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Cost-Volume-Profit Analysis
(Contribution Margin)
CURL SURFBOARDS
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999
The Break-Even Point
The break-even point is the point is the volume of
activity where the organization’s revenues and
expenses are equal.
Sales
Sales $$250,000
250,000
Less:
Less: variable
variable expenses
expenses 150,000
150,000
Contribution
Contribution margin
margin 100,000
100,000
Less:
Less: fixed
fixed expenses
expenses 100,000
100,000
Net
Net income
income $$ --
Total
Total Per
Per Unit
Unit Percent
Percent
Sales
Sales (500
(500 surfboards)
surfboards) $$250,000
250,000 $$ 500500 100%
100%
Less:
Less: variable
variable expenses
expenses 150,000
150,000 300
300 60%
60%
Contribution
Contribution margin
margin $$100,000
100,000 $$ 200200 40%
40%
Less:
Less: fixed
fixed expenses
expenses 80,000
80,000
Net
Net income
income $$ 20,000
20,000
Total
Total Per
Per Unit
Unit Percent
Percent
Sales
Sales (500
(500 surfboards)
surfboards) $$250,000
250,000 $$ 500500 100%
100%
Less:
Less: variable
variable expenses
expenses 150,000
150,000 300
300 60%
60%
Contribution
Contribution margin
margin $$100,000
100,000 $$ 200200 40%
40%
Less:
Less: fixed
fixed expenses
expenses 80,000
80,000
Net
Net income
income $$ 20,000
20,000
Let’s
Let’s calculate
calculate the
the break-even
break-even
point
point in
in units
units for
for Curl,
Curl, Inc.
Inc.
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999
Contribution-Margin Approach
Total
Total Per
Per Unit
Unit Percent
Percent
Sales
Sales (400
(400 surfboards)
surfboards) $$200,000
200,000 $$ 500500 100%
100%
Less:
Less: variable
variable expenses
expenses 120,000
120,000 300
300 60%
60%
Contribution
Contribution margin
margin $$ 80,000
80,000 $$ 200200 40%
40%
Less:
Less: fixed
fixed expenses
expenses 80,000
80,000
Net
Net income
income $$ --
$80,000
= 400 surfboards
$200
Total
Total Per
Per Unit
Unit Percent
Percent
Sales
Sales (400
(400 surfboards)
surfboards) $$200,000
200,000 $$ 500500 100%
100%
Less:
Less: variable
variable expenses
expenses 120,000
120,000 300
300 60%
60%
Contribution
Contribution margin
margin $$ 80,000
80,000 $$ 200200 40%
40%
Less:
Less: fixed
fixed expenses
expenses 80,000
80,000
Net
Net income
income $$ --
$80,000
= $200,000 sales
40%
400,000
350,000
300,000
Sales in Dollars
250,000
200,000
50,000
-
- 100 200 300 400 500 600 700 800
400,000
350,000
300,000
Sales in Dollars
250,000
Total expenses
200,000
150,000
100,000
50,000
-
- 100 200 300 400 500 600 700 800
300,000
Sales in Dollars
250,000
200,000
150,000
100,000
50,000
-
- 100 200 300 400 500 600 700 800
400,000 Break-even
350,000 point
300,000
Sales in Dollars
250,000
200,000
150,000
100,000
50,000
-
- 100 200 300 400 500 600 700 800
400,000
350,000
rea
300,000
f it a
Pro
Sales in Dollars
250,000
200,000
150,000
100,000 rea
ssa
50,000 Lo
-
- 100 200 300 400 500 600 700 800
$-
$- $50 $100 $150 $200 $250 $300 $350 $400
$(20,000)
$(40,000)
$(60,000)
$(80,000)
$(100,000) 1 2 3 4 5 6 7 8
Units sold (00s)
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999
Profit-Volume Graph
$100,000
$80,000
Break-even
$60,000 point
$40,000
$20,000
Profit
$-
$- $50 $100 $150 $200 $250 $300 $350 $400
$(20,000)
$(40,000)
$(60,000)
$(80,000)
$(100,000) 1 2 3 4 5 6 7 8
Units sold (00s)
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999
Profit-Volume Graph
$100,000
$80,000
$60,000
$40,000
$20,000
Profit
$-
$- $50 $100 $150 $200 $250 $300 $350 $400
$(20,000)
$(40,000)
$(60,000)
Sales revenue
$(80,000)
$(100,000) 1 2 3 4 5 6 7 8
Units sold (00s)
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999
Profit-Volume Graph
$100,000
$80,000
Profit line
$60,000
$40,000
$20,000
Profit
$-
$- $50 $100 $150 $200 $250 $300 $350 $400
$(20,000)
$(40,000)
$(60,000)
$(80,000)
$(100,000) 1 2 3 4 5 6 7 8
Units sold (00s)
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999
Profit-Volume Graph
$100,000
$80,000
$60,000
rea
$40,000
a
ofi t
$20,000
Pr
Profit
$-
$- $50 $100 $150 $200 $250 $300 $350 $400
$(20,000)
rea
$(40,000)
s a
os
$(60,000) L
$(80,000)
$(100,000) 1 2 3 4 5 6 7 8
Units sold (00s)
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999
Target Net Profit
We can determine the number of
surfboards that Curl must sell to earn a
profit of $100,000 using the contribution-
margin approach.
$80,000 + $100,000
= 900 surfboards
$200
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999
Equation Approach
Sales revenue – Variable expenses – Fixed expenses = Profit
($200X) = $180,00
X = 900 units
Should
Should we
we authorize
authorize the
the requested
requested increase
increase in
in
the
the advertising
advertising budget?
budget?
540
540units
units×× $500
$500per
perunit
unit ==$270,000
$270,000
$80,000
$80,000++ $10,000
$10,000advertising
advertising== $90,000
$90,000
{ }
Fixed expenses
Given: Unit contribution margin Find: {required sales volume}
Target net profit
{ }
Fixed expenses
Given: Unit contribution margin Find: {expected profit}
Expected sales volume
Number % of
Description of Boards Total
Surfboards 500 62.5% (500 ÷ 800)
Sailboards 300 37.5% (300 ÷ 800)
Total sold 800 100.0%
$200 × 62.5%
Break-even $170,000
=
point $331.25
Break-even
= 514 combined unit sales (rounded up)
point
$100,000
= 5
$20,000
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999
Measuring Operating Leverage
A measure of how a percentage change in
sales will affect profits.
Percent
Percent increase
increase in
in sales
sales 10%
10%
Operating
Operating leverage
leverage factor
factor ×× 55
Percent
Percent increase
increase in
in profits
profits 50%
50%