Cost Behavior and
Cost-Volume-Profit Analysis
LO 4 – Using the Graphic
Approach for CVP
Analysis
@ 2012, Cengage Learning
LO 4
Cost-Volume-Profit (Break-Even) Chart
A cost-volume-profit chart, sometimes called
a break-even chart, graphically shows sales,
costs, and the related profit or loss for various
levels of units sold.
LO 4
Cost-Volume-Profit (Break-Even) Chart
 The cost-volume-profit charts in this section are
based on Exhibit 5, which was constructed using the
following data:
(continued)
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Dollar
amounts
are
indicated
along
the
vertical
axis.
Sales and Costs (in thousands)
Cost-Volume-Profit (Break-Even) Chart
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
0
1
2
3
4
5
6
7
8
9 10
Units of Sales (in thousands)
Volume is shown along the horizontal axis.
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Sales and Costs (in thousands)
Cost-Volume-Profit (Break-Even) Chart
Point A
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
0
1
2
3
4
5
6
7
8
9 10
Units of Sales (in thousands)
Point A could have been plotted at any
sales level, because linearity is assumed.
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Sales and Costs (in thousands)
Cost-Volume-Profit (Break-Even) Chart
Point A
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
0
1
2
3
4
5
6
7
8
9 10
Units of Sales (in thousands)
Beginning at zero on the left corner of the graph,
connect a straight line to the dot (Point A). This is
the total revenue or total sales line.
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Sales and Costs (in thousands)
Cost-Volume-Profit (Break-Even) Chart
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Fixed Cost
0
1
2
3
4
5
6
7
8
9 10
Units of Sales (in thousands)
Fixed cost of $100,000 is a horizontal line.
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Sales and Costs (in thousands)
Cost-Volume-Profit (Break-Even) Chart
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
0
1
2
3
4
5
6
7
8
9 10
Units of Sales (in thousands)
A point is marked at $400,000,
where 10,000 units are sold.
(continued)
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Sales and Costs (in thousands)
Cost-Volume-Profit (Break-Even) Chart
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
0
1
2
3
4
5
6
7
8
9 10
Units of Sales (in thousands)
A line is drawn from fixed costs at zero sales ($100,000)
to this point. This is the total costs line.
(continued)
LO 4
Sales and Costs (in thousands)
Cost-Volume-Profit (Break-Even) Chart
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Break-even
Point
0
1
2
3
4
5
6
7
8
9 10
Units of Sales (in thousands)
The point where the revenue (blue) line and the
total costs (orange) line intersect is the break(continued)
even point.
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Sales and Costs (in thousands)
Cost-Volume-Profit (Break-Even) Chart
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Break-even
Point
0
1
2
3
4
5
6
7
8
9 10
Units of Sales (in thousands)
Break-even is sales of 5,000 units or $250,000.
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Sales and Costs (in thousands)
Cost-Volume-Profit (Break-Even) Chart
$500
$450
$400
$350
$300
$250
$200
$150
$100
$ 50
Operating Break-even
Loss Area
Point
Operating
Profit Area
0
1
2
3
4
5
6
7
8
Units of Sales (in thousands)
9 10
LO 4
Cost-Volume-Profit (Break-Even) Chart
LO 4
Cost-Volume-Profit (Break-Even) Chart
A proposal to reduce fixed costs by $20,000 is to be
evaluated. The cost-volume-profit chart in Exhibit 6
(next page) was designed to assist in this evaluation.
Note that the total costs line has been drawn from fixed
costs at zero sales of $80,000, reducing the break-even
point to dollar sales of $200,000, or 4,000 units.
LO 4
Cost-Volume-Profit (Break-Even) Chart
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Profit-Volume Chart
 Another graphic approach to cost-volume-profit
analysis, the profit-volume chart, plots only the
difference between total sales and total costs (or
profits). Again, data from Exhibit 5 are used.
Unit selling price
Unit variable cost
Unit contribution margin
Total fixed costs
$ 50
30
$ 20
$100,000
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Profit-Volume Chart
 The maximum operating loss is equal to the fixed
costs of $100,000. Assuming that the maximum unit
sales within the relevant range is 10,000 units, the
maximum operating profit is $100,000, as shown
below.
Maximum profit
LO 4
Profit-Volume Chart
LO 4
Profit-Volume Chart
Assume that an increase in fixed costs of $20,000 is
to be evaluated. The maximum operating profit would
be $80,000, as shown below:
Sales (10,000 units x $50)
Variable costs (10,000 units x $30)
Contribution margin (10,000 units x $20)
Fixed costs
Operating profit
$500,000
300,000
$200,000
120,000
$ 80,000
Revised
Maximum profit
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Profit-Volume Chart
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Assumptions of Cost-Volume-Profit Analysis
 The primary assumptions are as follows:
1. Total sales and total costs can be represented by straight
lines.
2. Within the relevant range of operating activity, the
efficiency of operations does not change.
3. Costs can be divided into fixed and variable
components.
4. The sales mix is constant.
5. There is no change in the inventory quantities during the
period.