CVP - Analysis
CVP - Analysis
ANALYSIS
Objectives:
1. Determine the number of units and amount of sales revenue needed to break
even and to earn a target profit
2. Determine the number of units and sales revenue needed to earn an after-tax
target profit
3. Apply cost-volume-profit analysis in a multiple-product setting
4. Prepare a profit-volume graph and a cost-volume-profit graph, and explain
the meaning of each
5. Explain the impact of risk, uncertainty, and changing variables on
cost-volume-profit analysis
6. Discuss the impact of non-unit cost drivers on cost-volume-profit analysis
The Traditional and Contribution
Formats
Sales XXX
Less: Variable Costs and Expenses
Direct Materials XXX
Direct Labor XXX
Variable Factory Overhead XXX
Variable selling & administrative expenses XXX XXX
Contribution Margin XXX
Less: Fixed Costs and Expenses
Fixed Factory Overhead XXX
Fixed selling & administrative expenses XXX XXX
Operating Income XXX
concepts
► Variable costs per unit – consists of variable product cost and variable selling and
administrative expenses
► Total variable costs – quantity sold multiplied by variable costs per unit
► Contribution margin per unit – the difference between the selling price per unit
and the variable costs per unit.This is the amount that each unit sold contributes
to recover the total fixed costs and upon recovery of fixed costs, contribute to
income.
► Total contribution margin – quantity sold multiply by the contribution margin per
unit
► Variable costs ratio– ratio of variable cost per unit to selling price per unit; or
ratio of total variable costs to total sales
► Contribution margin ratio – ratio of contribution margin per unit to selling price
per unit; or ratio of total contribution margin to total sales
► Fixed costs (Total)
Selling Price Per unit 500
Quantity 2,000
► What is the unit variable product costs? (80 +125 +15) = 220
► What is the variable cost per unit? (220 + 20) = 240
► What is the contribution margin per unit? (400 – 240) = 160
► What is the contribution margin ratio? ( 160 / 400 ) = 40%
► What is the expected net income this coming year?
► What is the total sales to break-even? How many units?
► What would be the sales revenue to earn P500,000? How many unit?
(3) Expected Net Income this year
► Selling price
► Variable costs per unit
► Total Fixed costs
► Volume / units /QUANTITY
Assumptions of CVP - Analysis
► Changes in the level of total revenues and total costs arise only because of changes
in the number of product (or service) units produced and sold.
► Total costs can be separated into fixed component that does not vary with the
output level and a component that is variable with respect to the output level.
► When represented graphically, the behavior of total revenues and total costs are
linear (represented as a straight line) in relation to output level within a relevant
range and time period.
► The selling price, variable cost per unit, and fixed costs are known and constant.
► The analysis either covers a single product or assumes that the sales mix, when
multiple products are sold, will remain constant as the level of total units sold
changes.
► All revenues and costs can be added and compared without taking into account the
time value of money