CVP Analysis

Format of Cost
Sheet
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  Cost-volume-profit (CVP) analysis is the study of the effects of
output volume on revenue (sales), expenses (costs), and net
income (net profit).

Per Unit Percentage of

Sales
Selling price $1.50 100%
Variable cost of each item 1.20 80
CVP Scenario Selling price less variable cost $ .30 20%

Monthly fixed expenses:

Rent $3,000
Wages for replenishing and
servicing 13,500
Other fixed expenses 1,500
Total fixed expenses per month $18,000
  The break-even point is the level of sales at which revenue equals
expenses and net income is zero.
Break-Even
Point Sales - Variable expenses - Fixed expenses = Zero net income
(break-even point)
 Contribution margin Contribution margin ratio
Per Unit Per Unit %
Selling price $1.50 Selling price 100
Variable costs 1.20 Variable costs 80
Contribution margin $ .30 Contribution margin 20

Contribution
Margin
Method
$18,000 fixed costs ÷ $.30
= 60,000 units (break even)
 60,000 units × $1.50 (Sales Price) = $90,000
in sales to break even

Contribution Or

Margin
Method $18,000 fixed costs
÷ 20% (contribution-margin percentage)
= $90,000 of sales to break even
  Let N = number of units to be sold to break even.

Variable Fixed
Sales – Expenses – Expenses = net income
Equation $1.50N – $1.20N – $18,000 = 0
Method $.30N = $18,000
N = $18,000 ÷ $.30
N = 60,000 Units
 Let S = sales in dollars
needed to break even.

S – .80S – $18,000 = 0
.20S = $18,000
Equation S = $18,000 ÷ .20
S = $90,000
Method
Shortcut formulas:
Break-even = fixed expenses = $18,000 = 60,000
volume in units unit contribution margin .30

Break-even = fixed expenses = $18,000 = $90,000

volume in sales contribution margin ratio .2
 $150,000 A
Net Income
138,000 Sales C
120,000 Net Income Area

Dollars
D
90,000 Variable
Cost-Volume- Total
60,000Expenses
Break-Even Point
60,000 units
Expenses

Net Loss
Profit Graph 30,000
Area
or $90,000
18,000 B

0 10 20 30 40 50 60 70 80 90 100

Units (thousands)
  Managers use CVP analysis to determine the total sales, in units
and dollars, needed to reach a target net profit.

Target Net
Profit Target sales $1,440 per month
– variable expenses is the minimum
– fixed expenses acceptable net income.
target net income
 Target sales volume in units =
(Fixed expenses + Target net income) ÷ Contribution
margin per unit

Selling price $1.50

Variable costs 1.20
Contribution margin per unit $ .30
Target Net
Profit ($18,000 + $1,440) ÷ $.30 = 64,800 units

Target sales dollars = sales price X sales volume in units

Target sales dollars = $1.50 X 64,800 units = $97,200.
 Contribution margin ratio
Per Unit %
Selling price 100
Variable costs 80
Contribution margin 20
Target Net Target sales volume in dollars =
Profit Fixed expenses + target net income
contribution margin ratio

Sales volume in dollars =

18,000 + $1,440 = $97,200
.20
 Sales price – Cost of goods sold = Gross margin

Sales price - all variable expenses =

Contribution Contribution margin
Margin
and Gross Per Unit
Margin Selling price $1.50
Variable costs (acquisition cost) 1.20
Contribution margin and
gross margin are equal $ .30
 Suppose the firm paid a commission of $.12 per unit sold.

Contribution Gross
Margin Margin
Contribution Per Unit Per Unit
Margin and Sales $1.50 $1.50
Acquisition cost of unit sold 1.20 1.20
Gross Margin Variable commission .12
Total variable expense $1.32
Contribution margin .18
Gross margin $.30
  Sales mix is the relative proportions or combinations of
quantities of products that comprise total sales.

Ramos Company Example

Wallets Key Cases
Sales Mix (W) (K) Total

Analysis Sales in units 300,000 75,000 375,000

Sales @ $8 and $5 $2,400,000 $375,000 $2,775,000
Variable expenses
@ $7 and $3 2,100,000 225,000 2,325,000
Contribution margins
@ $1 and $2 $ 300,000 $150,000 $ 450,000
Fixed expenses 180,000
Net income $ 270,000
 Let K = number of units of K to break even, and
4K = number of units of W to break even.

Sales Mix Break-even point for a constant sales mix

Analysis of 4 units of W for every unit of K.
sales – variable – fixed = zero net income
expense expenses
[$8(4K) + $5(K)] – [$7(4K) + $3(K)] – $180,000 = 0
32K + 5K - 28K - 3K - 180,000 = 0
6K = 180,000
K = 30,000
W = 4K = 120,000
30,000K + 120,000W = 150,000 units.
If the company sells only key cases:
break-even point = fixed expenses
contribution margin per unit
= $180,000
$2
= 90,000 key cases

If the company sells only wallets:

break-even point = fixed expenses
contribution margin per unit
= $180,000
$1
= 180,000 wallets
 Suppose total sales were equal to the budget of 375,000
units. However, Ramos sold only 50,000 key cases and
325,000 wallets. What is net income?

Ramos Company Example

Wallets Key Cases
(W) (K) Total

Sales in units 325,000 50,000 375,000

Sales @ $8 and $5 $2,600,000 $250,000 $2,850,000
Variable expenses
@ $7 and $3 2,275,000 150,000 2,425,000
Contribution margins
@ $1 and $2 $ 325,000 $100,000 $ 425,000
Fixed expenses 180,000
Net income $ 245,000
 Suppose a city has a $100,000 lump-sum budget
appropriation to conduct a counseling program. Variable
costs per prescription are $400 per patient per day. Fixed
costs are $60,000 in the relevant range of 50 to 150 patients.
If the city spends the entire budget
appropriation, how many patients
Nonprofit can it serve in a year?
Application
Variable + Fixed
Sales = expenses + expenses
$100,000 = $400N + $60,000
$400N = $100,000 – $60,000
N = $40,000 ÷ $400
N = 100 patients
 If the city cuts the total budget appropriation by
10%, how many Patients can it serve in a year?

Budget after 10% Cut

$100,000 X (1 - .1) = $90,000
Nonprofit
Application Variable + Fixed
Sales = expenses + expenses
$90,000 = $400N + $60,000
$400N = $90,000 – $60,000
N = $30,000 ÷ $400
N = 75 patients