You are on page 1of 30

# C V P Analysis

CVP Analysis
Understand how cost behavior and cost-volume-profit analysis are used by managers.

Cost-Profit-Volume Analysis
What is cost-volume-profit analysis?
It is the study of the effects of output volume on revenue (sales), expenses (costs), and net income (net profit).

## Questions Addressed by CVP Analysis

How much must I sell to earn my desired income? How will income be affected if I reduce selling prices to increase sales volume? What will happen to profitability if I expand capacity?

Variable Costs

Fixed Costs

Mixed Costs

## Cost Estimation Methods

Cost Estimation Methods are frequently required to separate the fixed and variable components of a total cost pool. Methods include:
1. 2. 3. 4. 5. Account Analysis Scattergraph High-Low Method Regression Relevant Range

Scattergraph

High-Low Method
Example: Let total costs at 500 units of output be \$150,000 and at 3,000 units of output be \$400,000. Calculate variable and fixed costs, respectively.

High-Low Method
Solution: High Low Change Costs: \$400,000 \$150,000 \$250,000 Units: 3,000 500 2,500 Calculate Variable Cost Per Unit: \$250,000/2,500 = \$100 Calculate Total Fixed Costs: \$400,000 (3,000 x 100) = \$100,000

High-Low Method

Regression Analysis

Relevant Range

## How Is Cost Behavior Used By Managers ?

Understanding cost behavior is vital to the managers decision-making role, because one of the main goals of management accounting is controlling costs.

15

Cost-Volume-Profit Analysis
1. 2. 3. 4. 5. 6. The Profit Equation Breakeven Point Margin of Safety Contribution Margin Contribution Margin Ratio What-if Analysis

## The Profit Equation

Profit = SP(x) VC(x) TFC

X = Quantity of units produced and sold SP = Selling price per unit VC = Variable cost per unit TFC = Total fixed cost

Break-Even Point
The break-even point is the level of sales at which revenue equals expenses and net income is zero.

18

Break-Even Point

Break-Even Point
TFC/CM(per unit) = Break-Even (units)

X = Quantity of units produced and sold SP = Selling price per unit VC = Variable cost per unit CM = Contribution margin TFC = Total fixed cost

## Contribution Margin and Gross Margin

Gross margin (which is also called gross profit) is the excess of sales over the cost of goods sold.

## Contribution margin is the excess of sales over all variable costs.

21

Contribution Margin
SP(u) VC(u) = CM (u)

SP = Selling price per unit VC = Variable cost per unit CM = Contribution margin u = per unit

## Contribution Margin Ratio

(SP VC) / SP = CM%

SP = Selling Price per unit VC = Variable Cost per unit CM = Contribution Margin

CVP Scenario
Selling price Variable cost Difference Per Unit \$5 4 \$1 Percentage 100 80 20

Total monthly fixed expenses = \$8,000 Rent \$2,000 Labor \$5,500 Other \$ 500
24

Equation Technique
Let N = number of units to be sold to break even \$5N \$4N \$8,000 = 0 \$1N = \$8,000 N = \$8,000 \$1 N = 8,000 Units
25

Equation Technique
Let S = sales in dollars needed to break even S 0.80S \$8,000 = 0 .20S = \$8,000 S = \$8,000 .20 S = \$40,000
26

Margin of Safety
The margin of safety shows how far sales can fall below the planned level before losses occur.

Margin of safety
27

## Target Net Profit

Managers can also use CVP analysis to determine the total sales, in units and dollars, needed to reach a target net profit.
28

## Target Net Income and Income Taxes

Revenues (2,535 \$90) Variable costs (2,535 \$32) Contribution margin: Fixed costs: Operating income: Income taxes: (\$51,030 .30) Net income \$228,150 81,120 \$147,030 96,000 \$ 51,030 15,309 \$ 35,721
29

## Target Net Profit

Contribution Margin Technique Target sales volume in units = Fixed expenses + Target net income Contribution margin per unit

30