STEVE

JOBS
Introducing the
first iPhone
 Cost-
Volume
Profit
Analysis
A systematic examination of the
relationships among the costs,
cost driver, and profit.
 • Planning and Decision Making

Applicatio • Product facilities to acquire

ns of CVP • Type of product to produce

Analysis
• Marketing strategy to use
 Contribution Margin (CM)
Income statement
Sales (Units * SP) xxxx

Variable Costs (Units * VC) (xxxx)

CM xxxx

TFC (xxxx)

Income before Income tax xxxx

 Simplifying assumptions in
CVP analysis

Changes in revenues and costs arise only

because of changes in the number of
product (or service) units sold.
 Simplifying assumptions in
CVP analysis

Total costs can be separated into two components:

fixed cost & variable costs

 Simplifying assumptions in
CVP analysis

Total costs can be separated into two components:

fixed cost & variable costs

Simplifying assumptions in
CVP analysis

When represented graphically, the behaviors

of total revenues and total costs are
linear
Simplifying assumptions in
CVP analysis

Selling price, variable cost per unit, and

total fixed costs are known and constant.

(within a relevant range and time period)

 Limitations
CVP is only an estimation at its best.

In CVP analysis, it is assumed that total

sales and total costs are linear and can be
represented by straight lines. In some cases,
this assumption may not be found true.
 Limitations
CVP analysis assumes that costs can be accurately
divided into fixed and variable categories.

CVP analysis is performed within a relevant

range of operating activity and it is
assumed that productivity and efficiency of
operations will remain constant.
 Limitations
It assumes no change in inventories during the
period.

If prices, unit costs, sales-mix, operating

efficiency, or other relevant factors
change, then the overall CVP analysis and
relationships also must be modified.
 Limitations
Multi-product analysis under CVP.
 Units Selling Sales F
or Price mix A
Volume C
T
Variable O
fixed R
Sales costs
costs S
per unit
 the sales volume level (in
Break-even pesos or in units) where total
revenues equals total costs,
Point that is, there is neither profit
nor loss.
 Methods for 125

determining
BEP 100

75

• Graphical Method
• Contribution 50
Margin Method
(Formula Approach)
• Equation 25

0
April May June July
Single Product
Break-even
calculations
Selling Price $1,000/
unit

Fixed Cost $25,000

Variable Cost $500/un

it
BEP in Pesos
 $25,000

Breakeven
=
Revenues $1,000/ $500/un
unit it

$1,000/
unit

$25,000
=

.50

Breakeven
= $50,000
Revenues
BEP in Units
 $25,000

Breakeven in
=
Units $1,000/ $500/un
unit it

$25,000
=

$500

Breakeven in 500
=
Units units
Target Operating
Income
 Target Operating Income

$25,000 + $50,000

Required Sales =
$1,000/ $500/un
unit it

$1,000/
unit

$75,000
=

.50

Required Sales =
$150,00
0
 Target Operating Income

$25,000 + $50,000

Required Sales
=
in Units $1,000/ $500/un
unit it

$75,000
=

500/unit

Required Sales =
150
units
 Target NET Income

Net income is operating income plus nonoperating

revenues (such as interest revenue) minus
nonoperating costs (such as interest cost) minus
income taxes.
Target Operating Profit
 Target Net Income

$25,000 + [$62,500-(62,500*.20)]

Required Sales =
$1,000/ $500/un
unit it

$1,000/
unit

$75,000
=

.50

Required Sales =
$150,00
0
 Target Net Income

$25,000 + [$62,500-(62,500*.20)]

Required Sales
=
in Units $1,000/ $500/un
unit it

$75,000
=

Required Sales 150

=
in Units units
 Required Sales in Required Sales
Single Product
Units in Pesos

To earn a desired
amount of profit RSU= (FxC + DP)/ CM per unit RSP= (FxC + DP ) / CMR
before tax

To earn a desired
amount of profit RSU= RSP=
after tax

To earn a desired
RSU= RSP=
profit ratio