COST-VOLUME-PROFIT
RELATIONSHIP
CHAPTER 5
CVP Formula
Sx
 S=
= VCx + FC + P
Selling Price
 X= Sales Volume
 VC = Variable Cost per unit
 FC = Fixed Cost
 P= Profit
 Very powerful equation
 If all else fails just work the equation
Things you can find out using CVP formula
Breakeven points
 Units to sell to get a certain profit
 How many more to sell if Fixed Cost
increased
 Selling Price

Apply CVP Formula
Selling Price $36
 Variable Cost $24 per unit
 Fixed Costs $12,000
 Units 2,000
 Profit= ?
 Put in CVP formula

CONTRIBUTION MARGIN
The amount that contributes to fixed
costs and profits i.e Contribution
 Calculated In per unit, $ and in %

$100 Sales

60 VC
 $ 40 CM

35 FC
 $ 5 NI

40% Ratio ($40/$100= .40)
CONTRIBUTION MARGIN FORMAT
Income Statement
 SALES
 -VARIABLE
COST
 =CONTRIBUTION MARGIN
 - FIXED EXPENSES
 NET OPERATING INCOME
 Exercise
5-1 page 213
Application of CVP Data
Exercise 5-5 page 214
 1- Increase advertising budget
 2- Increase quality of product

BREAK EVEN (BE) IN UNITS & $

The units or $ that will cover the fixed
costs with no profit.
Sx – VCx= FC BE in equation method
 FC/CM% = BE$
CM Method
 You can determine: BE in units, BE in $
 Exercise 5-7 pg 214

PROFIT PLANNING
Answers these questions:
 How many do I need to sell to make
$100,000 profit
 For example: If I reduce my fixed costs by
$2,000 and increase my sales in units by
100 how will my profit change?

Target Profit Analysis




Formula for units to make a $ profit
FC + Profit
Unit CM
X sales price = Sales to attain target profit
Exercise 5-6 pg 214
 1- equation method
 2- CM approach

Margin of Safety (MS)
Amount you can drop before losses are
incurred
 How much can our sales drop before we
start losing money
 Every company has a different % because
each is structured differently
 How much excess you have over break
even.
 How much you have after you cover
your fixed costs.

Margin of Safety formula
Budgeted Sales – BE$ = MS$
 MS$/Budgeted Sales=MS%
 Example:
 Sales $100,000
 BE$
87,500
 MS$ $ 12,500 / 100,000 = 12.5%
 Exercise 5-8 page 214

Operating Leverage (OL) pg 202
How sensitive income is to a % change in
Sales $
 How a % change in Sales volume will
affect profits.
 It is a Multiplier
 If OL is high a small % change in Sales will
reuslt in a higher change in NI

Operating Leverage Formula
Contribution Margin $
 Net Income in $

It OL is 2 and sales increased by 5% then
net income will increase by 10%
 Exercise 5-9 pg 215

Operating leverage proof
Sales 100,000
110,000
 VC
60,000
66,000
 CM
40,000
44,000
 FC
35,000
35,000
 NI
5,000
9,000 $4,000
 OL
40,000/5000= 8 times x 10%
 80% x $5000 = $4000

CM Ratio


Another way to determine effect on net income
Change in Net Income with the change in Total
Sales
If we sell 10,000 more units, how would our net
income increase?
 10,000 X25%CM= 2500 change in units X $24
per unit = $60,000 increase in NI



How much would our net income increase if our
sales increase by $240,000
$240,000 X 25% = $60,000
Sales Mix
Multi Product CM

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Proportions in which a company’s products are sold
Mix that will yield the greatest profit
Steps to determine
1- Total all sales
2- VC % for each product and total sales
3- = CM% for all sales
4- Determine total BE$ FC/CM%
5- Each product % of total sales X BE$
6- Use VC% for each product for VC
7- =CM for each product = total fixed costs
Page 206 Exhibit 5-4
Exercise 5-10, pg 215