CostVolumeProfit

Analysis: A
Managerial
Planning
Tool

LO 1
2

COST-VOLUME-PROFIT (CVP)
CVP expresses:
# units that must be sold to break even
Impact of a given reduction in fixed
costs on break-even point
Impact of an increase in price on profit
Sensitivity analysis of impact of various
price or cost levels on profit

Using
Using Operating
Operating Income
Income in
in CVP
CVP Analysis
Analysis
Narrative
Equation

Sales revenue

Variable expenses
Fixed expenses
= Operating income

Using
Using Operating
Operating Income
Income in
in CVP
CVP Analysis
Analysis
Sales (1,000 units @ $400)$400,000
Less: Variable expenses
Contribution margin
Less: Fixed expenses
Operating income

325,000

$ 75,000
45,000
$ 30,000

Using
Using Operating
Operating Income
Income in
in CVP
CVP Analysis
Analysis
Break Even in Units
0 = ($400 x Units) ($325 x Units) $45,000

$400,000
1,000

$325,000
1,000

Using
Using Operating
Operating Income
Income in
in CVP
CVP Analysis
Analysis
Break Even in Units
0 = ($400 x Units) ($325 x Units)
$45,000
0 = ($75 x Units) $45,000
$75 x Units = $45,000

Units = 600

Proof
Proof
Sales
$240,000
Sales(600
(600units)
units)
$240,000
Less:
195,000
Less: Variable
Variableexp.
exp.
195,000
Contribution
Contributionmargin
margin $$ 45,000
45,000
Less:
Less: Fixed
Fixedexpenses
expenses 45,000
45,000
Operating
00
Operatingincome
income $$

Achieving
Achieving aa Targeted
Targeted Profit
Profit
Desired Operating Income of
$60,000
$60,000 = ($400 x Units) ($325 x Units)
$45,000
$105,000 = $75 x Units

Units = 1,400

Proof
Proof
Sales
Sales(1,400
(1,400units)
units) $560,000
$560,000
Less:
455,000
Less: Variable
Variableexp.
exp.
455,000
Contribution
Contributionmargin
margin $105,000
$105,000
Less:
Less: Fixed
Fixedexpenses
expenses 45,000
45,000
Operating
Operatingincome
income $$ 60,000
60,000

Targeted Income as a Percent of Sales Revenue

Desired Operating
Income of 15% of
Sales
0.15($400)(Units)
= Revenue
($400 x Units) ($325 x Units)
$45,000
$60 x Units = ($400 x Units) $325 x Units)
$45,000
$60 x Units = ($75 x Units)
$45,000
$15 x Units = $45,000

Units = 3,000

After-Tax
After-Tax Profit
Profit Targets
Targets
Net income = Operating income Income taxes
= Operating income (Tax rate x Operating income)
= Operating income (1 Tax rate)

Or
Operating
income =

Net income
(1 Tax rate)

After-Tax
After-Tax Profit
Profit Targets
Targets
If the tax rate is 35 percent and a firm wants to
achieve a profit of $48,750. How much is the
necessary operating income?
$48,750 = Operating income (0.35 x Operating income)
$48,750 = 0.65 (Operating income)
$75,000 = Operating income

Break-Even
Break-Even Point
Point in
in Sales
Sales Dollars
Dollars
Dollar
First,
First, the
the contribution
contribution
margin
margin ratio
ratio must
must be
be
calculated.
calculated.
Sales
$400,000
Sales
$400,000 100.00%
100.00%
Less:
Less: Variable
Variable
expenses
325,000
expenses
325,000 81.25%
81.25%
Contribution
Contribution
margin
$$ 75,000
margin
75,000 18.75%
18.75%
Less:
45,000
Less: Fixed
Fixedexp.
exp.
45,000
Operating
Operatingincome
income $$ 30,000
30,000

Break-Even
Break-Even Point
Point in
in Sales
Sales Dollars
Dollars
Given a contribution margin ratio of 18.75%,
how much sales revenue is required to break
even?
Operating income = Sales Variable costs Fixed costs
$0 = Sales (Variable costs ratio x Sales)
$45,000
$0 = Sales (1 0.8125) $45,000
Sales (0.1875) =
$45,000
Sales = $240,000

Relationships
Relationships Among
Among Contribution
Contribution
Margin,
Margin, Fixed
Fixed Cost,
Cost, and
and Profit
Profit
Fixed Cost = Contribution
Margin
Fixed Cost

Contribution Margin
Revenue
Total Variable Cost

Relationships
Relationships Among
Among Contribution
Contribution
Margin,
Margin, Fixed
Fixed Cost,
Cost, and
and Profit
Profit
Fixed Cost < Contribution
Margin
Fixed Cost

Contribution Margin
Revenue
Total Variable Cost

Profit

Relationships
Relationships Among
Among Contribution
Contribution
Margin,
Margin, Fixed
Fixed Cost,
Cost, and
and Profit
Profit
Fixed Cost > Contribution
Margin
Fixed Cost

Contribution Margin
Revenue
Total Variable Cost

Loss