COST- VOLUME-PROFIT RELATIONSHIPS – CHAPTER 5
Learning Objective 5: Prepare a cost reconciliation report using the weighted-average method.
Week 4 Quick Question Check


Textbook Summary
Cost-volume-Profit (CVP) analysis helps managers make decision based on what products
and services to offer, price, marketing strategy.
Its primary purpose is to estimate how profits are affected by the following 5 factors:
a. Selling prices
b. Sales volume
c. Unit variable costs
d. Total fixed costs
e. Mix of products sold

Contribution Margin is the amount remaining from sales revenue after variable expenses
have been deducted.

Breakeven point is the level of sales at which profit is 0

To summarise, if sales are 0, the company’s loss would equal its fixed expenses. Each unit that
is sold reduces the loss by the amount of the unit contribution margin. Once the breakeven
point has been reached, each additional unit sold increases the company’s profit by the
amount of the unit contribution.
CONTRIBUTION FORMAT INCOME STATEMENT
Profit = (Sales − Variable expenses) − Fixed expense
Sales = Variable expenses==Selling price per unit × Quantity sold=P × Q Variable expenses per unit ×
Quantity sold=V×Q
Profit = (P×Q−V×Q) − Fixed expenses
UNIT CM
Unit CM = Selling price per unit−Variable expenses per unit = P−V
Profit = (P × Q−V × Q) − Fixed expenses
Profit = (P−V) × Q − Fixed expenses
Profit=Unit CM × Q − Fixed expense

Preparing a CVP Chart aka break even chart
- Unit volume is represented on a horizontal (X) axis
- Dollars on the vertical (Y) axis





CM ratio = contribution margin / sales
Acoustic Concepts = CM ration = total contribution margin /total sales x 100
If you only have one product = CM ratio = unit contribution margin / unit selling price x 100
Variable expense ratio = variable expense / sales
Acoustics concepts = variable expense ratio = variable expense per unit / unit selling price x
100
Having defined 2 terms:
- CM ratio = CM/Sales
- CM ratio = Sales – Variable Expenses / Sales
- CM ratio = 1 – Variable expense ratio
Acoustics Concepts
- CM ratio = 1 – Variable expense ratio
= 1 – 60% = 40%



Break even analysis
1. The formula method – short cut version of the equation method
o
o

Unit sales to break even = Fixed expenses / Unit CM
Dollar sales to break even = Fixed Expenses / CM ratio
Target profit analysis – estimate what sales volume is needed to achieve a specific target profit
2. The formula method
o Unit sales to attain the target profit = target profit + Fixed expenses / Unit CM
o Dollar sales to attain target profit = target profit + Fixed expenses / Unit ratio

The margin of safety is the excess of budgeted or actual sales dollars over the break when
volume of sales dollars. It is the amount by which sales can drop before losses are incurred.
The higher the margin pf safety, the lower the risk of not breaking even and incurring a loss.
o Margin of safety percentage = margin of safety in dollars / total budgeted for
actual sales in dollars

Degree of operating leverage at a given of sales of how aa percentage change in sales volume
will affect profits:
o Degree of operating leverage = CM / net operating income