Management Accounting - Chapter 02 - CVP Analysis

CHAPTER 2
Cost-Volume-Profit Analysis
30-Jul-20 201048-COST-VOLUME-PROFIT ANALYSIS 1

CHAPTER 02
CASE STUDY RERIEW
How the “The Biggest Rock Show Ever”

Turned a Big Profit

LEARNING OBJECTIVE
• Explain the features of cost-volume-profit (CVP)

analysis.
• Determine the breakeven point and output level needed
to achieve a target operating income;
• Understand how income taxes affect CVP analysis;
• Explain how managers use CVP analysis to make
decisions;
30-Jul-20 3
201048-COST-VOLUME-PROFIT ANALYSIS
LEARNING OBJECTIVE
• Explain how sensitivity analysis helps managers cope

with uncertainty;
• Use CVP analysis to plan variable and fixed costs;
• Apply CVP analysis to a company producing multiple
products;
• Apply CVP analysis in service and not-for-profit
organizations;
• Distinguish contribution margin from gross margin.
30-Jul-20 4
CHAPTER CONTENT
2.1. Explain the features of cost-volume-profit (CVP)

analysis;
2.2. Determine the breakeven point and out put level;
needed to achieve a target operating income;
2.3. Target Net Income and Income Taxes;
2.4. Using CVP Analysis for Decision Making;
30-Jul-20 5
CHAPTER CONTENT
2.5. Sensitivity Analysis and Margin of Safety;

2.6. Cost Planning and CVP;
2.7. Effects of Sales Mix;
2.8. CVP Analysis in Service and Nonprofit Organizations;
2.9. Contribution Margin Versus Gross Margin.
30-Jul-20 6
2.1. Explain the features of cost-
volume-profit analysis
What is CVP? How is it used?
• Managers want to know how profits will change as the

units sold of a product or service changes.
• Managers like to use “what-if” analysis to examine the

possible outcomes of different decisions to make the
best one.
• In this chapter, we take a closer look at the relationship
among the elements (selling price, variable costs, fixed
costs).
30-Jul-20 7
2.1. Explain the features of
cost-volume-profit analysis
What is CVP?
COST VOLUME PROFIT
CVP studies the relationship between revenue,

cost, and volume and their effect on profits.
30-Jul-20 8
The Income Statement The Profit Equation
Total Revenue Operating Profit equals

Total Revenue less Total
- Total Costs Costs!
= Operating Profit
The Income Statement written horizontally:

Operating Profit = Total Revenue - Total Cost
p = TR - TC

The Profit Equation
Total Revenue (TR) = Price (P) x Units of output produced
and sold (X)
TR = PX
Total Cost (TC) = [Variable Costs per unit (V) x Units of Output(X)]
+ Fixed Cost (F)
TC = VX + F
10
30-Jul-20 201048-COST-VOLUME-PROFIT ANALYSIS
The Profit Equation
p = TR - TC
p = PX - VX + F
p = P - V X - F

U-Develop
Income Statement
For the Month Ending March 200X
Per
Total Unit
Sales $ 7,200 $ 0.60
Less: Variable Cost of Goods 3,600 0.30
Sold
Less: Variable Selling Costs 720 .06
Contribution Margin 2,880 0.24
Less: Fixed Costs 1,500 Developed
12,000 prints
Operating Profit $ 1,380 in March
30-Jul-20 12
2.1. Explain the features of cost-
volume-profit analysis
A Five-Step Decision-Making Process in Planning and

Control – Revisited:
1. Identify the problem and uncertainties.

2. Obtain information.
3. Make predictions about the future.
4. Make decisions by choosing between alternatives,
using cost-volume-profit (CVP) analysis.
5. Implement the decision, evaluate performance, and
learn.
30-Jul-20 13
Foundational Assumptions USED in CVP ANALYSIS:
 Changes in production/sales volume are the sole

cause for cost and revenue changes.
 Total costs consist of fixed costs and variable costs.
 Revenue and costs behave and can be graphed as a

linear function (a straight line).
30-Jul-20 14
Foundational Assumptions USED in CVP ANALYSIS:
 Selling price, variable cost per unit, and fixed costs are
all known and constant.
 In many cases only a single product will be analyzed. If

multiple products are studied, their relative sales
proportions are known and constant.
 The time value of money (interest) is ignored.
30-Jul-20 15
2.1.1. Contribution Margins:
Contribution Margin: The difference between price and
variable cost. It is what is leftover to
cover fixed costs and then add to
AKA: “CM” operating profit.
Contribution Margin Per Unit:
Price Per Unit - Variable Cost Per Unit = CM Per Unit
Punit - Unit = CMunit

Total Contribution Margin:
(Price x Quantity) - (Variable Cost x Quantity = Total CM
P - V X = Total CM
or
PX - VX = Total CM
30-Jul-20 17
 Contribution margin = Total revenues -Total variable
(CM) costs
 Contribution margin per unit = Selling price –
Variable cost per unit.
 Contribution margin = Contribution margin per unit

* Number of units sold
 Contribution margin percentage (or contribution

margin ratio) = Contribution margin per unit / Selling
30-Jul-20
price.
18
Using the data Sold 12,000 units Per Unit
Total
from U-
Sales $ 7,200 $ 0.60
Develop Less: Variable Cost of Goods Sold 3,600 0.30
Less: Variable Selling Costs 720 .06
Contribution Margin 2,880 0.24
Less: Fixed Costs 1,500
Operating Profit $ 1,380
1. What is CM per unit? $0.60 – $0.36 = $0.24
2. What is total CM?($0.60 - $0.36)(12,000) = $2,880

Ex 1: At Firm A, in January, they produced and sold (Q): 1.000 units.
Unit price (p): 100.000 VND / unit.
Variable unit cost (v): 60.000 VND /unit.
Monthly fixed cost (F): 30.000.000 VND.
Require: If They increase the quantity of products produced and sold at 20% for
February, how much profit can be in creased here?
Ratio Total UC Product Quantity increased at 20%

(1.000 (1.000
VND) VND) Q = 1.000x20% = 200 units
Revenue 100.000 100
CM = Q x CM unit
(-) Variable Cost 60.000 60
CM 40.000 40 = 200x(100–60) = 8.000 (1.000 VND)
(-) Fixed Cost 30.000 P = CM = 8.000 (1.000 VND)
Profit 10.000
Ex 2: At Firm A, in January, they produced and sold (Q): 1.000 units.
Unit price (p): 100.000 VND / unit.
Variable unit cost (v): 60.000 VND /unit.
Monthly fixed cost (F): 30.000.000 VND.
Require: If They increase the quantity of products produced and sold at 20% for
February, how much profit can be in creased here?
Ratio Total UC Product Quantity increased at 20%

(1.000 (1.000
VND) VND) R = 100.000x30%= 30.000 (1.000 VND)
Revenue 100.000 100%
P= R x CM %
(-) Variable 60.000 60%
Cost = 30.000x 40% = 12.000ngđ
CM 40.000 40%
(-) Fixed Cost 30.000 P = 12.000 (1.000 VND)
Profit 10.000
2.1.2. Expressing CVP Relationships:
There are three related ways (we will call them methods)
to think more deeply about and model CVP relationships:
 The equation method;
 The contribution margin method;
 The graph method.
30-Jul-20 22
 The equation method:
Quantity Unit Quantity

( Selling
Price * of Units
Sold
) -( Variable
Costs
* of Units
Sold
) - Fixed
Costs = Operating
Income
Keep in mind the following:

Selling Price * Quantity of Units Sold = Revenue
Unit Variable Costs * Quantity of Units Sold = Variable Costs
Revenue – Variable Costs = Contribution Margin
Contribution Margin – Fixed Costs = Operating Income
30-Jul-20 23
 Contribution Margin Method:
(Contribution margin per unit * Quantity of units sold)

- Fixed costs = Operating income
30-Jul-20 24
 Graph Method: In the graph method, we represent total
costs and total revenues graphically.
o Total costs line. The total costs line is the sum of fixed
costs and variable costs;
o Total revenues line. One convenient starting point is $0

revenues at 0 units sold;
o Profit or loss at any sales level can be determined by the

vertical distance between the two lines at that level.
30-Jul-20 25
Revenue & Cost (1.000$)
Revenue
300
250
Total Cost
200
150 Variable
Graph
100 Cost
Fixed
50 Cost
Product Quantity
0 10 20 30 40 50 60
30-Jul-20 26
2.1.3. Cost-Volume-Profit Assumptions:
 Changes in the levels of revenues and costs arise only
because of changes in the number of product (or service)
units sold;
 Total costs can be separated into two components: a fixed
component that does not vary with units sold and a variable
component that changes with respect to units sold;
 When represented graphically, the behaviors of total
revenues and total costs are represented as a straight line
in relation to units sold within a relevant range;
 Selling price, variable cost per unit, and total fixed costs
(within a relevant range and time period) are known and
constant.
30-Jul-20 27
2.2. Determine the breakeven
point and target operating
income
2.2.1. Breakeven Point (BEP):
 The breakeven point (BEP) is that quantity of output sold at

which total revenues equal total costs—that is, the quantity
of output sold that results in $0 of operating income.
 Breakeven number of units =Fixed costs/Contribution

margin per unit.
 Breakeven revenues = Fixed costs/Contribution margin%
30-Jul-20 201048-C-V-P 28
2.2.1. Breakeven Point (BEP): income
Breakeven number of units ( Q BEP ):

P  0  Q BEP  p  F  v  Q BEP
Q BEP  F
pv
Breakeven revenues ( S BEP):
SBEP = QBEP x p or S BEP F

 v
1
p
30-Jul-20 29
• Breakeven revenues ( S BEP) con’t d:

P  0  Q BEP  p  F  v  Q BEP
Q BEP  F
(1  v )
Contribution
Margin
Contribution
Q BEP xp  F
Margin %
(1  v ) / p
30-Jul-20 30
Ex 3:T Firm has the information as:
- Unit Price: 500 vnd/unit.
- Variable Cost: 300 vnd/unit.
- CM Unit: 200 vnd/unit.
- CM %: 40% Identify BEP:
- Monthly Fixed Cost: 100.000 vnd Q BEP = F / (p-v)
Identify the BEP ? Q BEP = 100.000 / (500 – 300)
= 500sp
Formula
- Quantity BEP
S BEP = Q BEP x p
Q BEP = F / CM unit
= 500 units x 500 vnd/unit
= 250.000 vnd.
- Sale BEP
S BEP = F / CM %
S BEP = Q BEP x p
30-Jul-20 31
2.2.2. Target Operating Income:
income
Decision How can managers determine the

breakeven point or the output
Points
needed to achieve a target
operating income?

income
2.2.2. Target Operating Income, Cont’d:
Fixed costs + Target profit

Target volume
(units)
=
Unit contribution margin
Target volume
Fixed costs + Target profit
=
sales dollars
Contribution margin ratio
201048-COST-VOLUME-PROFIT
30-Jul-20 ANALYSIS
2.2.2. Target Operating Income, Cont’d: income
Ex 4: T firm has:
- Unit price: 500 vnd/unit
- Variable Unit Cost: 300 vnd/unit
- CM Unit: 200 vnd/unit
- CM %: 40% Identified Points:
Monthly fixed Cost: 100.000vnd Q BEP = (F+P) / (p-v)
Identify Quantity & target Sale Q BEP = (100.000+50.000)
for saving P at 50.000 vnd? /(500–300)
= 750 units
Formula:
- Target Product Quantity S BEP = Q BEPx p
Q BEP = (F+P) / CM Unit = 750 units x 500 vnd/unit
= 375.000 vnd
- Target Sale
S BEP = (F+P) / CM %
S BEP = Q BEP x p
30-Jul-20 34
2.3. Target Net Income and
Income Taxes.
 Decision Point: How can managers incorporate income

taxes into CVP analysis?
 Quantity of units required to be sold =

(Fixed costs + Target operating income) / Contribution
margin per unit
 Target operating income = Target net income/

(1 - Tax rate)
30-Jul-20 35
2.4. Using CVP Analysis for
Decision Making.
Section Overview:
 CVP analysis is useful for calculating the units that need to

be sold to break even, or to achieve a target operating
income or target net income;
 Managers also use CVP analysis to guide other decisions,

many of them strategic decisions;
 CVP analysis can be used to evaluate how operating

income will be affected if the original predicted data are not
achieved.
30-Jul-20 36
Decision Making.
 Decision to Advertise;
 Decision to Adjust Selling Price;
 Decision to adjust Target Selling Price:
 Decision to adjust Variable Cost…
30-Jul-20 37
Decision Making.
2.4.1. Decision to Advertise:
T Firm:
- Monthly quantity sold: 1.000 units Ex 5 (F, Q):
- Unit Price: 500 vnd/unit Forecasting:
- Variable Unit Cost: 300 vnd/unit - Advertised Fee increased for 32.000đ
- CM Unit: 200 vnd/unit - Quantity increased at 20%
- CM: 200.000 vnd Require: Should T does?
- CM %: 40%
- Fixed Cost: 100.000 vnd
Revenue increased for:
= 500 x (1000 x 20%)
Solution:
CM increased for
- Calculation CM.
= 500 x (1.000 x 20%) x 40% = 40.000đ
- Calculation Fixed Cost.
Fixed Cost increased for = 32.000đ
 Profitable
Profitable changed :
= +40.000 – 32.000 = + 8.000đ>0
+ P >0: Yes
+ P<0: No => Should do.

Decision Making.
2.4.1. Decision to Advertise: Con’t d
T Firm: Ex 6 (F, Q, p):
- Monthly quantity sold: 1.000 units Forecasting:
- Unit Price: 500 vnd/unit Reducing unit price for 40 vnd/unit.
- Variable Unit Cost: 300 vnd/unit - Increasing Advertise Fee for 9.000đ/month
- CM Unit: 200 vnd/unit - Quantity increased at 30%.
- CM: 200.000 vnd Require: Should T does?
- CM %: 40%
- Fixed Cost: 100.000 vnd New CM:
Solution: = 1000 x 130%x (200 - 40) = 208.000 vnd
- Calculation CM. CM increased for:
- Calculation Fixed Cost. = 208.000 – 200.000 = 8.000 vnd
 Profitable Fixed Cost increased for: 9.000đ
Profitable changed:
+ P >0: Yes = +8.000 – 9.000 = - 1.000đ <0
+ P<0: No => Should not.
30-Jul-20 39
Decision Making
2.4.2.Decision to adjust Selling Price:
T Firm: Ex 7 (v, F, Q, p): Forecasting:
- Monthly quantity sold: 1.000 units - Changing payroll payments
- Unit Price: 500 vnd/unit 15.000vnd/month-> 8.000 vnd/month.
- Variable Unit Cost: 300 vnd/unit + 12vnd/unit price.
- CM Unit: 200 vnd/unit - Decreasing Selling price 30 vnd/unit.
- CM: 200.000 vnd - Quantity sold increasing 20%
- CM %: 40% Require: Should T does?
- Fixed Cost: 100.000 vnd New CM
= 1000 x 120%x (200 – 12 - 30) = 189.600vnd
Solution: CM changed:
- Calculation CM. = 189.600 – 200.000 = - 10.400vnd
- Calculation Fixed Cost. FC changed:
 Profitable = 8.000 – 15.000 = - 7.000vnd
P changed:
+ P >0: Yes = - 10.400 + 7.000 = - 3.400đ <0
+ P<0: No => Should not.
30-Jul-20 40
Decision Making
2.4.3.Decision to adjust Target Price:
T Firm:
Monthly quantity sold:1.000 units Ex 8 : Forecasting:
Unit Price: 500 vnd/unit Client wants to purchase 200units more.
Variable Unit Cost: 300 vnd/ unit The required price less14% than current.
- CM Unit: 200 vnd/unit T want to receive P from this >=20.000đ
- CM: 200.000 vnd Require: Should T?
- CM %: 40%
CM changed:
Solution: = 200 x (200 – 500 x 14%) = 26.000đ
- Calculation CM. FC not be changed.
- Calculation Fixed Cost. Profit Changed:
 Profitable = 26.000 -0 = 26.000đ >20.000 vnd
=> T should does.
+ P min >0: Yes
+ P min <0: No

Decision Making
2.4.3.Decision to adjust Target Price: Con’t d
T Firm:
- Monthly quantity sold: 1.000 units Ex 9 :
- Unit Price: 500 vnd/unit T getting loss 15.000 vnd
- Variable Unit Cost: 300 vnd/unit Client wants to purchase 200 units more with
- CM Unit: 200 vnd/unit The price less thang 4% .
- CM: 200.000 vnd T wants the get final profit at 20.000 vnd.
- CM %: 40% Require: Should T does?
Variable Unit Cost: = 300vnd/unit
Solution: FC needed to used more: 15.000/200
Identify selling price of T (a) = 75 vnd/unit
Identify required selling price (b) Unit P: 20.000/200 = 100 vnd/unit
Selling Price of T:
+ a < b: Should = 300 + 75 + 100 = 475vnd/unit
+ a > b: Should not Required price: 500 x 96% = 480 vnd/unit
 T should does.
30-Jul-20 42
Decision Making.
2.4.4.Decision to adjust Variable Cost:
T Firm:
- Monthly quantity sold: 1.000 units EX 10 (v, Q):
- Unit Price: 500 vnd/unit Forecasting:
- Variable Unit Cost: 300 vnd/unit - Using new material,
- CM Unit: 200 vnd/unit increasing VC 25vnd/unit
- CM: 200.000 vnd - Quantity increasing 300 units
- CM %: 40% Require: Should T do?
- Fixed Cost: 100.000 vnd New CM
= 1300x (200 - 25) = 227.500vnd
Solution:
CM increased:
- Calculation CM.
= 227.500 – 200.000 = 27.500vnd
- Calculation Fixed Cost.
FC not be changed.
 Profitable
P changed:
= +27.500 – 0 = + 27.500đ >0
+ P >0: Yes
=> T should does.
+ P<0: No
30-Jul-20 43
2.5. Sensitivity Analysis and
Margin of Safety.
 Margin of safety = Budgeted (or actual) revenues –

Breakeven revenues
Margin of safety (in units) = Budgeted (or actual) sales

quantity – Breakeven quantity.
 Margin of safety percentage = Margin of safety in dollars /

Budgeted (or actual) revenues.
30-Jul-20 44
2.6. Cost Planning and CVP
2.6.1. Alternative Fixed-Cost/Variable-Cost Structures:
The proportion of fixed and

Cost Structure:
variable costs to total costs.
The higher the organization’s fixed cost, the bigger

changed profit incurred in period.

2.6.1. Alternative Fixed-Cost/Variable-Cost Structures:

Comparison of Cost Structures
Low-Level Company High-Level Company

(1,000,000 units) (1,000,000 units)
Amount Percentage Amount Percentage
Sales $1,000,000 100% $1,000,000 100%
Variable Cost $750,000 75% $250,000 25%
Contribution Margin $250,000 25% $750,000 75%
Fixed Costs $50,000 5% $550,000 55%
Operating Profit $200,000 20% $200,000 20%
Break-Even 200,000 units 733,334 units
CM per Unit $0.25 $0.75
Degree of Operating Leverage 1.25 3.75

2.6.2. Operating Leverage:
Operating The extent to which the cost

Leverage: structure is comprised of fixed cost.
The higher the organization’s operating leverage, the

higher the break-even point.
30-Jul-20 47
2.6.2. Operating leverage:

2.6.2. Operating leverage: Example: Operating Leverage

Suppose Low Level & High-Level both
Why do I care?
increase sales 10% or $100,000
Low-Level High-Level C
Sales $100,000 $100,000
CMR .25 .75
Increase in Profit $25,000 $75,000
Prior NI $200,000 $200,000
NI with Sales increase of 10% $225,000 $275,000
49
30-Jul-20 201048-COST-VOLUME-PROFIT ANALYSIS
2.6.2. Operating leverage: Example: Operating Leverage

Low-Level High-Level
Percent Increase in sales 10% 10%
Degree of Operating Leverage 1.25 1.75
Percent increase in NI 12.5% 17.5%
Prior NI $200,000 $200,000
Percent increase in NI 12.5% 17.5%
NI with sales increase of 10% $225,000 $235,000
30-Jul-20
50
2.7. Effects of Sales Mix.
Sales mix is the quantities (or proportion) of various

products (or services) that constitute total unit sales of a
company.
In contrast to the single-product (or service) situation,

the total number of units that must be sold to break even
in a multiproduct company depends on the sales mix.
Companies adjust their mix to respond to demand

changes.
30-Jul-20 51
What if:
U-Develop does prints and enlargements?
Prints Enlargements
Selling price $.60 $1.00
Variable cost .36 .56
Contribution margin $. 24 $. 44
Total Fixed Costs $1,820
30-Jul-20 52
U-Develops product mix: For every 9 prints sold U-
Develop sells 1 enlargement.
Weighted Average Contribution Margin
9/10 $.24 1/10 $.44 $ .26

9/10
Breakeven
6,300 prints
$1,820 7,000
$.26 1/10
700 enlargements
201048-COST-VOLUME-PROFIT ANALYSIS 53
30-Jul-20
2.8. CVP Analysis in Service
and Nonprofit Organizations
To apply CVP analysis in service and nonprofit organizations,

we need to focus on measuring their output.
Examples of output measures in various service and nonprofit

industries are as follows:
Industry Measure of Output

Airlines Passenger Miles
Hotels/motels Room-nights occupied
Hospitals Patient Days
Universities Student credit-hours
30-Jul-20 54
2.9. Contribution Margin
Versus Gross Margin
In the following equations, we clearly distinguish
contribution margin, which provides information for CVP
analysis, from gross margin, a measure of
competitiveness.
Gross margin = Revenues - Cost of goods sold;
Contribution margin = Revenues - All variable costs.
 Gross margin measures how much a company can

charge for its products over and above the cost of
acquiring or producing them.
 Contribution margin indicates how much of a

company’s revenues are available to cover fixed costs.
30-Jul-20 55
Terms to learn
TERMS TO LEARN Vietnamese
Breakeven point (BEP) Điểm hòa vốn
Choice criterion Qui tắc lựa chọn dự án
Contribution income Bảng kết quả hoạt động kinh
statement doanh
Contribution margin Số dư đảm phí
Contribution margin per
Số dư đảm phí đơn vị
unit
Contribution margin
% số dư đảm phí
percentage

Terms to learn
Contribution margin ratio Chỉ số số dư đảm phí
Cost–volume–profit
Phân tích chi phí, sản lượng và
(CVP)
doanh thu
analysis
Decision table Quyết định
Degree of operating
Đòn bẩy hoạt động
leverage
Event Sự kiện

Terms to learn
Expected monetary value Thu nhập mong đợi
Expected value Giá trị mong muốn
Gross margin percentage Lãi gộp
Margin of safety Số dư an toàn
Net income Thu nhập thuần
Operating leverage Đòn bẩy hoạt động

Terms to learn
PV graph Mô hình phân tích
Revenue driver Cơ sở phân bổ doanh
thu
Sales mix Doanh thu hỗn hợp
Sensitivity analysis Phân tích độ nhậy kinh
doanh
Outcomes Thu nhập
Probability Khả năng
Probability distribution Khả năng phân phối

Chapter Summary

Self- Preparation
Chapter 9 Text book of Management

Information Study Manual IAEW (P. 272- P.273)
Chapter 9 Text book of Management

Information Question Bank IAEW (P. 107- P.116)
Exercise: Chapter 7 Text book of Cost Accounting A

Managerial Emphasis 3-17 - 3-23, P. 116 –
P.117.
30-Jul-20 201048-Management Accounting 61

Multiple Choices
1) Managers use cost-volume-profit (CVP) analysis

to ________.
A) forecast the cost of capital for a given period of
time;
B) to study the behavior of and relationship among the

elements such as total revenues, total costs, and
income;
C) estimate the risks associated with a given job;
D) analyze a firm's profitability and help to decide

wealth distribution among its stakeholders.
B
Multiple Choices
2) One of the first steps to take when using CVP

analysis to help make decisions is ________.
A) calculating the break-even point;
B) identifying the variable and fixed costs;
C) calculation of the degree of operating leverage for

the company;
D) estimating the volume of sales to make a good

profit.
B
Multiple Choices
3) Which of the following is true of cost-volume-

profit analysis?
A) The theory assumes that all costs are variable;
B) The theory assumes that units manufactured

equal units sold;
C) The theory states that total variable costs remain

the same over a relevant range;
D) The theory states that total costs remain the same

over the relevant.
B
Multiple Choices
4) The selling price per unit less the variable cost

per unit is the ________.
A) fixed cost per unit;
B) gross margin;
C) margin of safety;
D) contribution margin per unit.

Multiple Choices
5) As per CVP, operating income calculations use

________.
A) net income and dividends;
B) income tax expense and net income;
C) contribution margins and fixed costs;
D) nonoperation revenues and nonoperation

expenses.
B
Multiple Choices
6) Which of the following is true about the

assumptions underlying basic CVP analysis?
A) Selling price varies with demand and supply of the
product;
B) Only selling price and variable cost per unit are

known and constant;
C) Only selling price, variable cost per unit, and total

fixed costs are known and constant;
D) Selling price, variable cost per unit, fixed cost per

unit, and total fixed costs are known and constant.
B

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CHAPTER 2

30-Jul-20 201048-COST-VOLUME-PROFIT ANALYSIS 1

CASE STUDY RERIEW

How the “The Biggest Rock Show Ever”

30-Jul-20 201048-COST-VOLUME-PROFIT ANALYSIS 2

• Explain the features of cost-volume-profit (CVP)

• Explain how sensitivity analysis helps managers cope

2.1. Explain the features of cost-volume-profit (CVP)

2.5. Sensitivity Analysis and Margin of Safety;

• Managers want to know how profits will change as the

• Managers like to use “what-if” analysis to examine the

COST VOLUME PROFIT

CVP studies the relationship between revenue,

Total Revenue Operating Profit equals

The Income Statement written horizontally:

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A Five-Step Decision-Making Process in Planning and

1. Identify the problem and uncertainties.

Foundational Assumptions USED in CVP ANALYSIS:

 Changes in production/sales volume are the sole

 Total costs consist of fixed costs and variable costs.

 Revenue and costs behave and can be graphed as a

 In many cases only a single product will be analyzed. If

 The time value of money (interest) is ignored.

Punit - Unit = CMunit

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(Price x Quantity) - (Variable Cost x Quantity = Total CM

 Contribution margin = Contribution margin per unit

 Contribution margin percentage (or contribution

1. What is CM per unit? $0.60 – $0.36 = $0.24

2. What is total CM?($0.60 - $0.36)(12,000) = $2,880

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Ratio Total UC Product Quantity increased at 20%

Ratio Total UC Product Quantity increased at 20%

 The equation method;

 The contribution margin method;

 The graph method.

Quantity Unit Quantity

Keep in mind the following:

(Contribution margin per unit * Quantity of units sold)

o Total revenues line. One convenient starting point is $0

o Profit or loss at any sales level can be determined by the

 The breakeven point (BEP) is that quantity of output sold at

 Breakeven number of units =Fixed costs/Contribution

 Breakeven revenues = Fixed costs/Contribution margin%

SBEP = QBEP x p or S BEP F

Decision How can managers determine the

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Fixed costs + Target profit

 Decision Point: How can managers incorporate income

 Quantity of units required to be sold =

 Target operating income = Target net income/

 CVP analysis is useful for calculating the units that need to

 Managers also use CVP analysis to guide other decisions,

 CVP analysis can be used to evaluate how operating

 Decision to Adjust Selling Price;

 Decision to adjust Target Selling Price:

 Decision to adjust Variable Cost…

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 Margin of safety = Budgeted (or actual) revenues –

Margin of safety (in units) = Budgeted (or actual) sales