ARBA MINCH UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT
MBA PROGRAM
 
COURSE TITLE: ACCOUNTING AND FINANCE
FOR MANAGERS
COURSE CODE: MBA 612
CREDIT HOURS: 3
PRE-REQUISITE: NONE

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 CHAPTER FOUR

COST-VOLUME-PROFIT(CVP)
ANALYSIS

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 Formula for Computing
Break-Even Sales (in Dollars)

The break-even formula may also be

expressed in sales dollars.
Fixed costs
Break-even point in dollars =
Contribution margin ratio

Unit Contribution Margin

Unit selling Price

12/28/22 Tamrat G.(PhD Candidate)

 Computing Break-Even Sales
Question 1

ABC Co. sells product XYZ at $5.00 per unit. If

fixed costs are $200,000 and variable costs are
$3.00 per unit, how many units must be sold to
break even?

a. 100,000 units
b. 40,000 units
Unit contribution = $5.00 - $3.00 = $2.00
Fixed costs
c. 200,000 units
Unit contribution
$200,000
= $2.00 per unit
d. 66,667 units
= 100,000 units

12/28/22 Tamrat G.(PhD Candidate)

 Computing Break-Even Sales
Question 2

Use the contribution margin ratio formula to

determine the amount of sales revenue ABC must
have to break even. All information remains
unchanged: fixed costs are $200,000; unit sales
price is $5.00; and unit variable cost is $3.00.

a. $200,000
b. $300,000
c. $400,000
d. $500,000
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 (Computing Break-Even Sales
Question 2, Cont’d)

Use the contribution margin ratio formula to

determine the amount of sales revenue ABC must
have to break even. All information remains
unchanged: fixed costs are $200,000; unit sales
price is $5.00; and unit variable cost is $3.00.
Unit contribution = $5.00 - $3.00 = $2.00

a. $200,000
Contribution margin ratio = $2.00 ÷ $5.00 = .40
Break-even revenue = $200,000 ÷ .4 = $500,000
b. $300,000
c. $400,000
d. $500,000
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 (Computing Sales Needed to Achieve Target
Operating Income, Cont’d)

ABC Co. sells product XYZ at $5.00 per unit. If

fixed costs are $200,000 and variable costs
are $3.00 per unit, how many units must be
sold to earn operating income of $40,000?

a. 100,000 units
b. 120,000 units
c. 80,000 units
d. 200,000 units
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 (Computing Sales Needed to Achieve Target
Operating Income, Cont’d)

ABC Co. sells product XYZ at $5.00 per unit. If

fixed costs are $200,000 and variable costs
are $3.00 per unit, how many units must be
sold to earn operating income of $40,000?

a. 100,000 unitsUnit contribution = $5.00 - $3.00 = $2.00

b. 120,000 unitsFixed Unit
costs + Target income
contribution
c. 80,000 units$200,000 + $40,000
= 120,000 units
d. 200,000 units $2.00 per unit
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 The High-Low Method
Question 1

If sales commissions are $10,000 when 80,000 units are

sold and $14,000 when 120,000 units are sold, what is
the variable portion of sales commission per unit sold?

a. $.08 per unit

b. $.12 per unit
c. $.10 per unit
d. $.125 per unit

12/28/22 Tamrat G.(PhD Candidate)

 The High-Low Method
Question 1

If sales commissions are $10,000 when 80,000 units are

sold and $14,000 when 120,000 units are sold, what is
the variable portion of sales commission per unit sold?

a. $.08 per unit Units Cost

b. $.12 per unit High level 120,000 $ 14,000
Low level 80,000 10,000
c. $.10 per unit Change 40,000 $ 4,000
d. $.125 per unit
$4,000 ÷ 40,000 units
= $.10 per unit

12/28/22 Tamrat G.(PhD Candidate)

 The High-Low Method
Question 2

If sales commissions are $10,000 when 80,000 units are

sold and $14,000 when 120,000 units are sold, what is
the fixed portion of the sales commission?

a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000

12/28/22 Tamrat G.(PhD Candidate)

 The High-Low Method
Question 2

If sales commissions are $10,000 when 80,000 units

are sold and $14,000 when 120,000 units are sold,
what is the fixed portion of the sales commission?
Total cost = Total fixed cost +
Total variable cost
a. $ 2,000
$14,000 = Total fixed cost +
b. $ 4,000 ($.10 × 120,000 units)
c. $10,000 Total fixed cost = $14,000 - $12,000

d. $12,000 Total fixed cost = $2,000

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 Application of CVP Analysis in Nonprofit
Organization
Consider how CVP relationship apply to nonprofit organizations.
Suppose a city has a birr 100,000 lump sum budget appropriation
to conduct a counseling program for drug addicts. The variable
costs for drug prescription are Birr 400 per patient per year. Fixed
costs are Birr 60,000 in the relevant range of 50 to 150 patients. If
all of the budget appropriation is spent how many patients can be
served in a year?
To solve this problem we again use the breakeven
equation:
Let N be the number of patients:
Revenue - Variable Cost – Fixed Costs = 0

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 (Application of CVP Analysis in Nonprofit…,
Cont’d)

Revenue – Variable Costs – Fixed Costs = 0

Br. 100,000 – Br. 400N – Br. 60,000 = 0
Br. 400N = Br. 100,000 – Br. 60,000
N = Br. 40,000 ÷ Br. 400
N = 100 Patients

Suppose the total budget appropriation for the following year is cut by 10
percent. Fixed costs will be unaffected, how many patients will be served in
the following year?
Revenue - Variable Costs – Fixed Costs = 0
Br. 90,000 – Br. 400N – Br. 60,000 = 0
Br. 400N = Br. 30,000 ÷ Br. 400
N = 75 Patients

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END OF CHAPTER FOUR