CVP ANALYSIS LOOKS PRIMARILY AT THE EFFECTS OF

DIFFERING LEVELS OF ACTIVITY ON THE FINANCIAL
RESULTS OF A BUSINESS. THE REASON FOR THE
PARTICULAR FOCUS ON SALES VOLUME IS BECAUSE,
IN THE SHORT-RUN, SALES PRICE, AND THE COST OF
MATERIALS AND LABOUR, ARE USUALLY KNOWN WITH
A DEGREE OF ACCURACY.
ln any busIness, cr, Indeed, In lIfe
In general, hIndsIght Is a beautIful
thIng. lf cnly we cculd lcck Intc a
crystal ball and fInd cut exactly hcw
many custcmers were gcIng tc buy
cur prcduct, we wculd be able tc
make perfect busIness decIsIcns and
maxImIse prcfIts.
Take a reslaurahl, íor exampíe. lí
lhe owhers khew exaclíy how mahy
cuslomers wouíd come íh each evehíhg
ahd lhe humber ahd lype oí meaís lhal
lhey wouíd order, lhey couíd ehsure lhal
slaíííhg íeveís were exaclíy accurale ahd
ho wasle occurred íh lhe kílcheh. The
reaííly ís, oí course, lhal decísíohs such
as slaíííhg ahd íood purchases have
lo be made oh lhe basís oí eslímales,
wílh lhese eslímales beíhg based oh
pasl experíehce.
Whííe mahagemehl accouhlíhg
íhíormalíoh cah'l reaííy heíp much
wílh lhe cryslaí baíí, íl cah be oí use
íh provídíhg lhe ahswers lo queslíohs
aboul lhe cohsequehces oí díííerehl
courses oí aclíoh. Ohe oí lhe mosl
ímporlahl decísíohs lhal heeds lo be
made beíore ahy busíhess eveh slarls
ís 'how much do we heed lo seíí íh
order lo break·eveh!' By 'break·eveh'
we meah símpíy coveríhg aíí our cosls
wílhoul makíhg a proííl.
Thís lype oí ahaíysís ís khowh as
'cosl·voíume·proííl ahaíysís' (CVF
ahaíysís) ahd lhe purpose oí lhís arlícíe
ís lo cover some oí lhe slraíghl íorward
caícuíalíohs ahd graphs requíred íor
lhís parl oí lhe Faper F5 syííabus, whííe
aíso cohsíderíhg lhe assumplíohs whích
uhderííe ahy such ahaíysís.
THE OBJECTIVE OF CVP ANALYSIS
CVF ahaíysís íooks prímarííy al lhe
eííecls oí díííeríhg íeveís oí aclívíly
oh lhe ííhahcíaí resuíls oí a busíhess.
The reasoh íor lhe parlícuíar íocus
oh saíes voíume ís because, íh lhe
shorl·ruh, saíes príce, ahd lhe cosl
oí maleríaís ahd íabour, are usuaííy
khowh wílh a degree oí accuracy.
8aíes voíume, however, ís hol usuaííy
so predíclabíe ahd lhereíore, íh lhe
shorl·ruh, proíílabíííly oíleh híhges
upoh íl. For exampíe, Compahy A may
khow lhal lhe saíes príce íor producl
x íh a parlícuíar year ís goíhg lo be
íh lhe regíoh oí S50 ahd íls varíabíe
cosls are approxímaleíy S30.
ll cah, lhereíore, say wílh some
degree oí cerlaíhly lhal lhe
cohlríbulíoh per uhíl (saíes príce íess
varíabíe cosls) ís S20. Compahy A may
aíso have ííxed cosls oí S200,000 per
ahhum, whích agaíh, are íaíríy easy
lo predícl. However, wheh we ask lhe
queslíoh: 'Wííí lhe compahy make a
proííl íh lhal year!', lhe ahswer ís 'We
doh'l khow'. We doh'l khow because
we doh'l khow lhe saíes voíume íor
lhe year.
However, we cah work oul how mahy
saíes lhe busíhess heeds lo make íh
order lo make a proííl ahd lhís ís where
CVF ahaíysís begíhs.
Methods for calculating the
break-even point
The break·eveh poíhl ís wheh lolaí
revehues ahd lolaí cosls are equaí,
lhal ís, lhere ís ho proííl bul aíso ho
íoss made. There are lhree melhods íor
ascerlaíhíhg lhís break·eveh poíhl:
COST-VOLUME-
PROFIT
RELEVANT TO ACCA QUALIFICATION PAPER F5
01 TECHNICAL
1 The equatIcn methcd
A ííllíe bíl oí símpíe malhs cah
heíp us ahswer humerous díííerehl
cosl·voíume·proííl queslíohs.
We khow lhal lolaí revehues are
íouhd by muílípíyíhg uhíl seíííhg príce
(U8F) by quahlíly soíd (Q). Aíso,
lolaí cosls are made up íírslíy oí
lolaí ííxed cosls (FC) ahd secohdíy
by varíabíe cosls (VC). Tolaí varíabíe
cosls are íouhd by muílípíyíhg uhíl
varíabíe cosl (UVC) by lolaí quahlíly
(Q). Ahy excess oí lolaí revehue over
lolaí cosls wííí gíve ríse lo proííl
(F). By pullíhg lhís íhíormalíoh
íhlo a símpíe equalíoh, we come up
wílh a melhod oí ahsweríhg CVF
lype queslíohs. Thís ís dohe beíow
cohlíhuíhg wílh lhe exampíe oí
Compahy A above.
Tolaí revehue ÷ lolaí varíabíe cosls ÷
lolaí ííxed cosls = Froííl
(U8F x Q) ÷ (UVC x Q) ÷ FC = F
(50Q) ÷ (30Q) ÷ 200,000 = F
Nole: lolaí ííxed cosls are used ralher
lhah uhíl ííxed cosls síhce uhíl ííxed
cosls wííí vary depehdíhg oh lhe íeveí
oí oulpul.
Studying Paper F5?
Performance objectives 12, 13 and 14 are relevant to this exam
ANALYSIS
ll wouíd, lhereíore, be
íhappropríale lo use a uhíl ííxed
cosl síhce lhís wouíd vary depehdíhg
oh oulpul. 8aíes príce ahd varíabíe
cosls, oh lhe olher hahd, are
assumed lo remaíh cohslahl íor aíí
íeveís oí oulpul íh lhe shorl·ruh, ahd,
lhereíore, uhíl cosls are appropríale.
Cohlíhuíhg wílh our equalíoh, we
how sel F lo zero íh order lo ííhd oul
how mahy ílems we heed lo seíí
íh order lo make ho proííl, íe lo
break eveh:
(50Q) ÷ (30Q) ÷ 200,000 = 0
20Q ÷ 200,000 = 0
20Q = 200,000
Q = 10,000 uhíls.
The equalíoh has gíveh us our
ahswer. lí Compahy A seíís íess lhah
10,000 uhíls, íl wííí make a íoss; íí
íl seíís exaclíy 10,000 uhíls, íl wííí
break·eveh, ahd íí íl seíís more lhah
10,000 uhíls, íl wííí make a proííl.
Z The ccntrIbutIcn margIn methcd
Thís secohd approach uses a
ííllíe bíl oí aígebra lo rewríle our
equalíoh above, cohcehlralíhg
oh lhe use oí lhe 'cohlríbulíoh
margíh'. The cohlríbulíoh margíh
ís equaí lo lolaí revehue íess lolaí
varíabíe cosls. Aílerhalíveíy, lhe
uhíl cohlríbulíoh margíh (UCM)
ís lhe uhíl seíííhg príce (U8F) íess
lhe uhíl varíabíe cosl (UVC). Hehce,
lhe íormuía írom our malhemalícaí
melhod above ís mahípuíaled íh
lhe íoííowíhg way:
(U8F x Q) ÷ (UVC x Q) ÷ FC = F
(U8F ÷ UVC) x Q = FC - F
UCM x Q = FC - F
Q = FC - F
UCM
8o, íí F=0 (because we wahl lo ííhd
lhe break·eveh poíhl), lheh we wouíd
símpíy lake our ííxed cosls ahd
dívíde lhem by our uhíl cohlríbulíoh
margíh. We oíleh see lhe uhíl
cohlríbulíoh margíh reíerred lo as lhe
'cohlríbulíoh per uhíl'.
Appíyíhg lhís approach lo
Compahy A agaíh:
UCM = 20, FC = 200,000 ahd F = 0.
Q = FC
UCM
Q = 200,000
20
Thereíore Q = 10,000 uhíls
THE CONTRIBUTION MARGIN METHOD USES A
LITTLE BIT OF ALGEBRA TO REWRITE OUR EQUATION
ABOVE, CONCENTRATING ON THE USE OF THE
‘CONTRIBUTION MARGIN’.
STUDENT ACCOUNTANT ISSUE 14/2010
02
3 The graphIcal methcd
Wílh lhe graphícaí melhod, lhe lolaí
cosls ahd lolaí revehue ííhes are
píolled oh a graph; S ís showh oh
lhe y axís ahd uhíls are showh oh
lhe x axís. The poíhl where lhe lolaí
cosl ahd revehue ííhes íhlersecl ís
lhe break·eveh poíhl. The amouhl
oí proííl or íoss al díííerehl oulpul
íeveís ís represehled by lhe díslahce
belweeh lhe lolaí cosl ahd lolaí
revehue ííhes. FIgure 1 opposíle
shows a lypícaí break·eveh charl íor
Compahy A. The gap belweeh lhe
ííxed cosls ahd lhe lolaí cosls ííhe
represehls varíabíe cosls.
Aílerhalíveíy, a cohlríbulíoh graph
couíd be drawh. Whííe lhís ís hol
specííícaííy covered by lhe Faper F5
syííabus, íl ís slííí useíuí lo see íl.
Thís ís very símííar lo a break·eveh
charl, lhe ohíy díííerehce beíhg lhal
íhslead oí showíhg a ííxed cosl ííhe,
a varíabíe cosl ííhe ís showh íhslead.
Hehce, íl ís lhe díííerehce belweeh
lhe varíabíe cosl ííhe ahd lhe lolaí
cosl ííhe lhal represehls ííxed cosls.
The advahlage oí lhís ís lhal íl
emphasíses cohlríbulíoh as íl ís
represehled by lhe gap belweeh lhe
lolaí revehue ahd lhe varíabíe cosl
ííhes. Thís ís showh íor Compahy A íh
FIgure Z opposíle.
Fíhaííy, a proííl÷voíume graph
couíd be drawh, whích emphasíses
lhe ímpacl oí voíume chahges oh
proííl (FIgure 3 oh page 7). Thís
ís key lo lhe Faper F5 syííabus ahd
ís díscussed íh more delaíí íaler íh
lhís arlícíe.
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
UnIts scld
S
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
Tolaí cosls
FIGURE 1: COMPANY A: BREAK-EVEN CHART
Fíxed cosls
Break·eveh poíhl
Tolaí revehue
03 TECHNICAL
ASCERTAINING THE SALES
VOLUME REQUIRED TO ACHIEVE A
TARGET PROFIT
As weíí as ascerlaíhíhg lhe break·eveh
poíhl, lhere are olher roulíhe caícuíalíohs
lhal íl ís |usl as ímporlahl lo uhderslahd.
For exampíe, a busíhess may wahl lo
khow how mahy ílems íl musl seíí íh
order lo allaíh a largel proííl.
Example 1
Compahy A wahls lo achíeve a largel
proííl oí S300,000. The saíes voíume
hecessary íh order lo achíeve lhís
proííl cah be ascerlaíhed usíhg ahy oí
lhe lhree melhods oulííhed above. lí
lhe equalíoh melhod ís used, lhe proííl
oí S300,000 ís pul íhlo lhe equalíoh
ralher lhah lhe proííl oí S0:
(50Q) ÷ (30Q) ÷ 200,000 = 300,000
20Q ÷ 200,000 = 300,000
20Q = 500,000
Q = 25,000 uhíls.
Aílerhalíveíy, lhe cohlríbulíoh melhod
cah be used:
UCM = 20, FC = 200,000 ahd F =
300,000.
Q = FC - F
UCM
Q = 200,000 - 300,000
20
Thereíore Q = 25,000 uhíls.
Fíhaííy, lhe ahswer cah be read írom lhe
graph, aílhough lhís melhod becomes
cíumsíer lhah lhe prevíous lwo. The proííl
wííí be S300,000 where lhe gap belweeh
lhe lolaí revehue ahd lolaí cosl ííhe ís
S300,000, síhce lhe gap represehls
proííl (aíler lhe break·eveh poíhl) or íoss
(beíore lhe break·eveh poíhl.)
0 5,000 10,000 15,000 20,000 25,000
UnIts scld
S
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
Tolaí cosls
FIGURE 2: COMPANY A: CONTRIBUTION GRAPH
Break·eveh poíhl
Tolaí revehue
Varíabíe cosls
C
o
h
l
r
í
b
u
l
í
o
h
A CONTRIBUTION GRAPH SHOWS THE DIFFERENCE
BETWEEN THE VARIABLE COST LINE AND THE TOTAL
COST LINE THAT REPRESENTS FIXED COSTS.
AN ADVANTAGE OF THIS IS THAT IT EMPHASISES
CONTRIBUTION AS IT IS REPRESENTED BY THE GAP
BETWEEN THE TOTAL REVENUE AND VARIABLE
COST LINES.
STUDENT ACCOUNTANT ISSUE 14/2010
04
Thís ís hol a quíck ehough
melhod lo use íh ah exam so íl ís
hol recommehded.
MARGIN OF SAFETY
The margíh oí saíely íhdícales by how
much saíes cah decrease beíore a íoss
occurs, íe íl ís lhe excess oí budgeled
revehues over break·eveh revehues.
Usíhg Compahy A as ah exampíe, íel's
assume lhal budgeled saíes are 20,000
uhíls. The margíh oí saíely cah be
íouhd, íh uhíls, as íoííows:
Budgeled saíes ÷ break·eveh saíes =
20,000 ÷ 10,000 = 10,000 uhíls.
Aílerhalíveíy, as ís oíleh lhe case, íl
may be caícuíaled as a percehlage:
Budgeled saíes ÷ break·eveh saíes/
budgeled saíes.
lh Compahy A's case, íl wííí be
10,000/20,000 x 100 = 50¸.
Fíhaííy, íl couíd be caícuíaled íh lerms
oí S saíes revehue as íoííows:
Budgeled saíes ÷ break·eveh saíes
x seíííhg príce = 10,000 x S50 =
S500,000.
CONTRIBUTION TO SALES RATIO
ll ís oíleh useíuí íh síhgíe producl
sílualíohs, ahd essehlíaí íh
muílí·producl sílualíohs, lo ascerlaíh
how much each S soíd acluaííy
cohlríbules lowards lhe ííxed cosls. Thís
caícuíalíoh ís khowh as lhe cohlríbulíoh
lo saíes or C/8 ralío. ll ís íouhd íh
síhgíe producl sílualíohs by eílher
símpíy dívídíhg lhe lolaí cohlríbulíoh by
lhe lolaí saíes revehue, or by dívídíhg
lhe uhíl cohlríbulíoh margíh (olherwíse
khowh as cohlríbulíoh per uhíl) by lhe
seíííhg príce:
For Compahy A: S20/S50 = 0.4
lh muílí·producl sílualíohs, a weíghled
average C/8 ralío ís caícuíaled by usíhg
lhe íormuía:
Tolaí cohlríbulíoh/lolaí saíes revehue
Thís weíghled average C/8 ralío cah
lheh be used lo ííhd CVF íhíormalíoh
such as break·eveh poíhl, margíh oí
saíely elc.
Example 2
As weíí as producíhg producl x
descríbed above, Compahy A aíso
begíhs producíhg producl y. The
íoííowíhg íhíormalíoh ís avaííabíe íor
bolh producls:
Prcduct x Prcduct y
8aíes príce S50 S60
Varíabíe cosl S30 S45
Cohlríbulíoh per uhíl S20 S15
Budgeled saíes
(uhíls) 20,000 10,000
The weíghled average C/8 ralío cah be
ohce agaíh caícuíaled by dívídíhg lhe
lolaí expecled cohlríbulíoh by lhe lolaí
expecled saíes:
(20,000 x S20) - (10,000 x S15) /
(20,000 x S50) - (10,000 x S60) =
34.375¸
The C/8 ralío ís useíuí íh íls owh ríghl
as íl leíís us whal percehlage each S oí
saíes revehue cohlríbules lowards ííxed
cosls; íl ís aíso íhvaíuabíe íh heípíhg
us lo quíckíy caícuíale lhe break·eveh
poíhl íh S saíes revehue, or lhe saíes
revehue requíred lo geherale a largel
proííl. The break·eveh poíhl cah how be
caícuíaled lhís way íor Compahy A:
Fíxed cosls / cohlríbulíoh lo saíes ralío
= S200,000/0.34375 = S581,819 oí
saíes revehue.
To achíeve a largel proííl oí S300,000:
Fíxed cosls - requíred proííl /
cohlríbulíoh lo saíes ralío = S200,000
- S300,000/0.34375 = S1,454,546.
Oí course, such caícuíalíohs províde
ohíy eslímaled íhíormalíoh because
lhey assume lhal producls x ahd y are
soíd íh a cohslahl míx oí 2x lo 1y. lh
reaííly, lhís cohslahl míx ís uhííkeíy
lo exísl ahd, al límes, more y may be
soíd lhah x. 8uch chahges íh lhe míx
lhroughoul a períod, eveh íí lhe overaíí
míx íor lhe períod ís 2:1, wííí íead lo lhe
acluaí break·eveh poíhl beíhg díííerehl
lhah ahlícípaled. Thís poíhl ís louched
upoh agaíh íaler íh lhís arlícíe.
CONTRIBUTION TO SALES RATIO IS OFTEN USEFUL
IN SINGLE PRODUCT SITUATIONS, AND ESSENTIAL
IN MULTI-PRODUCT SITUATIONS, TO ASCERTAIN
HOW MUCH EACH $ SOLD ACTUALLY CONTRIBUTES
TOWARDS THE FIXED COSTS.
05 TECHNICAL

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

LV  &RPSDQ\ $ PD\ DOVR KDYH IL[HG FRVWV RI  SHU DQQXP ZKLFK DJDLQ DUH IDLUO\ HDV\ WR SUHGLFW +RZHYHU ZKHQ ZH DVN WKH TXHVWLRQ ¶:LOO WKH FRPSDQ\ PDNH D SURILW LQ WKDW \HDU"· WKH DQVZHU LV ¶:H GRQ·W NQRZ· :H GRQ·W NQRZ EHFDXVH ZH GRQ·W NQRZ WKH VDOHV YROXPH IRU WKH \HDU +RZHYHU ZH FDQ ZRUN RXW KRZ PDQ\ VDOHV WKH EXVLQHVV QHHGV WR PDNH LQ RUGHU WR PDNH D SURILW DQG WKLV LV ZKHUH &93 DQDO\VLV EHJLQV Methods for calculating the break-even point 7KH EUHDNHYHQ SRLQW LV ZKHQ WRWDO UHYHQXHV DQG WRWDO FRVWV DUH HTXDO WKDW LV WKHUH LV QR SURILW EXW DOVR QR ORVV PDGH 7KHUH DUH WKUHH PHWKRGV IRU DVFHUWDLQLQJ WKLV EUHDNHYHQ SRLQW .

STUDENT ACCOUNTANT ISSUE 14/2010 Studying Paper F5? Performance objectives 12. 13 and 14 are relevant to this exam 02 ANALYSIS  7KH HTXDWLRQ PHWKRG $ OLWWOH ELW RI VLPSOH PDWKV FDQ KHOS XV DQVZHU QXPHURXV GLIIHUHQW FRVWYROXPHSURILW TXHVWLRQV :H NQRZ WKDW WRWDO UHYHQXHV DUH IRXQG E\ PXOWLSO\LQJ XQLW VHOOLQJ SULFH 863.

E\ TXDQWLW\ VROG 4.

 $OVR WRWDO FRVWV DUH PDGH XS ILUVWO\ RI WRWDO IL[HG FRVWV )&.

DQG VHFRQGO\ E\ YDULDEOH FRVWV 9&.

 7RWDO YDULDEOH FRVWV DUH IRXQG E\ PXOWLSO\LQJ XQLW YDULDEOH FRVW 89&.

E\ WRWDO TXDQWLW\ 4.

 $Q\ H[FHVV RI WRWDO UHYHQXH RYHU WRWDO FRVWV ZLOO JLYH ULVH WR SURILW 3.

 %\ SXWWLQJ WKLV LQIRUPDWLRQ LQWR D VLPSOH HTXDWLRQ ZH FRPH XS ZLWK D PHWKRG RI DQVZHULQJ &93 W\SH TXHVWLRQV 7KLV LV GRQH EHORZ FRQWLQXLQJ ZLWK WKH H[DPSOH RI &RPSDQ\ $ DERYH 7RWDO UHYHQXH ² WRWDO YDULDEOH FRVWV ² WRWDO IL[HG FRVWV 3URILW 863 [ 4.

² 89& [ 4.

² )& 3 4.

² 4.

²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

² 4.

²  4 ²   4  4  XQLWV  863 [ 4.

² 89& [ 4.

² )& 863 ² 89&.

[ 4 )&  3 8&0 [ 4 )&  3 4 )&  3 8&0 3  7KH FRQWULEXWLRQ PDUJLQ PHWKRG 7KLV VHFRQG DSSURDFK XVHV D OLWWOH ELW RI DOJHEUD WR UHZULWH RXU HTXDWLRQ DERYH FRQFHQWUDWLQJ RQ WKH XVH RI WKH ¶FRQWULEXWLRQ PDUJLQ· 7KH FRQWULEXWLRQ PDUJLQ LV HTXDO WR WRWDO UHYHQXH OHVV WRWDO YDULDEOH FRVWV $OWHUQDWLYHO\ WKH XQLW FRQWULEXWLRQ PDUJLQ 8&0.

LV WKH XQLW VHOOLQJ SULFH 863.

OHVV WKH XQLW YDULDEOH FRVW 89&.

 +HQFH WKH IRUPXOD IURP RXU PDWKHPDWLFDO PHWKRG DERYH LV PDQLSXODWHG LQ WKH IROORZLQJ ZD\ 7KH HTXDWLRQ KDV JLYHQ XV RXU DQVZHU .I &RPSDQ\ $ VHOOV OHVV WKDQ  XQLWV LW ZLOO PDNH D ORVV LI LW VHOOV H[DFWO\  XQLWV LW ZLOO EUHDNHYHQ DQG LI LW VHOOV PRUH WKDQ  XQLWV LW ZLOO PDNH D SURILW 6R LI 3  EHFDXVH ZH ZDQW WR ILQG WKH EUHDNHYHQ SRLQW.

CONCENTRATING ON THE USE OF THE ‘CONTRIBUTION MARGIN’.  XQLWV . WKHQ ZH ZRXOG VLPSO\ WDNH RXU IL[HG FRVWV DQG GLYLGH WKHP E\ RXU XQLW FRQWULEXWLRQ PDUJLQ :H RIWHQ VHH WKH XQLW FRQWULEXWLRQ PDUJLQ UHIHUUHG WR DV WKH ¶FRQWULEXWLRQ SHU XQLW· $SSO\LQJ WKLV DSSURDFK WR &RPSDQ\ $ DJDLQ 8&0  )& 4 )& 8&0 4   7KHUHIRUH 4  DQG 3  THE CONTRIBUTION MARGIN METHOD USES A LITTLE BIT OF ALGEBRA TO REWRITE OUR EQUATION ABOVE.

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²YROXPH JUDSK FRXOG EH GUDZQ ZKLFK HPSKDVLVHV WKH LPSDFW RI YROXPH FKDQJHV RQ SURILW )LJXUH  RQ SDJH .

 7KLV LV NH\ WR WKH 3DSHU ) V\OODEXV DQG LV GLVFXVVHG LQ PRUH GHWDLO ODWHU LQ WKLV DUWLFOH FIGURE 1: COMPANY A: BREAK-EVEN CHART   7RWDO UHYHQXH  7RWDO FRVWV  %UHDNHYHQ SRLQW  )L[HG FRVWV           8QLWV VROG .

I WKH HTXDWLRQ PHWKRG LV XVHG WKH SURILW RI  LV SXW LQWR WKH HTXDWLRQ UDWKHU WKDQ WKH SURILW RI  4.STUDENT ACCOUNTANT ISSUE 14/2010 04 FIGURE 2: COMPANY A: CONTRIBUTION GRAPH   7RWDO UHYHQXH &RQWULEXWLRQ ASCERTAINING THE SALES VOLUME REQUIRED TO ACHIEVE A TARGET PROFIT $V ZHOO DV DVFHUWDLQLQJ WKH EUHDNHYHQ SRLQW WKHUH DUH RWKHU URXWLQH FDOFXODWLRQV WKDW LW LV MXVW DV LPSRUWDQW WR XQGHUVWDQG )RU H[DPSOH D EXVLQHVV PD\ ZDQW WR NQRZ KRZ PDQ\ LWHPV LW PXVW VHOO LQ RUGHU WR DWWDLQ D WDUJHW SURILW Example 1 &RPSDQ\ $ ZDQWV WR DFKLHYH D WDUJHW SURILW RI  7KH VDOHV YROXPH QHFHVVDU\ LQ RUGHU WR DFKLHYH WKLV SURILW FDQ EH DVFHUWDLQHG XVLQJ DQ\ RI WKH WKUHH PHWKRGV RXWOLQHG DERYH .

² 4.

²   4 ²   4  4  XQLWV $OWHUQDWLYHO\ WKH FRQWULEXWLRQ PHWKRG FDQ EH XVHG  7RWDO FRVWV %UHDNHYHQ SRLQW  9DULDEOH FRVWV        8QLWV VROG   8&0  )&  DQG 3  4 )&  3 8&0 4     7KHUHIRUH 4  XQLWV A CONTRIBUTION GRAPH SHOWS THE DIFFERENCE BETWEEN THE VARIABLE COST LINE AND THE TOTAL COST LINE THAT REPRESENTS FIXED COSTS. AN ADVANTAGE OF THIS IS THAT IT EMPHASISES CONTRIBUTION AS IT IS REPRESENTED BY THE GAP BETWEEN THE TOTAL REVENUE AND VARIABLE COST LINES. )LQDOO\ WKH DQVZHU FDQ EH UHDG IURP WKH JUDSK DOWKRXJK WKLV PHWKRG EHFRPHV FOXPVLHU WKDQ WKH SUHYLRXV WZR 7KH SURILW ZLOO EH  ZKHUH WKH JDS EHWZHHQ WKH WRWDO UHYHQXH DQG WRWDO FRVW OLQH LV  VLQFH WKH JDS UHSUHVHQWV SURILW DIWHU WKH EUHDNHYHQ SRLQW.

RU ORVV EHIRUH WKH EUHDNHYHQ SRLQW.

.

W LV RIWHQ XVHIXO LQ VLQJOH SURGXFW VLWXDWLRQV DQG HVVHQWLDO LQ PXOWLSURGXFW VLWXDWLRQV WR DVFHUWDLQ KRZ PXFK HDFK VROG DFWXDOO\ FRQWULEXWHV WRZDUGV WKH IL[HG FRVWV 7KLV FDOFXODWLRQ LV NQRZQ DV WKH FRQWULEXWLRQ WR VDOHV RU &6 UDWLR .Q &RPSDQ\ $·V FDVH LW ZLOO EH  [    )LQDOO\ LW FRXOG EH FDOFXODWHG LQ WHUPV RI VDOHV UHYHQXH DV IROORZV %XGJHWHG VDOHV ² EUHDNHYHQ VDOHV [ VHOOLQJ SULFH  [   CONTRIBUTION TO SALES RATIO .W LV IRXQG LQ VLQJOH SURGXFW VLWXDWLRQV E\ HLWKHU VLPSO\ GLYLGLQJ WKH WRWDO FRQWULEXWLRQ E\ WKH WRWDO VDOHV UHYHQXH RU E\ GLYLGLQJ WKH XQLW FRQWULEXWLRQ PDUJLQ RWKHUZLVH NQRZQ DV FRQWULEXWLRQ SHU XQLW.05 TECHNICAL 7KLV LV QRW D TXLFN HQRXJK PHWKRG WR XVH LQ DQ H[DP VR LW LV QRW UHFRPPHQGHG MARGIN OF SAFETY 7KH PDUJLQ RI VDIHW\ LQGLFDWHV E\ KRZ PXFK VDOHV FDQ GHFUHDVH EHIRUH D ORVV RFFXUV LH LW LV WKH H[FHVV RI EXGJHWHG UHYHQXHV RYHU EUHDNHYHQ UHYHQXHV 8VLQJ &RPSDQ\ $ DV DQ H[DPSOH OHW·V DVVXPH WKDW EXGJHWHG VDOHV DUH  XQLWV 7KH PDUJLQ RI VDIHW\ FDQ EH IRXQG LQ XQLWV DV IROORZV %XGJHWHG VDOHV ² EUHDNHYHQ VDOHV  ²   XQLWV $OWHUQDWLYHO\ DV LV RIWHQ WKH FDVH LW PD\ EH FDOFXODWHG DV D SHUFHQWDJH %XGJHWHG VDOHV ² EUHDNHYHQ VDOHV EXGJHWHG VDOHV .

Q PXOWLSURGXFW VLWXDWLRQV D ZHLJKWHG DYHUDJH &6 UDWLR LV FDOFXODWHG E\ XVLQJ WKH IRUPXOD 7RWDO FRQWULEXWLRQWRWDO VDOHV UHYHQXH 7KLV ZHLJKWHG DYHUDJH &6 UDWLR FDQ WKHQ EH XVHG WR ILQG &93 LQIRUPDWLRQ VXFK DV EUHDNHYHQ SRLQW PDUJLQ RI VDIHW\ HWF Example 2 $V ZHOO DV SURGXFLQJ SURGXFW [ GHVFULEHG DERYH &RPSDQ\ $ DOVR EHJLQV SURGXFLQJ SURGXFW \ 7KH IROORZLQJ LQIRUPDWLRQ LV DYDLODEOH IRU ERWK SURGXFWV 3URGXFW [ 6DOHV SULFH  9DULDEOH FRVW  &RQWULEXWLRQ SHU XQLW  %XGJHWHG VDOHV XQLWV. E\ WKH VHOOLQJ SULFH )RU &RPSDQ\ $    .

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

  [ .

  [ .

  [ .

 CONTRIBUTION TO SALES RATIO IS OFTEN USEFUL IN SINGLE PRODUCT SITUATIONS. TO ASCERTAIN HOW MUCH EACH $ SOLD ACTUALLY CONTRIBUTES TOWARDS THE FIXED COSTS. . AND ESSENTIAL IN MULTI-PRODUCT SITUATIONS.

Sign up to vote on this title
UsefulNot useful