CVP - 1
COST-VOLUME-PROFIT ANALYSIS
A Managerial Planning Tool
CVP - 2
CVP ANALYSIS
Advantages
 Assists in establishing prices of
products.
 Assists in analyzing the impact that
volume has on short-term profits.
 Assists in focusing on the impact that
changes in costs (variable and fixed)
have on profits.
 Assists in analyzing how the mix of
products affects profits.
CVP - 3
CVP ANALYSIS
Additional Items
 Breakeven considerations
 Target income goals
CVP - 4
LIMITATIONS OF CVP ANALYSIS
 Requires accurate knowledge of
revenue and cost amounts and behavior
patterns
• Identification of fixed and variable components
 Linear revenue and cost functions
• Integration of concept of “relevant range”
 No change in inventories
 Constant sales mix
CVP - 5
Three Methods of Using the CVP
Model
 Operating Income Approach
 Contribution Approach
 Graphical Approach
CVP - 6
A CVP Example
Assume the following:
Sales (400 Microwaves)
Less: Variable Expenses
Contribution Margin
Total
Per unit %of Sales
$200,000 $500
100%
120,000
300
60
$ 80,000 $200
40%
Less Fixed Expenses
Net Income
70,000
$10,000
1. What is the break-even point?
2. How much sales-revenue must be generated to earn
a before-tax profit $30,000?
3. How much sales-revenue must be generated to earn an after-tax profit
of $30,000 and a 40% marginal tax rate?
CVP - 7
The Operating Income Approach for
Breakeven Point
Sales - Variable costs - Fixed Costs = Net Income
Sales-Revenue Method:
100%(Sales)- 60%(Sales) - $70,000 =0 (at BEP)
.4 (Sales) = $70,000
Sales = $175,000
Units-Sold Method:
Let x = Number of microwaves at the break-even
point
$500(x) - $300(x) - $70,000 = 0 (at BEP)
$200 (x) = $70,000
x = 350 microwaves
CVP - 8
The Contribution Approach for
Breakeven Point
Sales-Revenue Method:
BEP (Revenue $) = (Fixed Costs + Net Income)/Contribution Ratio
= $70,000 + 0/.40
= $175,000
Units-Sold Method:
BEP (Revenue Units) = (Fixed Costs + Net Income)/Contribution
per microwave
= $70,000 + 0/$200 per microwave
= 350 units
CVP - 9
The Operating Income Approach for
Targeted Revenue
Sales - Variable costs - Fixed Costs = Net Income
Sales-Revenue Method:
100%(Sales)- 60%(Sales) - $70,000 = $30,000
.4 (Sales) = $100,000
Sales = $250,000
Units-Sold Method:
Let x = Number of microwaves at the break-even point
$500(x) - $300(x) - $70,000 = $30,000
$200 (x) = $100,000
x = 500 microwaves
CVP - 10
C-V-P and After-Tax Target
Profits
Sales - Variable costs - Fixed Costs = Net Income/ (1-tax rate)
Sales-Revenue Method:
100%(Sales)- 60%(Sales) - $70,000 = $30,000/(1-.4)
.4 (Sales) = $120,000
Sales = $300,000
Units-Sold Method:
Let x = Number of microwaves at the break-even point
$500(x) - $300(x) - $70,000 = $30,000/(1-.4)
$200 (x) = $120,000
x = 600 microwaves
CVP - 11
The Contribution Approach for
Targeted Revenue
Sales-Revenue Method for Targeted Revenue:
Targeted(Revenue $) = (Fixed Costs + Net Income)/Contribution Ratio
= ($70,000 + $30,000)/.40
= $250,000
Units-Sold Method for Targeted Units Sold:
BEP (Revenue Units) = Fixed Costs + Net Income/Contribution
per microwave
= ($70,000 + $30,000)/$200 per microwave
= 500 units
CVP - 12
COST-VOLUME-PROFIT
Traditional Format
Total
Revenue
Total Costs
Total $
Breakeven
Point
Total Variable
Costs
Total Fixed
Costs
Level of Activity
CVP - 13
COST-PROFIT-VOLUME
Contribution Margin Format
Total
Revenue
Total Costs
Total $
Breakeven
Point
Total Fixed
Costs
Total Variable
Costs
Contribution
Margin
Level of Activity
CVP - 14
A Multiple-Product Example
Assume the following:
Regular
Unit of Sales
Sales Price per Unit
Sales Revenue
Less: Variable Expenses
Contribution Margin
Less Fixed Expenses
Net Income
400
$500
$200,000
120,000
$ 80,000
Deluxe Total Percent
200
$750
$150,000
60,000
$ 90,000
600
---------$350,000 100.0%
180,000 51.4
$170,000 48.6%
130,000
$ 40,000
1. What is the break-even point?
2. How much sales-revenue of each product must be
generated to earn a before-tax profit $50,000?