Professional Documents
Culture Documents
1
Cost-Volume-Profit Analysis
CVP
CVP analysis
analysis is is used
used toto answer
answer questions
questions
such
such as: as:
How
How much much mustmust II sell
sell to
to earn
earn my
my desired
desired income?
income?
How
How will will income
income bebe affected
affected
ifif II reduce
reduce selling
selling prices
prices toto
increase
increase sales sales volume?
volume?
What
What will will happen
happen to to
profitability
profitability ifif II expand
expand
capacity?
capacity?
CP 2
Total Fixed Cost
Telephone Charge
The cost per long distance Per Minute
minute talked is constant.
For example, 10
cents per minute. Minutes Talked
CP 6
Cost Behavior Summary
CP 7
Mixed Costs
CP 8
Mixed Costs
Slope is
variable cost
per unit
of activity.
Total Utility Cost
ost
edc Variable
mix
tal Utility Charge
To
Fixed Monthly
Utility Charge
Activity (Kilowatt Hours)
CP 9
Stair-Step Costs
Cost
Activity
CP 10
Stair-Step Costs
Cost
Activity
CP 11
Cost-Volume-Profit CVP) Analysis
CP 12
Computing Break-Even Point
CP 13
Computing Break-Even Point
Total Unit
Sales Revenue (2,000 units) $ 100,000 $ 50
Less: Variable costs 60,000 30
Contribution margin $ 40,000 $ 20
Less: Fixed costs 30,000
Operating income $ 10,000
How
How
How
How much
How
many
much
many
How much contribution
many
units
units
Contribution
How much mustmargin
units
must
contribution
Contribution margin
contribution
margin
contribution ismust
this
margin
is must
amount
this
margin
amount
margin bythis
this
company
must
by
company
must
mustthis company
company
whichsell
company
this
which
this to
revenue
sell have
to cover
have
cover
company
revenue
company
exceeds
exceedsto
haveto
havethecover
cover
to
its
theto its
variable
cover
fixed
variable
cover fixed
its its
fixed
costs
costsfixed
costs
its costs
costs
fixed of (break
(break
producing
costs
(break
of (breakeven)?
even)?
even)?
producing
costs (break the revenue.
even)?
the revenue.
even)?
its fixed costs (break
sell to cover its fixed costs even)?
Answer: $30,000
Answer:even)?
$30,000
CP Answer: (break
Answer: $30,000 ÷ $20 per
$30,000 ÷ $20 per unit
unit == 1,500
14 1,500 units
units
Formula for Computing Break-Even Sales (in Units)
Finding the Break-Even Point
We have just seen one of the basic CVP relationships – the
break-even computation.
Fixed costs
Break-even point in units =
Contribution margin per unit
CP 15
Formula for Computing
Break-Even Sales (in Dollars)
Fixed costs
Break-even point in dollars =
Contribution margin ratio
ABC
ABC Co.
Co. sells
sells product
product XYZ
XYZ at
at $5.00
$5.00 per
per unit.
unit. IfIf fixed
fixed costs
costs are
are $200,000
$200,000
and
and variable
variable costs
costs are
are $3.00
$3.00 per
per unit,
unit, how
how many
many unitsunits must
must be
be sold
sold to
to
break
break even?
even?
a.
a. 100,000
100,000 units
units
b.
b. 40,000
40,000 units
units
c.
c. 200,000
200,000 units
units
d.
d. 66,667
66,667 units
units
CP 17
Computing Break-Even Sales
ABC
ABC Co.
Co. sells
sells product
product XYZ
XYZ at
at $5.00
$5.00 per
per unit.
unit. IfIf fixed
fixed costs
costs are
are $200,000
$200,000
and
and variable
variable costs
costs are
are $3.00
$3.00 per
per unit,
unit, how
how many
many unitsunits must
must be
be sold
sold to
to
break
break even?
even?
a.
a. 100,000
100,000 units
units
b.
b. 40,000
40,000 units
units
c.
c. 200,000
200,000 units
units
d.
d. 66,667
66,667 units
units
Unit contribution = $5.00 - $3.00 = $2.00
Fixed costs $200,000
= $2.00 per unit
Unit contribution
CP 18
= 100,000 units
Computing Break-Even Sales
Use
Use the
the contribution
contribution margin
margin ratio
ratio formula
formula toto
determine
determine the
the amount
amount ofof sales
sales revenue
revenue ABCABC must
must
have
have to
to break
break even.
even. All
All information
information remains
remains
unchanged:
unchanged: fixed
fixed costs
costs are
are $200,000;
$200,000; unit
unit sales
sales
price
price is
is $5.00;
$5.00; and
and unit
unit variable
variable cost
cost is
is $3.00.
$3.00.
a.
a. $200,000
$200,000
b.
b. $300,000
$300,000
c.
c. $400,000
$400,000
d.
d. $500,000
$500,000
CP 19
Computing Break-Even Sales
Use
Use the
the contribution
contribution margin
margin ratio
ratio formula
formula toto
determine
determine the
the amount
amount ofof sales
sales revenue
revenue ABCABC must
must
have
have to
to break
break even.
even. All
All information
information remains
remains
unchanged:
unchanged: fixed
fixed costs
costs are
are $200,000;
$200,000; unit
unit sales
sales
price
price is
is $5.00;
$5.00; and
and unit
unit variable
variable cost
cost is
is $3.00.
$3.00.
Unit contribution = $5.00 - $3.00 = $2.00
a.
a. $200,000
$200,000
Contribution margin ratio = $2.00 ÷ $5.00 = .40
b.
b. $300,000
$300,000
Break-even revenue = $200,000 ÷ .4 = $500,000
c.
c. $400,000
$400,000
d.
d. $500,000
$500,000
CP 20
Preparing a CVP Graph
Break-even
Profit
Point
in Dollars
Total cost
Loss
Total fixed cost
CP Volume
22 in Units
Computing Sales Needed to Achieve
Target Operating Income
Break-even
Break-even formulas
formulas may
may be
be adjusted
adjusted to
to show
show the
the sales
sales
volume
volume needed
needed toto earn
earn
any
any amount
amount of
of operating
operating income.
income.
ABC
ABC Co.
Co. sells
sells product
product XYZ
XYZ at
at $5.00
$5.00 per
per unit.
unit. IfIf
fixed
fixed costs
costs are
are $200,000
$200,000 and
and variable
variable costs
costs
are
are $3.00
$3.00 per
per unit,
unit, how
how many
many units
units must
must bebe
sold
sold to
to earn
earn operating
operating income
income ofof $40,000?
$40,000?
a.
a. 100,000
100,000 units
units
b.
b. 120,000
120,000 units
units
c.
c. 80,000
80,000 units
units
d.
d. 200,000
200,000 units
units
CP 24
Computing Sales Needed to Achieve
Target Operating Income
ABC
ABC Co.
Co. sells
sells product
product XYZ
XYZ at
at $5.00
$5.00 per
per unit.
unit. IfIf
fixed
fixed costs
costs are
are $200,000
$200,000 and
and variable
variable costs
costs
are
are $3.00
$3.00 per
per unit,
unit, how
how many
many units
units must
must bebe
sold
sold to
to earn
earn operating
operating income
income ofof $40,000?
$40,000?
Operating
Income = $20,000 × .40 = $8,000
CP 27
What Change in Operating Income Do We
Anticipate?
Once break-even is reached, every additional dollar of contribution margin
becomes operating income:
Change in
operating income = $15,000 × .40 = $6,000
CP 28
Business Applications of CVP
CP 29
Business Applications of CVP
CP 30
Business Applications of CVP
500 550
550 × $500
Bikes Bikes
Sales $ 250,000 $ 275,000
Less: variable expenses 150,000 550 × $300 165,000
Contribution margin $ 100,000 $ 110,000
Less: fixed expenses 80,000 92,000
Operating income $ 20,000 $80K + $12K $ 18,000
CP 31
Business Applications of CVP
CP 32
Business Applications of CVP
CP 33
Business Applications of CVP
Now, in combination with advertising and a price cut, Speedo
will replace $50,000 in sales salaries with a $25 per bike
commission, increasing sales by 50 percent above the
original 500 bikes. What is the effect on income?
500
Bikes
Sales $ 250,000
Less: variable expenses 150,000
Contribution margin $ 100,000
Less: fixed expenses 80,000
Operating income $ 20,000
CP 34
Business Applications of CVP
Now, in combination with advertising and a price cut, Speedo
will replace $50,000 in sales salaries with a $25 per bike
commission, increasing sales by 50 percent above the
original 500 bikes. What is the effect on income?
500 1.5 × 500 750
Bikes Bikes
Sales $ 250,000 750 × $450 $ 337,500
Less: variable expenses 150,000 243,750
Contribution margin $ 100,000 750 × $325 $ 93,750
Less: fixed expenses 80,000 42,000
Operating income $ 20,000 $92K - $50K $ 51,750
Determining semivariable
cost elements.
Sales
Sales mix
mix is
is the
the relative
relative combination
combination in
in which
which
aa company’s
company’s different
different products
products are
are sold.
sold.
Different
Different products
products have
have different
different selling
selling prices,
prices, costs,
costs, and
and
contribution
contribution margins.
margins.
IfIf Speedo
Speedo sells
sells bikes
bikes and
and carts,
carts, how
how
will
will we
we deal
deal with
with break-even
break-even analysis?
analysis?
CP 37
CVP Analysis When a Company Sells
Many Products
CP 38
CVP Analysis When a Company Sells
Many Products
$265,000
= 48% (rounded)
$550,000
CP 39
CVP Analysis When a Company Sells
Many Products
$170,000
= $354,167 (rounded)
.48
CP 40
The High-Low Method
CP 41
The High-Low Method
Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600
∆ in cost $3,600
Unit variable cost = ∆ in units= 4,000 = $0.90 per unit
CP 42
The High-Low Method
Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600
∆ in cost $3,600
Unit variable cost = ∆ in units= 4,000 = $0.90 per unit
Fixed cost = Total cost – Total variable cost
CP 43
The High-Low Method
Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600
∆ in cost $3,600
Unit variable cost = ∆ in units= 4,000 = $0.90 per unit
Fixed cost = Total cost – Total variable cost
Fixed cost = $9,700 – ($0.90 per unit × 9,000 units)
Fixed cost = $9,700 – $8,100 = $1,600
CP 44
The High-Low Method
Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600
∆ in cost $3,600
Unit variable cost = ∆ in units= 4,000 = $0.90 per unit
Fixed cost = Total cost – Total variable cost
Fixed cost = $9,700 – ($0.90 per unit × 9,000 units)
Fixed cost = $9,700 – $8,100 = $1,600
Total cost = $1,600 + $.90 per unit
CP 45
The High-Low Method
IfIf sales
sales commissions
commissions areare $10,000
$10,000 when
when 80,000
80,000 units
units are
are
sold
sold and
and $14,000
$14,000 when
when 120,000
120,000 units
units are
are sold,
sold, what
what is
is
the
the variable
variable portion
portion of
of sales
sales commission
commission per
per unit
unit sold?
sold?
a.
a. $.08
$.08 per
per unit
unit
b.
b. $.10
$.10 per
per unit
unit
c.
c. $.12
$.12 per
per unit
unit
d.
d. $.125
$.125 per
per unit
unit
CP 46
The High-Low Method
IfIf sales
sales commissions
commissions areare $10,000
$10,000 when
when 80,000
80,000 units
units are
are
sold
sold and
and $14,000
$14,000 when
when 120,000
120,000 units
units are
are sold,
sold, what
what is
is
the
the variable
variable portion
portion of
of sales
sales commission
commission per
per unit
unit sold?
sold?
a.
a. $.08
$.08 per
per unit
unit
b.
b. $.10
$.10 per
per unit
unit Units Cost
High level 120,000 $ 14,000
c.
c. $.12
$.12 per
per unit
unit
Low level 80,000 10,000
d.
d. $.125
$.125 per
per unit
unit Change 40,000 $ 4,000
IfIf sales
sales commissions
commissions are are $10,000
$10,000 when
when 80,000
80,000 units
units
are
are sold
sold and
and $14,000
$14,000 when
when 120,000
120,000 units
units are
are sold,
sold,
what
what is
is the
the fixed
fixed portion
portion of
of the
the sales
sales commission?
commission?
a.
a. $$ 2,000
2,000
b.
b. $$ 4,000
4,000
c.
c. $10,000
$10,000
d.
d. $12,000
$12,000
CP 48
The High-Low Method
IfIf sales
sales commissions
commissions are are $10,000
$10,000 when
when 80,000
80,000 units
units
are
are sold
sold and
and $14,000
$14,000 when
when 120,000
120,000 units
units are
are sold,
sold,
what
what is
is the
the fixed
fixed portion
portion of
of the
the sales
sales commission?
commission?
a.
a. $$ 2,000
2,000
Total cost = Total fixed cost +
b.
b. $$ 4,000
4,000 Total variable cost
c.
c. $10,000
$10,000 $14,000 = Total fixed cost +
d.
d. $12,000
$12,000 ($.10 × 120,000 units)
Total fixed cost = $14,000 - $12,000
Total fixed cost = $2,000
CP 49
Assumptions Underlying
CVP Analysis
CP 50