8-1

Chapter Four

Cost-Volume-Profit
Analysis

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 8-2

The Break-Even Point

The break-even point is the point in the volume of
activity where the organization’s revenues and
expenses are equal.

Sales $ 250,000
Less: variable expenses 150,000
Contribution margin 100,000
Less: fixed expenses 100,000
Net income $ -

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 Methods in Determining Break-Even 8-3

Point
1. Equation Method/ Algebraic Approach
2. Contribution Margin Approach
3. Graphic Approach

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 8-4
Equation Method/Algebraic Approach
Total Per Unit Percent
Sales (500 surf boards) $250,000 $ 500 100%
Less: variable expenses 150,000 300 60%
Contribution margin $100,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ 20,000

Sales – Variable Costs – Fixed Costs = Profit Sales = Units X Selling Price Per Unit
Sales = Variable Costs + Fixed Costs + Profit Variable Costs = Units X Variable Costs Per Unit

Let X = The number of units to be sold to break even

Variable Costs = P300X
Fixed Costs = P80,000

Sales = Variable Costs + Fixed Costs + Profit

500X = 300X + 80,000 + 0
500X-300X = 80,000
200X = 80,000
200 200
X = 400 units or 400 surf boards
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 8-5

Contribution-Margin Approach
Fixed expenses Break-even point
=
Unit contribution margin (in units)

Total Per Unit Percent

Sales (500 surf boards) $250,000 $ 500 100%
Less: variable expenses 150,000 300 60%
Contribution margin $100,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ 20,000

$80,000
= 400 surf boards
$200
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 8-6

Contribution Margin Ratio

Calculate the break-even point in sales dollars rather
than units by using the contribution margin ratio.

Contribution margin
= CM Ratio
Sales

Fixed expense Break-even point

=
CM Ratio (in sales dollars)

McGraw-Hill/Irwin
 8-7

Cost-Volume-Profit Graph
450,000

400,000 Break-even Total sales

350,000
point

300,000

250,000 Total expenses

200,000

150,000 Fixed expenses

100,000

50,000

-
- 100 200 300 400 500 600 700 800

McGraw-Hill/Irwin Units Sold

 8-8

Profit-Volume Graph
$100,000
Some managers like the profit-volume
graph$80,000
because it focuses on profits and volume.
$60,000

$40,000

$20,000

$-
$- $50 $100 $150 $200 $250 $300 $350 $400
$(20,000)

$(40,000)

$(60,000) Break-even
point
$(80,000)

$(100,000) 1 2 3 4 5 6 7 8
Units sold (00s)
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 8-9

Income Statement
Traditional Income Statement Variable Costing Income Statement

Net Sales XX Net Sales XX

Less: Cost of Goods Sold XX Less: Variable Costs and Expenses XX
Gross Profit XX Contribution Margin XX
Less: Operating Expenses Less: Fixed Costs and Expenses XX
Selling XX Profit XX
Operating XX XX
Profit XX

1 2 3 4 5 6 7 8

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 8-10

Applying CVP Analysis

Safety Margin
The difference between budgeted sales
revenue and break-even sales revenue.
The amount by which sales can drop
before losses begin to be incurred.

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 8-11

Predicting Profit Given Expected

Volume
Fixed expenses
Given: Unit contribution margin Find: {required sales volume}
Target net profit

Fixed expenses
Given: Unit contribution margin Find: {expected profit}
Expected sales volume

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 8-12

Cost Structure and Operating

Leverage
The cost structure of an organization is the
relative proportion of its fixed and variable
costs.
Operating leverage is . . .
the extent to which an organization uses
fixed costs in its cost structure.
greatest in companies that have a high
proportion of fixed costs in relation to variable
costs.

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 8-13

Degree of Operating Leverage

Contribution Margin
DOL = ---------------------------
Pretax Profit

Total Per Unit Percent

Sales (500 surf boards) $250,000 $ 500 100%
Less: variable expenses 150,000 300 60%
Contribution margin $100,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ 20,000

DOL = 100,000/20,000
=5

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 8-14
Degree of Operating Leverage
Total Per Unit Percent
Sales (500 surf boards) $250,000 $ 500 100%
Less: variable expenses 150,000 300 60%
Contribution margin $100,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ 20,000

If sales volume/quantity is increased by 10%, considering DOL at 5, will result

to a 50% increase (5X10%) in profit.
Total Per Unit Percent
Sales (550 surf boards) $ 275,000 $ 500 100%
Less: variable expenses 165,000 300 60%
Contribution margin $ 110,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ 30,000

Net income after 10% increase in sales volume = 30,000

Net income before 10% increase in sales volume = 20,000
Increased in Net Income 10,000
Percentage of increased = 10,000/20,000 = 50%
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 8-15

End of Chapter 4
We made
it!

McGraw-Hill/Irwin