CVP - 1

COST-VOLUME-PROFIT ANALYSIS

A Managerial Planning Tool

CVP - 2

CVP ANALYSISAdvantages

Assists in establishing prices of products.

Assists in analyzing the impact that volume has on short-term profits.

Assists in focusing on the impact that changes in costs (variable and fixed) have on profits.

Assists in analyzing how the mix of products affects profits.

CVP - 3

CVP ANALYSISAdditional Items

Breakeven considerations

Target income goals

CVP - 4

LIMITATIONS OF CVP ANALYSIS

Requires accurate knowledge of revenue and cost amounts and behavior patterns

• Identification of fixed and variable components

Linear revenue and cost functions• Integration of concept of “relevant range”

No change in inventories

Constant sales mix

CVP - 5

Three Methods of Using the CVP Model

Operating Income Approach Contribution Approach Graphical Approach

CVP - 6

A CVP ExampleAssume the following: Total Per unit %of

Sales

Sales (400 Microwaves) $200,000 $500 100%

Less: Variable Expenses 120,000 300 60

Contribution Margin $ 80,000 $200 40%

Less Fixed Expenses 70,000

Net Income $10,000

1. What is the break-even point?

2. How much sales-revenue must be generated to earn

a before-tax profit $30,000?

3. How much sales-revenue must be generated to earn an after-tax profit of $30,000 and a 40% marginal tax rate?

CVP - 7

The Operating Income Approach for Breakeven Point

Sales - Variable costs - Fixed Costs = Net Income

Sales-Revenue Method:100%(Sales)- 60%(Sales) - $70,000 =0 (at BEP)

.4 (Sales) = $70,000

Sales = $175,000

Units-Sold Method:Let x = Number of microwaves at the break-even

point

$500(x) - $300(x) - $70,000 = 0 (at BEP)

$200 (x) = $70,000

x = 350 microwaves

CVP - 8

BEP (Revenue $) = (Fixed Costs + Net Income)/Contribution Ratio

= $70,000 + 0/.40

= $175,000

Units-Sold Method:

BEP (Revenue Units) = (Fixed Costs + Net Income)/Contribution

per microwave

= $70,000 + 0/$200 per microwave

= 350 units

The Contribution Approach for Breakeven Point

Sales-Revenue Method:

CVP - 9

The Operating Income Approach for Targeted Revenue

Sales - Variable costs - Fixed Costs = Net Income

Sales-Revenue Method:100%(Sales)- 60%(Sales) - $70,000 = $30,000

.4 (Sales) = $100,000

Sales = $250,000

Units-Sold Method:Let x = Number of microwaves at the break-even point

$500(x) - $300(x) - $70,000 = $30,000

$200 (x) = $100,000

x = 500 microwaves

CVP - 10

C-V-P and After-Tax Target Profits

Sales - Variable costs - Fixed Costs = Net Income/ (1-tax rate)

Sales-Revenue Method:100%(Sales)- 60%(Sales) - $70,000 = $30,000/(1-.4)

.4 (Sales) = $120,000

Sales = $300,000

Units-Sold Method:Let x = Number of microwaves at the break-even point

$500(x) - $300(x) - $70,000 = $30,000/(1-.4)

$200 (x) = $120,000

x = 600 microwaves

CVP - 11

The Contribution Approach for Targeted Revenue

Targeted(Revenue $) = (Fixed Costs + Net Income)/Contribution Ratio

= ($70,000 + $30,000)/.40

= $250,000

Units-Sold Method for Targeted Units Sold:

BEP (Revenue Units) = Fixed Costs + Net Income/Contribution

per microwave

= ($70,000 + $30,000)/$200 per microwave

= 500 units

Sales-Revenue Method for Targeted Revenue:

CVP - 12

COST-VOLUME-PROFITTraditional Format

Total $

Level of Activity

Total Revenue

Total FixedCosts

Total VariableCosts

BreakevenPoint

Total Costs

CVP - 13

COST-PROFIT-VOLUMEContribution Margin Format

Total Revenue

Total FixedCosts

Total VariableCosts

ContributionMargin

BreakevenPoint

Total $

Level of Activity

Total Costs

CVP - 14

Assume the following:

Regular Deluxe Total PercentUnit of Sales 400 200 600 ----

Sales Price per Unit $500 $750 ---- ----

Sales Revenue $200,000 $150,000 $350,000 100.0%

Less: Variable Expenses 120,000 60,000 180,000 51.4

Contribution Margin $ 80,000 $ 90,000 $170,000 48.6%

Less Fixed Expenses 130,000

Net Income $ 40,000

1. What is the break-even point?

2. How much sales-revenue of each product must be

generated to earn a before-tax profit $50,000?

A Multiple-Product Example