Tutorial 3a
Cost-Volume-Profit Analysis
J. E. Cairnes School of Business and Economics
NUI Galway
Cost-Volume-Profit (CVP) Analysis
•  This is a method used to examine the relationship
between changes in volume/output and changes in
total sales revenue, expenses and net profit
•  CVP analysis enables management to identify critical
output levels, such as the level at which profit will be
maximised or break-even point (the level at which
neither a profit or loss will occur)
•  Based on the short run; one year or less
Cost- Volume-Profit Analysis
•  Need to analyse the behaviour of costs in relation to
changes in volume
•  Classification of costs into fixed and variable
J. E. Cairnes School of Business & Economics
NUI Galway
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Fixed Costs -> Fixed costs remain the same i.e. fixed
irrespective of the level of activity or volume of output
E.g. Rent, insurance, cleaning costs, depreciation
€
Volume
Variable Costs -> varies directly with changes in
the level of output e.g. raw material costs = €8 per
unit of output produced
€
Volume
Step Fixed Costs- A cost which is fixed over a certain range
of production (quantity) but then increases as the capacity
(and the usage of a particular activity) increases
€
Volume
J. E. Cairnes School of Business & Economics
NUI Galway
2
Semi-variable Cost-A cost which is partially fixed and
partially varies with the changes in the level of quantity
(activity) e.g: telephone costs; fixed line rental plus costs for
the calls
The slope of
this line is the
variable cost
per unit
100
Cost
80
60
40
Variable cost element
20
Fixed cost element
0
100
200
300
400
Volume
7
CVP Analysis
Y = a + bx
Sales
x
Total Cost
= Fixed Costs + Variable
Costs
Less Variable Costs
Contribution
Less Fixed Costs
Profit
(x)
x
(x)
x
Contribution
•  Contribution = Sales Revenue less Variable costs
•  Contribution/ unit (CPU)= Sales price/unit- Var cost/unit
•  Indicates revenue remaining after all variable costs have
been covered
•  Variable costs include variable production and variable
selling and administration costs
J. E. Cairnes School of Business & Economics
NUI Galway
3
Break-even point (BEP)
At break-even point
–  total costs = total revenues
–  i.e. no profit or loss is made
Where:
Sales
Less Variable Costs
Contribution
Less Fixed Costs
x
(x)
x
(x)
0
Break-even Point
To calculate breakeven point in units:
Total fixed costs
Contribution per unit
Example 1
Sales price per unit
= €100
Variable cost per unit
= €40
Fixed Costs
= €6,000
What is Contribution per unit?
What Contribution is required to breakeven?
How many units need to be sold to breakeven?
J. E. Cairnes School of Business & Economics
NUI Galway
4
What is Contribution per unit?
Sales price per unit
€100
Less variable cost per unit
€40
Contribution per unit
€60
What Contribution is required to breakeven?
At the break-even point no profit or loss is made
i.e. Sales – Variable costs= Fixed costs
The fixed costs are €6,000
For no profit or loss contribution needs to be €6,000
How many units that need to be sold to
breakeven?
Total Fixed Costs
Contribution per unit
=
€6,000
€60
=
100 units (required to be produced to breakeven)
J. E. Cairnes School of Business & Economics
NUI Galway
5
Target Profit
Sales required to earn target profit in units:
Total fixed costs + Target profit
Contribution per unit
Example 2
Sales price per unit
= €100
Variable cost per unit
= €40
Fixed Costs
= €6,000
Q- What production is required to generate a profit of
€30,000?
(€6,000+ €30,000) = 600 units
€60
Margin of Safety (MOS)
•  The excess of a company’s budgeted or actual units or
revenues over its BEP
•  Reflects the amount by which sales can drop before
reaching BEP
•  Margin of safety (units)= Actual units – Breakeven units
•  Or as a percentage
Actual units – Breakeven units = %
Actual units
J. E. Cairnes School of Business & Economics
NUI Galway
6
CVP Assumptions
•  Fixed costs remain fixed regardless of the level of activity
•  Variable costs are the same at all levels of activity
•  No changes in stock levels – everything that is produced
is sold
•  Sales Price will be the same at all output levels
•  There is no uncertainty in the estimates of fixed and
variable costs
Breakeven Chart
Sales
€
Breakeven
point
Profit
Total
fixed
cost
Loss
0
Total
cost
Volume – units/€s
Let’s look at some CVP examples
•  In Tutorial 3b we will look at Leaving Cert Ordinary
Level 2010 Q8
•  In Tutorial 3c we will look at Leaving Cert Ordinary
Level 2012 Q8
•  In Tutorial 3d we will look at Leaving Cert Higher Level
2011 Q8
•  See: http://www.nuigalway.ie/cairnes/leavingcert/
for tutorials on other topics
J. E. Cairnes School of Business & Economics
NUI Galway
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Interested in pursuing an accounting career?
Study at NUI Galway
•  CAO Course Codes
•  GY201 B Comm
•  GY202 B Comm (International) with French
•  GY203 B Comm (International) with German
•  GY204 B Comm (International) with Spanish
•  GY207 B Comm (Accounting)
•  GY208 B Comm (Gaeilge)
•  For further information
contact:accounting@nuigalway.ie
J. E. Cairnes School of Business & Economics
J. E. Cairnes School of Business & Economics
NUI Galway
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