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Basic CVP Analysis
Basic CVP Analysis
Learning Objectives:
Toknow the relationship among cost, volume
and profit.
To identify the importance of CVP Analysis and
how do companies use CVP information in
decision-making
To observe the difference of CVP Analysis for
single-product and multiproduct firms.
To familiarize with the use of Margin of safety
and operating leverage in business
Main Objective of Finance
Maximization of Shareholder’s
Wealth
C
O
P
S
R
O T
F S
I (Minimize)
T
(Maximize)
Cost Volume Profit
• Analyzing the effects of changes in selling prices on
profits
Supervisor/Manager’s
Salary
Unit Variable Cost
On a per-unit basis, variable costs are assumed
to remain constant. Therefore, total variable cost
fluctuates in direct proportion to level of activity or
volume.
Direct Materials Direct Labor
Sales
Commission
This is the excess of unit Formula
selling price over unit
variable cost and the
amount each unit sold
Contribution contributes toward
Margin covering fixed cost and
providing operating
profits
R(X) - VC(X) – FC = P
Sales XX
Variable Costs (M and S/A) XX
Contribution Margin XX
Fixed Costs (M and S/A) XX
Operating Income 00
Breakeven point can be computed as follows :
FMC 0
FSA 0
OI / EBIT $ 2,200,000
Sensitivity Analysis as to Profit
REGULAR BREAKEVEN MARGIN OF
SALES SALES SAFETY
Fixed Cost INVERSE DIRECT INVERSE
Requirement:
a) Calculate the Breakeven Output
b) Calculate the Revenue at breakeven point
b)
You want to open a cookie store. The selling price of each CM/unit = Price - VC
cookie is $ 3. The variable cost is $ 1.30 and the fixed cost is
$ 10,000. What is breakeven point in units.
Solution:
Selling price =$5
Variable Cost/unit =$3 CM/unit = P-VC
Fixed Cost = $ 20,000 CM Ratio = CM per unit /
Price
Requirement :
a) Breakeven point in units
b) Breakeven point in sales
Solution:
a) BEP (units)
b) BEP (Sales)
Racing Bicycle company
Contribution Income Statement
For the month of May
Total Per unit CM Ratio
Sales (500 $ 250,000 500 100%
bicycles) $150,000 300
Less: Variable 60%
Expense
CM $100,000 200 40%
Less: Fixed $80,000
Expense
Net Operating $20,000
Income
Requirements:
a) Breakeven un units
b) Breakeven in sales
Solution:
a) BEP (units)
b) BEP (Sales)
Coffee Klatch is an espresso stand in a downtown office bldg. The average selling
price of a cup of coffee is $ 1.49 and the average variable expense per cup is $ 0.36.
The average fixed expense per month is $ 1,300. An average of $ 2,100 cups are
sold each month . What is the break even sales and breakeven units ?
𝐹𝑖𝑥𝑒𝑑𝑒𝑥𝑝𝑒𝑛𝑠𝑒 1300
𝐵𝐸𝑃 𝑆𝑎𝑙𝑒𝑠= = =1,715
𝐶𝑀 𝑅𝑎𝑡𝑖𝑜 .758
𝐹𝑖𝑥𝑒𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 1300
𝐵𝐸𝑃 𝑢𝑛𝑖𝑡𝑠= = =1150
𝐶𝑀 /𝑢𝑛𝑖𝑡 1.13
Thank You!!!