n
in

%of total

Weighted
Contributi
on

SAFETY
Clothing

$17

40%

6.8

SAFETY
SHOES

$20

60%

12

100%

18.8

BEP

Fixed Expense

Weighted average unit Contribution Margin

= $1,000
= 54 COMBINED SALES UNITS
18.8

Break-even Point is 54 combined unit

sales
Descripti
on

Breakeven
sales

%of total Individu

al sales

SAFETY
clothing

54

40%

22

SAFETY
SHOES
Total
Units

54

60%

32

100%

54

Tax
AFTER TAX PROFIT=
BEFORE TAX PROFIT X (1-TAX RATE)

Adding Tax to profit can increase number of sales

units required to achieve target profit.

Advantages of using
CVP
-Decision making
-Price determination
-Profit planning
-Preparation of budgets
-Cost control

Difficulties in applying CVP

company selling multi products, need

so much detail ex: restaurants
Besides volume, other elements like
inflation, efficiency, capacity and
technology can affect costs.

Conclusion
SUNmks Ltd can do the CVP analysis by
finding its break-even point, targeted
income, and considering either to
increase/decrease its selling price, sales
volume, costs to be more profitable.
However, CVP analysis requires so much
detailed to find the variable costs
especially for a company with multi
products, and it is also affected by
inflation, efficiency.

Good and Bad About It. Accessed May 15, http://onaccountingmanagement.blogspot.sg/2013/03/cost-volume-profit-analysis-whats-good.html

Explain what are the limitations of Cost Volume Profit (CVP)
Analysis For Short Term Decision Making. 2006. College Accounting Coach.
http://basiccollegeaccounting.com/2006/08/explain-whatt-are-the-limitations-of-cost-volume-profit-cvp-analysis-for-short-term-decision-making/

Hilton, Ronald W and Platt, David E. 2014. Managerial

Accounting: Creating Business Value in a Dynamic Business Environment. New York: McGraw-Hill Education.

Holtzman, Mark P. Managerial Accounting: How to Determine Margin of

Safety. Accessed May 15,
http://www.dummies.com/how-to/content/managerial
accounting-how-to-determine-margin-of-s.html

Lewis, Jared. Advantages & Disadvantages of Cost-Volume-Profit Analysis.

Accessed May 15, http://smallbusiness.chron.com/advantages-disadvantages-costvolumeprofit-analysis-35135.html

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