AFM 102: Winter 2017

Week 4 Chapter 4: Cost-Volume-Profit Relationships

The Basis of Cost-Volume-Profit

Break-Even Point
Level of sales at which profit is zero
Point where total sales equals total expenses
Point where total contribution margin equals total fixed expenses
Sales Variable Expenses Fixed Expenses = $0
Once the break-even point is reached, operating income will increase by the unit
CM for each additional unit sold
Cost-Volume-Profit Relationships in Graphic Form
CostVolumeProfit (CVP) Graph

Profit Graph
AFM 102: Winter 2017

Contribution Margin Ratio

Shows how the contribution margin is affected by a change in total sales

Some Applications of Cost-Volume-Profit Concepts

Variable Expense Ratio
AFM 102: Winter 2017

Incremental Analysis
Analytical approach that focuses only on those items of revenue, cost, and
volume that will change as a result of a decision

Break-Even Analysis
The Equation Method
Method of computing breakeven sales using the contribution format income

statement
The Formula Method

Target Operating Profit Analysis

AFM 102: Winter 2017

The Equation Method

The Formula Method

After-Tax Analysis

The Margin of Safety

Cost-Volume-Profit Considerations in Choosing a Cost Structure

Operating Leverage
Measure of how sensitive operating income is to a given percentage change in
sales

Indifference Analysis

Assumptions of CVP Analysis

AFM 102: Winter 2017