COST/ VOLUME/

PROFIT (CVP)
AHMAD SAYUTI BIN YAHYA
INTRODUCTION
• COST-VOLUME-PROFIT (CVP) analysis is a systematic method of examining
the effects of changes in an organization’s volume of activity on its costs,
revenue and profits.
• In other words, CVP analysis helps in analysing the effects of changes of Selling
Price (SP) or sales volume or sales mix or fixed costs on the profits of the firm.

SALES= COST OF SALES + COST OF LABOUR + COST OF OVERHEAD + PROFITS,

Where, Cost of Sales is a variable cost, Cost of overhead is a Fixed cost, and Cost of Labour is a
semi variable cost (cost that contain both element of fixed and variable cost)

SALES = VARIABLE COST + FIXED COST + PROFITS

 Cost/Volume/Profit
Assumptions
• - Costs can be fixed or variable
• - VC are directly variable
• - Fixed costs are stable
• - Sales prices are constant
• - Sales mix will remain constant
CVP Analysis: Typical question
• What-if Analysis (Refer to exercise)
• How many buns used to produce a sales of RM5000 for burger?
• How much profits will be generated by Ching Kopitiam if annual sales volume is
RM180,000?
• What will happen to the cost of raw materials and how it will affect sales if price
for sugar will increase by 2%, next year?
USEFUL TERMS
• FIXED COST: Cost that are unaffected by the volume of sales in short run. Eg.
Rental, Fixed salary  Usually will remain the same whether the sales increase or
decrease.

Total Fixed Costs= $ 10,000

2 units = $ 10,000 per month
4 units = $ 10,000 per month
6 units = $ 10,000 per month
8 units = $ 10,000 per month
10units = $ 10,000 per month
•
USEFUL TERMS
Variable cost, (VC): Cost that are directly proportion to the sales volume. If the sales
increases, the VC will increase and vice versa.
• Eg. Food cost – if the cost of raw materials to produce 1 number of burger is RM1.50, the
cost to produce 10 nos of burgers are RM15.00

Variable Cost= $10 per unit

 0 units = $ 0= total
 2 units = $ 20= total
 4 units = $ 40= total
 6 units = $ 60=total
 8 units = $ 80=total
10units = $100=total
 USEFUL TERMS
• Contribution Margin (CM) – The amount of revenue remaining after deducting variable
cost.
• In other words, CM is the Dollar amount that contributes to covering fixed costs and
providing for a profit.

• CM = SALES – VARIABLE COST

 Important Equations
• 1. Sales = VC + FC + Profit
• 2. Variable rate = VC/Sales
• 3. Contribution rate = 1 - VR
 Cost/Volume/Profit Equation
 Sales = Sales cost + Labor cost + OH + Profit

 $325,000 = $108,875 + $81,250 + 97,500 + $37,375 S = VC

+ FC + P
 VC = Food & Beverage Cost + Variable LC (40% Total Labor)
 FC = Fixed LC ( 60% Total Labor) + Overhead
 S ($325,000) = VC ($141,375) + FC ($146,250)+ Profit ($37,375)
 Variable Rate
• Ratio of variable cost to dollar sales
• Variable rate = VC/Sales
• VR = VC($141,375)/Sales($325,000)
• VR = .435
Contribution Rate
• CR = 1 - VR
• 1 - .435 = .565
• CR = .565
 Break-Even Point
• Point at which the sum of all costs equals sales, thus profit = 0
• BE = Fixed Costs/CR
• BE = $146,250/.565
• BE = $258,849
• $325,000 - $258,850 = $66,150
• Profit = Sales after BE x CR
• $66,150 x .565 = $37,375
To determine sales dollars to achieve the
profit goal, use the following formula:

Fixed Costs + Profit

Contribution Rate = Sales Dollars to Achieve
Desired Profit

To determine break-even point, compute the

following: 
FC + 0
CR = Break-even point
 To determine the dollar sales required to break
even, use the following formula:
Fixed Costs
Contribution Rate = Break-Even Point in Sales

In terms of the number of units that must be

served in order to break even, use the following
formula:
Fixed Costs
Contribution Margin per Unit
= Break-Even Point in Unit Sales
© John Wiley & Sons, Inc. 2009
•  
Variable rate: Ratio of variable cost to dollar sales. It is determined by dividing
variable cost by dollar sales and is expressed in decimal form. It is similar to a cost
percent.
• =
• The contribution rate is determined by subtracting the variable rate from 1.
• CR= 1 – VR (Variable rate)
 BREAK-EVEN POINT
• The break-even point (BE), is a point at which the sum of all costs equals sales, so that
profit equals zero.

• Eg. Amin’s Restaurant generates RM20,000 of food sales for year ended 2017, with the
cost of RM20,000 to produce the food. Thus, Amin has no profits since the sales are
equal to cost. In this situation, Amin is known of running a break-even business.
COST OF RAW MATERIALS TO PRODUCE A BURGER

RM0.45
RM0.20

RM0.50 RM0.15

RM0.20 RM1.00

• SELLING PRICE= RM2.50

TOTAL COST= RM2.50
Since no profit is gained (profit = 0), this situation is known as “Break-even point”