• Cost-volume-profit (CVP)

analysis is a method of cost

accounting that looks at the impact
that varying levels of costs and
volume have on operating profit.
 Function vs. Behavior
TRADITIONAL CONTRIBUTION
INCOME MARGIN
STATEMENT INCOME
STATEMENT
 Comparison of Income Statements
TRADITIONAL CONTRIBUTION MARGIN
Sales $1,000 Sales $1,000
Less: Cost of Goods Sold: Less: Variable Costs:
Variable Costs $350 Manufacturing $350
Fixed Costs 150 Costs
S, G, & A Costs 50
Total Cost of Goods Sold $500
Total Variable Costs $400
Gross Profit $500 Contribution Margin $600
Less: S, G, & A Costs:
Less: Fixed Costs:
Variable Costs $ 50 Manufacturing $150
Fixed Costs 250 Costs
Total S, G, & A Costs $300 S, G, & A Costs 250
Net Income $200 Total Fixed Costs $400
Net Income $200
Contribution Margin Per Unit
Happy
Daze
Game Co.

Total Contribution
Margin Per unit
Sales (8,000 units) 100,000 $12.50
Less: Variable Costs 72,000 9.00
Contribution Margin 28,000 $3.50
Less: Fixed Costs 35,000
Net Income (Loss) (7,000)
 Contribution Margin Per Unit
Every game sold by Happy Daze Game Co. adds $3.50 to the
contribution margin and net income increases by the same
Happy $3.50 (assuming Contribution margin
that fixed costs don't (per unit) =
change).
Daze
Contribution margin (in $)/Units sold
Game Co.
= $28,000/8,000 = $3.50

Total Contribution
Margin Per unit
Sales (8,000 units) $100,000 $12.50
Less: Variable Costs 72,000 9.00
Contribution Margin $ 28,000 $3.50

Less: Fixed Costs 35,000

Net Income (Loss) $ (7,000)
 What Contribution Margin per
Unit Explains
Every game sold by Happy Daze Game Co. adds $3.50 to the
contribution margin and net income increases by the same
$3.50 (assuming that fixed costs don't change).

Total Contribution Margin Per unit

Sales (8,001 units) $100,012.50 $12.50
Less: Variable Costs 72,009.00 9.00
Contribution Margin $ 28,003.50 $ 3.50

Less: Fixed Costs 35,000.00

Net Income (Loss) $ (6,996.50)
 Contribution Margin Ratio
Contribution Margin (in $)
Sales (in $)
Total
Sales (8,000 units) $100,000 Happy Daze’s
Less: Variable Costs 72,000 Contribution Margin =
$28,000
Contribution Margin $ 28,000
$100,000
Less: Fixed Costs 35,000 =28%
Net Income (Loss) $ (7,000)
 Applying the
Contribution Margin Ratio
For every dollar change in sales, contribution
margin will increase or decrease by the
contribution margin ratio multiplied by the
increase or decrease in sales dollars.
If Sales Decrease 200 units: Decrease in
Contribution
Sales Dollar Decrease Margin and
Contribution
x = Net Income
200 units x $12.50 Margin Ratio

$2,500 X 28% =
$700
 Break-Even Analysis
The break-even point is the level of sales
at which contribution margin just covers
fixed costs and consequently net income is
equal to zero.

Break-Even Fixed Costs

(units) = Contribution Margin Per Unit

Break-Even = Fixed Costs

(Sales $) Contribution Margin Per Unit
Break-Even Units for Happy Daze
If Happy Daze has fixed costs of $35,000
and a contribution margin per unit of
$3.50, what is its breakeven point in units?

Break-Even = Fixed Costs

(units) Contribution Margin Per Unit

= $35,000 = 10,000 units

$3.50
 Break-Even Sales Dollars for
Happy Daze
If Happy Daze has fixed costs of $35,000
and a contribution margin ratio of 28%,
what is its breakeven point sales dollars?

Break-Even = Fixed Costs

($) Contribution Margin Ratio

= $35,000 = $125,000
28%
Break-Even Graph
 Operating Leverage
•The measure of the proportion of fixed costs in
a company’s cost structure.
•It is used as an indicator of how sensitive profit
is to changes in sales volume.

Operating Contribution Margin

Leverage =
Net Income
 Operating Leverage

Operating Leverage
HIGH LOW
% profit increase with sales Large Small
increase

% loss increase with sales Large Small

decrease
 Operating Leverage

As a company gets closer and

closer to the break-even point,
operating leverage will continue
to increase, and income will be
very sensitive to changes in sales.