COST-VOLUME-PROFIT ANALYSIS (CVP)

ANALYSIS
Important formulae in break-even analysis:
1. Contribution margin per unit: Sales per unit- variable cost per unit

2. contribution margin ratio: contribution/sales or contribution per unit/sales per unit;

3. variable expense ratio: Variable costs/ sales

4. Break-even in units: Fixed costs

contribution margin per unit;

5. Break-even in dollars: Fixed costs

contribution margin ratio
: Break-even in units * sales price per unit;

6. Break-even point in units with a target profit (before tax):

(Fixed cost + Target profit)
Contribution per unit

7. Break-even in units with a target profit ( after tax):

= {Fixed cost + {profit after tax/(100%-Tax rate %)}
contribution margin per unit

8. Break-even in dollars with a profit (before tax)

(fixed costs + Target Profit)
contribution margin ratio
 COST-VOLUME-PROFIT ANALYSIS
(CVP) ANALYSIS
CVP Analysis is a procedure that examines changes in costs and volume levels
and the resulting effects on net income.

It examines the relationship among the price of products, volume, unit variable
costs, total fixed costs and mix of products sold.
ASSUMPTIONS OF COST-VOLUME-
PROFIT ANALYSIS
 Changes in the level of revenues and costs arise only because of changes in the number
of products/units produced and sold.

 Total costs can be divided into a fixed component and a variable component with
respect to the level of output.

 The unit selling price, unit variable costs and fixed costs are known and constant.

 The behaviour of total revenues and total cost is linear (straight-line) in relation to
output units within the relevant range.
 CONCEPTS USED IN CVP ANALYSIS
 Operating income= Total revenues from income –(Cost of goods sold + operating costs)
 Net Income= Operating income – Income taxes.

Activity:

JD Shop can purchase rugs for $32 from the local factory. Other variable costs amount to $10 per unit.
The local factory allows the JD Shop to return all unsold rugs and receive a full $32 refund per rug.
The average selling price per rug is $70 and total fixed costs amount to $84,000.
 Calculate total revenue if JD Shop sold 2,500 rugs; 2,500 rugs *$70 =$175,000

 Calculate the total variable cost of the business;

Purchase cost: (2,500 rugs * $32) + other variable costs(2,500 rugs * $10)
$80,000 + 25,000 =$105,000
 Determine the operating income
Total revenue- (cost of goods sold + operating costs)
Total Revenue- (total variable costs + total fixed costs)
=$175,000 - ($105,000 +$84,000)
=($14,000)
 CONCEPTS USED IN CVP ANALYSIS

Contribution- this is the difference between the selling price and the variable cost. SP – TOTAL VC
Contribution is the sales revenue after the deduction of variable costs that can be used towards paying
off fixed costs and then lead to profit.

Activity:

JD Shop can purchase rugs for $32 from the local factory. Other variable costs amount to $10 per
unit.
The local factory allows the JD Shop to return all unsold rugs and receive a full $32 refund per
rug.
The average selling price per rug is $70 and total fixed costs amount to $84,000.

Calculate contribution:
Contribution= Sales – Variable Costs
=$70 - ($32 + $10)
=$28 per unit

Calculate total Contribution if 2,500 rugs were sold:

= contribution per unit * units sold
=$28 * 2,500 rugs
=$70,000

Calculate contribution ratio

= contribution per unit/ sales per unit
=$28/ $70
=40 %
 ACTIVITY
Information from a window manufacturing company are given below:
$
Sales 300,000
Less: Variable costs (180,000)
Contribution 120,000
Less: Fixed costs 60,000
Net Income 60,000
The firm produced and sold 10,000 windows last year.
a. Calculate the selling price per window
Sales/ units produced =$300,000/10,000 windows =$30
b. Calculate the variable cost per window
Variable costs/ units produced =$180,000/10,000 windows =$18

c. Calculate the profit or loss if the following quantities were produced:

i. 7,000Units ii. 4,000 units
Sales (7,000*$30) 210,000 (4,000* $30) 120,000
-VC (7,000*18) (126,000) (4,000* $18) (72,000)
Contribution 84,000 48,000
- FC (60,000) (60,000)
Net Income/ (Loss) 24,000 (12,000)
At 7,000 Units the business makes a profit of $24,000 but at 4,000 units the business makes a loss of $12,000.
This brings us to the point of determining the minimum amount the business should make and sell to ensure it
Does not make a loss.
 BREAK- EVEN POINT
This is the point where the total cost of production s equal to the total revenue obtained from selling
the product.
Break-even point can be expressed in both units and in value.
Important formulae in break-even analysis:
1. Break-even in units: Fixed costs
contribution margin per unit;

2. Break-even in dollars: Fixed costs

contribution margin ratio
: Break-even in units * sales price per unit;

3. Break-even point in units with a target profit (before tax):

(Fixed cost + Target profit)
Contribution per unit

4. Break-even in units with a target profit ( after tax):

= {Fixed cost + {profit after tax/(100%-Tax rate %)}
contribution margin per unit

5. Break-even in dollars with a profit (before tax)

(fixed costs + Target Profit)
contribution margin ratio
 Demonstration Question

Phone Tec. Sells phones for $100. The unit variable cost per phone is $50 plus a selling commission of
10%. Fixed manufacturing costs total $ 1,250 per month, while fixed selling and administrative costs
total $2,500.

Calculate the following:

a. Contribution margin per unit; S-VC
=$100 - ($50 + 10%*$100)
=$100 -$60
=$40

b. Contribution margin ratio; CM/S

= $40 =40%
$100

c. Break-even point in phones; FC/ CM

=$1,250 +$2,500 = 93.75 phones =94 phones
$40

d. Break-even point in dollars; FC/CMR

=$1,250 + $2,500 =$9,375
40%
OR: Break-even in units* SP
= 93.75 phones * $100
=$9,375
e. The number of phones to be sold to earn a profit of $7,500. FC+ Profit/CM
=$1,250+ $2,500 + $7,500 =281.25 phones=282 phones must be sold
$40
f. The sales which must be made to earn a profit of $7,500. FC+ Profit/CMR
=$1,250+ $2,500 + $7,500
40%
=$28,125
2009
Calculate the following: 2009
i. Contribution margin per unit; S-VC =$6.40 - ($3.20 + $0.64)
=$6.40 -$3.84
=$2.56
Contribution margin ratio; CM/S = $2.56 =40%
$6.40

Break-even point in units; FC/ CM =$844,8000 = 330,000 boxes of chocolates

$2.56

ii. Break-even point in dollars; FC/CMR =$844,800 =$2,112,000 OR: Break-even in units* SP
40% = 330,000 boxes * $6.40
=$2,112,000

iii. Expected net Income (500,000 boxes) $

Sales (500,000 * $6.40) 3,200,000
Less: Variable Costs
Variable production cost (500,000* $3.2 (1,600,000)
Product contribution margin 1,600,000
Less: Variable Selling and Administrative (500,000* $0.64) (320,000)
Contribution margin 1,280,000
Less: Fixed Costs (844,800)
Net Income 435,200

iv. CM= S-VC

$2.56= X-(1.2*$3.84)
$2.56=X- $4.608
-X+$4.608=-$2.56
-X= -$2.56-$4.608
X=$2.56+$4.608
X=$7.168
New Selling Price= $7.168
Double check the CM:
$7.168-$4.608=$2.56
2017