COST-VOLUME-PROFIT RELATIONSHIP
By: G.E ZAFRAN
ATENEO Graduate School of Business 2011-2012
Series 1
6
Series 2
5
Series 3
4
3
2
1
0
Category 1
Category 2
Category 3
Category 4
LEARNING OBJECTIVES:
After studying chapter 6, you should be able to:
• Explain how changes in activity affect
Contribution Margin and Net Operating Income.
• Prepare and interpret a cost-volume-profit (CVP)
graft and profit graft
• Use the contribution Margin ratio (CM Ratio)to
compute changes in Contribution and Net
Operating Income resulting from changes in
Sales Volume
• Show the effects on Contribution Margin of
changes in Variable Costs, Fixed Costs, Selling
Price and Volume
-
• Determine the level of sales needed to achieve a
desired target profit
• Determine Break-even point
• Compute the margin of safety an explain its
significance
• Compute the degree of operating leverage at a
particular level of sales and explain how it can be
used to predict changes in net operating income
• Compute the Break-even point for a multiproduct
company and explain the effects of shifts in the
sales mix on contribution margin and the breakeven point
WHAT IS COST-VOLUME PROFIT ANALYSIS AND
ITS RELATIONSHIP?
• When Managers start to manufacture certain
product, these 3 vital tools must first be
considered before the production is initiated
as to how much will it COST the company to
produce per unit of product.
Fixed
cost
Variable
cost
Total
cost
-
When COST PER UNIT is identified, the company
will consider how many units will then be
produced (VOLUME) to get a certain margin of
PROFIT for certain VOLUME of Products sold
PER UNIT
COST($10)
X NUMBER
OF
UNITS(100)
GROSS
PROFIT
($1000)
COST
VOLUME
ANALYSIS
PROFIT
VARIABLE
+ FIXED
EXPENSE
ANALIZING THE FF:
NUMBER OF
UNITS SOLD
Selling Price, sales
volume, unit
variable cost, total
fixed cost, mix of
product sold
PROFIT
NET
OPERATING
INCOME
Cost-Volume-Profit (CVP)Analysis
-Is the powerful tool that helps managers understand
the relationship among cost, volume, and profit.
-CVP Analysis focuses on how profit are affected by the
following FIVE FACTORS:
1.
2.
3.
4.
5.
Selling Prices
Sales volume
Unit variable cost
Total fixed cost
Mix of products cost
• Selling Price: is the amount actually attach to
the product or the value of a product
• Sales volume: is the number of unit sold in a
transaction
• Unit variable cost: a non-fixed cost or expense
incurred to manufacture a certain product
• Total fixed cost: is the overall sum of fixed cost
or expenses
• Mix products sold: pertain to two or more
varieties of product sold
THE IMPORTANCE OF CVP ANALYSIS
• CVP analysis helps managers understand how
profits are affected by these 5 key factors.
Selling
price
MIX OF
PRODUCT
SALES
VOLUME
MARKET
UNIT
VARIAB
LE COST
TOTAL
FIXED
COST
SOLD
-
• It is a vital tool in many business decisions.
These decision include what product and
services to offer, what price to charge, what
marketing strategy to use, and what cost
structure to implement.
• It will help the managers decide on certain
aspect of operation whether certain product is
significant in some areas for profit margin
• It will help what product is saleable and what
is not
• It will also help the company reach its ROI
THE BASIC OF COST-VOLUME-PROFIT (CVP)
ANALYSIS
To help understand the role of CVP analysis in
business decisions, consider the case of acoustic
concept Inc where cost behavior is carefully analyze
with the contribution of income statement.
The contribution of income statement emphasizes
the behavior of cost s and therefore is extremely
helpful to managers in judging the impact on profits
of changes in selling price and cost or volume.
XYZ Paint Industry
Contribution Income Statement
Note:
Volume in kilos
Price in Phil Peso
TOTAL
PER UNIT
Sales (volume: 1,231,000)
306,862,000
249.28
Variable Expense (1,231,000)
210,500,000
171.00
Contribution Margin
96,362,000
78.28
Fixed Expenses
17,800,00
Net Operating Income
78,562,000