CVP Analysis

Case: Aussie Pies (A)

 Establishing the Business
• Used kitchen at home to develop more than 100 variation of the meat pie
recipe and tested on friends and family
• Hit upon a pie which maintained..,
• Authentic flavor of meat pie
• Less fat
• Less sodium
• Based on commercial price a pie would cost $1.20 for all the ingredients..,
• Ground beef
• Onions
• Flour
• Butter
• Sauces
• Amount of utilities cost per pie: $0.03
 Establishing the Business
• Conducted extensive market survey at Pike Place
• Reasonable initial price: $3.25 per pie (comparable to
burgers and hotdogs)
• Cost of each pie box used for customer packaging at the
point of sale: $0.02
• Ideal location was Seattle destination frequently visited
by tourists who would be interested in trying new exotic
foods
• Large store of 4,000 Sq ft and capacity to produce and
sell 30,000 pies per month could be rented for $11,900
per month
 Establishing the Business
• Renting cooking equipment: cost $8,000 per month
• Renting fixtures: cost $5,000 per month
• Glass wall panel so that customer could see the spotlessly clean
facilities in which the pies are made
• Premium product + using high quality ingredients + produced under
impeccably sanitary conditions
• Two full-time chefs at $1,800 per month
• One full-time sales assistant would be needed at a monthly salary of
$1,200 per month
• Utility cost for lighting the store during business hours were
estimated to be $300 per month
Fixed vs. Variable Costs

Committed or Fixed Costs per Month

Store rent 11,900
Equipment 8,000
Fixtures 5,000
Chef's wages 3,600
Sales person's wages 1,200
Utilities 300
Total fixed costs 30,000
Selling Price of a pie 3.25
Flexible or variable costs per pie
Ingredients 1.2
Utilities 0.03
Packaging 0.02
Variable cost per pie 1.25
Contribution margin per pie 2
Fixed Cost Behavior
Management Control of Fixed Costs
Variable Cost: Effect of Change in Slope of Line

V = Average variable cost rate

Variable Cost Factors
Total Fixed and Variable Cost
Total Variable and Fixed Cost
 Discussion Question

What profits would Aussie Pies generate if meat pie sales

were 6,000 pie per month (ignore taxes)?
 Profit for 6000 Pie
• Profit = 6000 pies x contribution margin
per pie - total fixed costs
• = 6000*2 – 30,000 = - 180,000
 Discussion Question

What must sales of meat pies be if the business is to break

even (ignore taxes)?
 Break-even Sales
• Profit = 6000 pies x contribution margin
per pie - total fixed costs
• Break even sales = 30,000 – 2 x Q =
15,000 units
 Discussion Question

What does it cost Aussie Pies to make and distribute a

meat pie (ignore taxes)?
 Capacity
• Capacity to produce = 30,000 pies per month
• Business’s practical capacity = business’s capacity produce meat
pies under reasonable operating conditions
• At 30,000 capacity average cost of producing and distributing a pie
= (1.25*30,000 + 30,000) / 30,000 = $2.25
• Profit on full capacity = $3.25 – $2.25 = $1
• Cost of unused capacity = fixed cost – absorbed costs at practical
capacity
• If unused capacity is more, then firm should think of..,
• Increasing its marketing efforts to boost sales
• Price reduction
• Sublease some of the production capacity
• Move to a smaller store with lower production capacity to reduce committed
costs
 Unsed
Monthly Production Variable Cost Fixed Costs Average Total
Capacity
of Pies Per Pie Per Pie Cost Per Pie Profit
Costs
0 30000 -30000
1000 1.25 30.00 31.25 29000 -28000
2000 1.25 15.00 16.25 28000 -26000
3000 1.25 10.00 11.25 27000 -24000
4000 1.25 7.50 8.75 26000 -22000
5000 1.25 6.00 7.25 25000 -20000
6000 1.25 5.00 6.25 24000 -18000
7000 1.25 4.29 5.54 23000 -16000
8000 1.25 3.75 5.00 22000 -14000
9000 1.25 3.33 4.58 21000 -12000
10000 1.25 3.00 4.25 20000 -10000
11000 1.25 2.73 3.98 19000 -8000
12000 1.25 2.50 3.75 18000 -6000
13000 1.25 2.31 3.56 17000 -4000
14000 1.25 2.14 3.39 16000 -2000
15000 1.25 2.00 3.25 15000 0
16000 1.25 1.88 3.13 14000 2000
17000 1.25 1.76 3.01 13000 4000
18000 1.25 1.67 2.92 12000 6000
19000 1.25 1.58 2.83 11000 8000
20000 1.25 1.50 2.75 10000 10000
21000 1.25 1.43 2.68 9000 12000
22000 1.25 1.36 2.61 8000 14000
23000 1.25 1.30 2.55 7000 16000
24000 1.25 1.25 2.50 6000 18000
25000 1.25 1.20 2.45 5000 20000
26000 1.25 1.15 2.40 4000 22000
27000 1.25 1.11 2.36 3000 24000
28000 1.25 1.07 2.32 2000 26000
29000 1.25 1.03 2.28 1000 28000
30000 1.25 1.00 2.25 30000
Different Kinds of Cost Behavior
Mixed Cost: Splitting into Fixed and Variable Cost
Scatter Graph Utility Cost
 Mixed Cost: Splitting into Fixed and Variable Cost
Least Square Regression Method

• Y = A + b(X)
• TC = F + V(Q)
General Cost Classifications
Cost Classifications
Break Even Analysis
BE Analysis for Multiple Products
Applications of BEA
Applications of BEA
Reducing BEP
Unreasonable Assumptions?
Cost Classification
Cost Classification
Cost Classification
Criteria to Evaluate and Choose Cost
Drivers
How BEA Helps?
Assigning Costs to a Cost Object