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Cost-Volume Profit Analysis: The FF Assumptions Underlie Each CVP Application

This document discusses cost-volume-profit (CVP) analysis, which examines the relationships between costs, volume, and profits. It outlines the key assumptions of CVP analysis and how to calculate contribution margin, break-even point, and use a CVP graph. Vargo Video Company is used as an example, with a unit selling price of $500 and variable cost of $300.

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Chan Laguilles
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37 views

Cost-Volume Profit Analysis: The FF Assumptions Underlie Each CVP Application

This document discusses cost-volume-profit (CVP) analysis, which examines the relationships between costs, volume, and profits. It outlines the key assumptions of CVP analysis and how to calculate contribution margin, break-even point, and use a CVP graph. Vargo Video Company is used as an example, with a unit selling price of $500 and variable cost of $300.

Uploaded by

Chan Laguilles
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Cost-Volume Profit Analysis

• The study of the effects of changes of costs and volume on a company’s


profits,
• CVP analysis involves a consideration of the interrelationships

CVP Assumptions
The ff assumptions underlie each CVP application: When these
assumptions are not valid, the results of CVP analysis may be inaccurate.

1. The behaviour of both costs and revenues is linear throughout the


relevant range of the activity index.
2. All costs can be classified as either variable or fixed with reasonable
accuracy.
3. Changes in activity are the only factors that affect costs.
4. All units produced are sold.
5. When more than one type of product is sold, total sales will be in a
constant sales mix.

CVP Analysis
The term cost includes manufacturing costs plus selling and admin
expenses.

• We will use Vargo Video Company as an example. Relevant data for the
VCRs made by this company are as follows:

Unit selling price $500


Unit variable costs $300

Total monthly fixed costs $200,000


Contribution Margin
• Is the amount of revenue remaining after deducting variable costs. The
CM is then available to cover fixed costs and to contribute income for
the company.

Unit Contribution Margin


• Best way to express contribution margin (CM). Some favor a per unit
basis.

Break-Even Analysis
• The level of activity where total revenues equals total costs, both fixed
and variable.
• No income is involved when the break-even point is the objective, the
analysis is often referred toas break-even analysis.
- Computed from a mathematical equation
- Computed by using contribution margin
- Derived from a CVP graph
• Can be expressed in either sales dollars or sales units.

Mathematical Equation for


Dollars
• Break-even point in dollars is found by expressing variable costs as a
percentage of unit selling price.

Mathematical Equation for Units


• Can be computed directly from the mathematical equation by using unit
selling prices and unit variable costs.
CM Technique for Units
• CM equals total revenues less variable costs, it follows that at the break-
even point, contribution margin must equal total fixed costs.

Graphic Presentation
• An effective way to derive the break-even point is to prepare a break-
even graph.
• The graph is referred to as a cost-volume-profit (CVP) graph since it
shows costs, volume, and profits.

CVP Income Statement


• Classifies costs and expenses as variable or fixed and specifically
reports contribution margin in the body of the statement
• Format is sometimes called the contribution margin format
• For internal management use only

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