Proceedings of the Second Asia Pacific International Conference on Industrial Engineering and Operations Management

Surakarta, Indonesia, September 14-16, 2021

Cost-Volume-Profit Analysis for Uncertain Capacity

Planning: A Case Study Paper
Hayati Mukti Asih1,2,*
Department of Industrial Engineering
Faculty of Industrial Technology
Universitas Ahmad Dahlan
Daerah Istimewa Yogyakarta, 55191 Indonesia
[email protected]

Chong Kuan Eng2

Faculty of Manufacturing Engineering
Universiti Teknikal Malaysia Melaka
Melaka, 76100, Malaysia.
Email:

Abstract
Capacity planning under uncertainty is one of the crucial points as it relates on the investment in a company. This
research is based on case company in a multinational hard disk drive company in Malaysia. This research is extended
on the previous research by Chong and Asih (1) which proposed some scenarios of capacity planning under demand
uncertainty towards the number of required testers. These scenarios impact on the investment on expansion planning
in order to meet customer demand. Therefore, this research is proposed to develop CVP analysis for multi products to
evaluate how many units or dollars must be earned to break-even for capacity planning under demand uncertainty.
The result shows scenario 9 has the highest number of products and dollars to break–even because this scenario has
high protection level to handle demand uncertainty. In addition, compared to other products, Product B has the lowest
number to break-even. It is because this product has the lowest customer demand and the longest testing durations.
On the other hand, Product T has the highest number to break-even as it has the highest demand and the lowest testing
durations. For managerial insight, this research could assist decision maker in analyzing the different scenarios for
capacity planning under demand uncertainty.

Keywords
Cost-volume-profit analysis, capacity planning, uncertainty, break-even point

1. Introduction
Planning the company’s activities and events in the future is an important phase in successful management. The Cost-
Volume-Profit (CVP) analysis becomes an important tool to predict the cost to be incurred, sales to be made, and
profit to be received in order to break-even. According to Larson et al. (2), there are several essential questions why
the managers use CVP analysis, such as:
i) What sales volume is required to achieve a target income?
ii) What are the profits if the prices of selling product is declined and the sales volume is improved?
iii) How much does profit improve when the company installs new equipment or decrease the labor cost?
iv) How is the profit affected if the company changes the sales mix of products or services?

In investing the new technology or new resources, the CVP analysis is an essential tool that must be conducted to
evaluate the effects of sales volume changes on company’s cost, revenue and income.

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Proceedings of the Second Asia Pacific International Conference on Industrial Engineering and Operations Management
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1.1 Objectives
From the previous researches, there is a few research related on cost-volume-profit analysis of multi products that
considering uncertainty. Therefore this research is proposed to evaluate how many units must be sold or how many
dollars must be earned for multi products to break–even using cost-volume-profit analysis for all proposed scenarios.

2. Literature Review
Atrill et al. (3) explained that there are some costs that are considered in CVP analysis, namely fixed cost, variable
cost, and semi-fixed (semi-variable) cost. Fixed cost is the cost that is not altered by changes in volume of activity
within a particular period. On the other hand, variable cost is the cost that could vary with level of the activity. Then,
semi-fixed (semi-variable) cost is the cost that involves fixed cost and variable cost components. In interpreting the
CVP information, it is important to understand the underlying assumptions, such as: all other variables remain
constant; single product or constant sales mix; total cost and total revenue are linear functions of output; the analysis
applies only to the relevant range; and the analysis applies only to a short-term time horizon (4).

Xin-gang et al. (5) presented economic analysis for the grate-based waste-to-energy plant and circulating fluidized
bed combustion plant in China’s waste-to-energy industry. The economic analysis consists of return on investment,
net present value, internal rate of return, and sensitivity analysis. This research considered two kinds of technologies
or equipment, namely the imported equipment and China-made equipment. The results showed that the China-made
equipment has faster payback periods and higher internal rate of return for both grate-based waste-to-energy plant and
circulating fluidized bed combustion plant. However, this study does not take into account the quality aspects of those
equipment as the quality could affect the plant’s performances.

Compare to Testa et al. (6), they proposed economic analysis of the new health technology, namely bedside
ultrasonography, which has a better efficacy and a greater efficiency. This research tried to evaluate cost-benefit
analysis for bedside ultrasonography in the Internal Medicine department. The result showed that the volume of
activity to break-even was around 734 ultrasonography examination, and the money that must be earned € 81,998 with
time required was around 406 days.

Then, urban renewal investment projects in the province of Naples (Italy) were proposed by Morano and Tajani (7).
They were essential to support Public Administration decisions. This research conducted financial feasibility of the
investment in planning urban renewal initiative involving private investors. The results shows the break-even analysis
could define the amount of quantity as building products to be realized and sold. Then, Wang et al (8) presented cost
reduction and investment required to achieve economic break-even point in China’s photovoltaic industry. The result
showed that ¥ 1.2 billion of ¥ 2.2 billion is required to achieve the break-even.

Then, Nykamp et al (9) presented break-even analysis of decentralized storage assets as a substitute to conventional
reinforcements of photovoltaic in German’s power distribution grids. The annual cost for the investment (capital
expenditures) and operational expenditures are the main cost to derive break-even point. The results showed that the
storage assets to break-even was between 100 and 500 € per kWh of installed capacity. In addition, sensitivity analysis
were employed to define the profitability can be improved significantly if not all peaks photovoltaic generation need
to be stored.

3. Methods
The basic equations in this approach are as follows.
p index of product; p = 1, … , 4
IC Investment cost
TIC Total investment cost
FC Fixed cost
TC Total cost
TCM Total contribution margin
SPp Selling price of product p
VCp Variable cost of product p
TVC Total variable cost
CMp Contribution margin per unit of product p
CMRp Contribution margin ratio of product p

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Proceedings of the Second Asia Pacific International Conference on Industrial Engineering and Operations Management
Surakarta, Indonesia, September 14-16, 2021

Dp Monthly demand of product p

T Total number of additional testers required for both tester stages
SMRp Sales mix ratio of product p
RISp Ratio of individual sales of product p
SRRp Sales Revenue Ratio of product p
WCM Weighted average contribution margin ratio
WCMu Weighted average contribution margin ratio in units
BEPD Total break – even point in dollars
BEPUp Break – even point in units of product p
BEPDp Break – even point in dollars of product p

Contribution margin per unit of product p is equal to sales price of product p minus variable cost of product p. The
equation can be expressed as:

𝐶𝐶𝐶𝐶𝑝𝑝 = 𝑆𝑆𝑆𝑆𝑝𝑝 − 𝑉𝑉𝑉𝑉𝑝𝑝 (1)

Total variable cost refer to the demand of product p multiplied by the variable cost of product p, starting at
D1 and VC1, and ending with D4 and VC4 and then summing up them.
4
(2)
𝑇𝑇𝑇𝑇𝑇𝑇 = �( 𝐷𝐷𝑝𝑝 × 𝑉𝑉𝑉𝑉𝑝𝑝 )
𝑝𝑝=1
Contribution margin ratio of product p is the contribution margin per units of product p divided by sales
price of product p. The constraint can be expressed as:
𝐶𝐶𝐶𝐶𝑝𝑝
𝐶𝐶𝐶𝐶𝐶𝐶𝑝𝑝 = (3)
𝑆𝑆𝑆𝑆𝑝𝑝
Sales mix ratio of product p is the ratio of sales for each product by dividing the demand of product p and
sum of the demand of product p. It can be mathematically expressed as:
𝐷𝐷𝑝𝑝
𝑆𝑆𝑆𝑆𝑆𝑆𝑝𝑝 = 4 (4)
∑𝑝𝑝=1 𝐷𝐷𝑝𝑝
Total investment cost is multiplying the investment cost and total number of additional testers required for
both tester stages as shown in the equation below.
𝑇𝑇𝑇𝑇𝑇𝑇 = 𝐼𝐼𝐼𝐼 × 𝑇𝑇 (5)

3.1 Multi product break – even point in units

The equation below is used to calculate the weighted average contribution margin per unit. It is calculated by summing
up the multiplication contribution margin of product p and sales mix ratio of product p.
4

𝑊𝑊𝑊𝑊𝑊𝑊𝑢𝑢 = �(𝐶𝐶𝐶𝐶𝑝𝑝 × 𝑆𝑆𝑆𝑆𝑆𝑆𝑝𝑝 ) (6)

𝑝𝑝=1
Total cost is the sum of total investment cost and fixed cost. It can be mathematically expressed as:
𝑇𝑇𝑇𝑇 = 𝑇𝑇𝑇𝑇𝑇𝑇 + 𝐹𝐹𝐹𝐹 (7)
Break – even point in units represents the sales amount that is required to cover total costs, and there is
neither profit nor loss. It can be computed by dividing the total cost and total contribution margin as
expressed in the equation below:
𝑇𝑇𝑇𝑇
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 = (8)
𝑊𝑊𝑊𝑊𝑊𝑊𝑢𝑢
Breakdown of break – even sales in units is the quantity detail of each product that must be sold to achieve the break
– even. It is calculated by multiplying break-even point in units and sales mix ratio of product p.
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝑝𝑝 = 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 × 𝑆𝑆𝑆𝑆𝑆𝑆𝑝𝑝 (9)

3.2 Multi product break – even point in dollars

The equation below represents the ratio of individual sales of product p that is calculated by multiplying the sales price
of product p and sales mix ratio of product p.
𝑅𝑅𝑅𝑅𝑅𝑅𝑝𝑝 = 𝑆𝑆𝑆𝑆𝑝𝑝 × 𝑆𝑆𝑆𝑆𝑆𝑆𝑝𝑝 (10)

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Proceedings of the Second Asia Pacific International Conference on Industrial Engineering and Operations Management
Surakarta, Indonesia, September 14-16, 2021

Computation of weighted average contribution margin ratio is by conducted dividing weighted average
contribution margin ratio in units and total ratio of individual sales of product p. It can be expressed as:
𝑊𝑊𝑊𝑊𝑊𝑊𝑢𝑢
𝑊𝑊𝑊𝑊𝑊𝑊 = 4 (11)
∑𝑝𝑝=1 𝑅𝑅𝑅𝑅𝑅𝑅
𝑝𝑝
Break – even point in dollars refers to how many dollars that company must be earn to break-even. It is calculated by
dividing the total cost and weighted average contribution margin ratio.
𝑇𝑇𝑇𝑇
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 = (12)
𝑊𝑊𝑊𝑊𝑊𝑊
Sales Revenue Ratio of product p is calculated by dividing the ratio of individual sales of product p and the sum of
ratio of individual sales of product p.
𝑅𝑅𝑅𝑅𝑅𝑅𝑝𝑝
𝑆𝑆𝑆𝑆𝑆𝑆𝑝𝑝 = 4 (13)
∑𝑝𝑝=1 𝑅𝑅𝑅𝑅𝑅𝑅𝑝𝑝
Breakdown of break – even sales in dollars refers to how many dollars that must be earned for each product
to break-even. It is calculated by multiplying break – even point in dollars and Sales Revenue Ratio of
product p.
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝑝𝑝 = 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 × 𝑆𝑆𝑆𝑆𝑆𝑆𝑝𝑝 (14)

4. Data Collection
This research is based on case study on a multinational hard disk drive (HDD) company, especially in the automatic
testing process. There are many products produced and these products has short life cycle. In addition, the demand
uncertainty in automatic testing process makes the problem very complicated. Therefore, the company must determine
the capacity planning that considering this uncertainty. This model has been developed by Chong and Asih (1) which
proposed some scenarios of capacity planning under demand uncertainty towards the number of required testers as
shown in Table 1.

The parameter Г is called the degree of conservatism, which reflects the decision makers’ attitude toward risk. The
higher parameter Г, the lower risk that decision maker has (10,11). It is interpreted as the maximum number of
parameters that can deviate from their nominal values. If Г = 0 (nominal case), it means the demand is realized as
forecasted, there is no protection against uncertainty. If Г = S (worst case), it means the demand is completely protected
against uncertainty, which yields a very conservative solution.

In the automatic testing process, there are two tester stages, i.e. Tester A and Tester B. Each tester stage has their own
configuration to test the HDD. For instance, in Table 1 for Tester A, there are five scenarios. The first scenario has
the lowest number of required testers but the probability of meeting demand is about 65.35%. Compare to the fifth
scenario which is the worst case, this scenario has the highest number of required testers but the demand is 100% met.
For managerial insight, these scenarios impact on the investment on expansion planning in order to meet customer
demand. Therefore, this research is proposed to develop CVP analysis to know how many units or dollars must be
earned to break-even for capacity planning under demand uncertainty.

Table 1. Scenarios of capacity planning under demand uncertainty towards the number of required testers (Source:
Chong and Asih (1))
Scenario Degree Of Conservatism The Number of Required Testers (in Probability of Meeting
(Г) Units) Demand
Tester A
1 0 (nominal case) 28 65.35%
2 1 33 82.63%
3 2 41 91.53%
4 3 44 97.42%
5 4 (worst case) 50 100%
TESTER B
6 0 (nominal case) 8 40.79%
7 1 17 71.12%
8 2 19 91.21%
9 3 (worst case) 20 100%

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Proceedings of the Second Asia Pacific International Conference on Industrial Engineering and Operations Management
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Currently, there are 45 units of Tester A and 11 units of Tester B in this company. According to table above, some
scenarios needs additional tester in order to meet customer demand. Table 2. presents the required additional testers
for all scenarios which will be input in analyzing the CVP. For instance, scenario 1 is no need to add the testers, on
the other hand, scenario 5 requires five testers as it is subtraction of the scenario (see on Table 1) and current system,
e.g. 50 units – 45 units = 5 units for Tester A.

Table 2. The required additional testers for all scenarios

Scenario The required additional testers (in units)
Tester A
1 -
2 -
3 -
4 -
5 5
Tester B
6 -
7 6
8 8
9 9

Cost – volume – profit (CVP) analysis is proposed to know how many units must be sold or how many dollars must
be earned to break – even (means, recover the costs without gaining the profits). The calculation of CVP analysis is
more complicated for the multiple products than the single product. In this research, CVP analysis is calculated to all
proposed scenarios developed that required additional testers. Table 3. presents the assumption of costs required.
There are four different product types, such as Product T, Product S, Product A, and Product B. Each product type has
different selling price and variable cost. For instance, for Product T, the selling price is $ 30/unit and variable cost is
$ 10/unit. Then, for both tester stages (e.g. Tester A and Tester B), the investment cost is $ 5,000,000 / tester and the
fixed cost is $ 450,000.

Table 3. List of costs

Costs Product T Product S Product A Product B
Selling Price $ / unit 30 70 80 100
Variable Cost $ / unit 10 30 40 50
Tester A Tester B
Investment Cost $ / tester 5,000,000 5,000,000
Fixed Cost $ 450,000

5. Results and Discussion

This section is concerned with analyzing cost–volume–profit for all proposed scenarios developed. It is useful to know
how many units must be sold or how many dollars must be earned to break–even (this means recover the costs without
gaining the profits). Multi products break-even analysis is more complex in comparison to single product break-even
analysis. Some basic equations are proposed to achieve this objective.

5.1 Numerical Results

The sample calculation of scenario 5 is as follows. Table 4. presents the calculation result for total variable cost,
contribution margin, contribution margin ratio and sales mix ratio for scenario 5. There are four main products, each
having its demand, sales price and variable cost. By referring to Equation (1) – Equation (4), the computing of
contribution margin, total variable cost, contribution margin ratio, and sales mix ratio can be conducted, respectively.
The result shows that Product T is the biggest sales compare to others (which is about 0.71 or 71%), even though this
product is the lowest price. Then, the total variable cost is about $ 2 million.

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Proceedings of the Second Asia Pacific International Conference on Industrial Engineering and Operations Management
Surakarta, Indonesia, September 14-16, 2021

Table 4. The Calculation Result of Total Variable Cost, Contribution Margin, Contribution Margin Ratio, and Sales
Mix Ratio
Product Demand Selling Variable Total Contribution Contribution Sales
Price Cost Variable Margin Margin Ratio Mix
Cost (Eq. 1) (Eq. 3) Ratio
(Eq. 2) (Eq. 4)
T 83,647 30 10 836,470 20 0.67 0.71
S 16,798 70 30 503,940 40 0.57 0.14
A 13,660 80 40 546,400 40 0.50 0.12
B 4,262 100 50 213,100 50 0.50 0.03
Total 118,367 2,099,910

Table 5. shows the calculation result of total investment cost and total cost. In scenario 5, the additional
testers required are 5 units for Tester A (please refer to Table 2). Because of that, the total investment cost and total
cost are computed using Equation (5) and Equation (7), respectively.

Table 5. The Calculation Result of Total Investment Cost and Total Cost
Tester A Tester B TOTAL
Number of Additional Tester 5 units - 5 units
Investment Cost 5,000,000 5,000,000 10,000,000
Total Investment Cost 25,000,000 25,000,000
(Eq. 5)
Fixed Cost 450,000
Total Cost 25,450,000
(Eq. 7)

After calculating the costs above, the break–even points in units for each product can be provided by computing
weighted average contribution margin per unit, break–even point in units and its breakdown using Equation (6),
Equation (8), and Equation (9), respectively (as shown in Table 6). By expanding the capacity, the company must sell
742,233 units of Product T; 149,075 units of Product S; 121,227 units of Product A; and 37,824 units of Product B to
break–even.

Table 6. The calculation result of multi products break–even point in units

Product Weighted Average Contribution Break – Even Breakdown Break – Even Point
Margin per unit Point in Units in Units
(Eq. 6) (Eq. 8) (Eq. 9)
T 14.13 1,050,459 742,333
S 5.67 149,075
A 4.62 121,227
B 1.80 37,824
TOTAL 26.22 1,050,459

Besides calculating the break-even point in units, the break-even point in dollar for each product can be provided.
Table 7. presents the calculation result of ratio of individual sales, weighted average contribution margin ratio, break–
even point in dollars, sales revenue ratio, and breakdown break–even point in dollars through Equation (3.10) –
Equation (3.14). The result means how many dollars to sell for each product to break–even. For instance, Product T
must be sold at about 38 million dollars, Product S is about 18 million dollars, Product A is about 16 million dollars,
and Product B is about 6 million dollars. These are verified by the sales and costs for scenario 5 at this break-event
point. It shows that a CVP analysis for a multi-product company can be employed to answer a variety of planning
questions. If a product mix is determined, all answers are according to the assumption that the mix remains constant
at all relevant sales levels.

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Proceedings of the Second Asia Pacific International Conference on Industrial Engineering and Operations Management
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Table 7. The calculation result of multi products break–even point in dollars

Ratio of Weighted Average Sales Breakdown Break –
Break – Even
Individual Contribution Margin Revenue Even Point in
Product Point in Dollars
Sales Ratio Ratio Dollars
(Eq. 12)
(Eq. 10) (Eq. 11) (Eq. 13) (Eq. 14)
T 21.20 0.48 38,436,979
S 9.94 0.22 18,010,810
A 9.23 59.65 79,714,521 0.21 16,738,568
B 3.60 0.09 6,528,164
TOTAL 43.97 1 79,714,521

After obtaining the expansion planning of the mixed–load testers for the proposed scenarios, the cost–
volume–profit analysis in units and in dollars are developed as presented in Table 8. There are several scenarios that
do not require additional costs because these scenarios do not need additional testers, such as scenario 1, 2, 3, 4, and
6. On the other hand, the other of scenarios are required additional cost. For example, scenario 7 requires 877,058
units of Product T; 176,131 units of Product S; 143,228 units of Product A; and 44,688 units of Product B to be sold
in order to break-even. Or, it can also be stated that scenario 7 needs $ 26,311,736 of Product T; $ 12,329,160 of
Product S; $ 11,458,257 of Product A; and $ 4,468,804 of Product B must be earned to break-even.

5.3 Proposed Improvements

This result show that scenario 9 has the highest number of products and dollars to break–even because this scenario
has high protection level to handle demand uncertainty. In addition, compared to other products, Product B has the
lowest number to break-even. It is because this product has the lowest customer demand. On the other hand, Product
T has the highest number to break-even as it has the highest demand and the lowest testing durations. This result can
help the managers of the company for making decision on which scenarios that should be chosen.

Table 8. Break-even sales for all proposed scenarios in units and dollars
(a) Break-even sales for all proposed scenarios in units
Break -Even Sales in Units
Product T Product S Product A Product B TOTAL
Scenario 1
Scenario 2
No additional testers required
Scenario 3
Scenario 4
Scenario 5 742,333 149,075 121,227 37,824 1,050,459
Scenario 6 No additional testers required
Scenario 7 877,058 176,131 143,228 44,688 1,241,105
Scenario 8 1,146,508 230,242 187,231 58,417 1,622,398
Scenario 9 1,281,233 257,297 209,232 65,282 1,813,044

(b) Break-even sales for all proposed scenarios in dollars

Break -Even Sales in Dollars
Product T Product S Product A Product B TOTAL
Scenario 1
Scenario 2
No additional testers required
Scenario 3
Scenario 4
Scenario 5 22,269,993 10,435,279 9,698,156 3,782,352 46,185,780

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Proceedings of the Second Asia Pacific International Conference on Industrial Engineering and Operations Management
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Scenario 6 No additional testers required

Scenario 7 26,311,736 12,329,160 11,458,257 4,468,804 54,567,958
Scenario 8 34,395,243 16,116,932 14,978,470 5,841,713 71,332,358
Scenario 9 38,436,986 18,010,813 16,738,571 6,528,165 79,714,536

6. Conclusion
This research is based on case company in a multinational hard disk drive (HDD) company, especially in the automatic
testing process. There are many products produced and these products has short life cycle. In addition, the demand
uncertainty in automatic testing process makes the problem very complicated. Therefore, the company must determine
the capacity planning that considering this uncertainty. This model has been developed by Chong and Asih (1) which
proposed some scenarios of capacity planning under demand uncertainty towards the number of required testers.

This model proposed several scenarios that impact on the expansion planning for both tester stages, Tester A and
Tester B. These scenarios are required to be analyzed on financial problem as considerations for company to make
decisions on investment planning. This research has objective to evaluate how many units must be sold or how many
dollars must be earned for multi products to break–even using cost-volume-profit analysis for all proposed scenarios.

This research contributes on theory as there are few researches related on cost-volume-profit analysis of multi products
that considering uncertainty. Not only theory, this research could assist decision maker in analyzing the different
scenarios for capacity planning under demand uncertainty.

Acknowledgements
This work was supported by UTeM Postgraduate Fellowship (Zamalah) Scheme from Universiti Teknikal Malaysia
Melaka (UTeM), Malaysia and Malaysian International Scholarship (MIS) from Ministry of Higher Education,
Malaysia, and Universitas Ahmad Dahlan, Indonesia.

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Biographies
Hayati Mukti Asih, ST., M.Sc., Ph.D., Hayati Mukti Asih has been serving Industrial Engineering Department in
Universitas Ahmad Dahlan as a lecturer since 2017. She graduated with Bachelor of Industrial Engineering (Hons.)

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Proceedings of the Second Asia Pacific International Conference on Industrial Engineering and Operations Management
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from Universitas Islam Indonesia in 2010. She completed her Master of Science in Manufacturing Engineering from
Universiti Teknikal Malaysia Melaka in 2014. Then, she had scholarship to finish her PhD in Manufacturing
Engineering from Universiti Teknikal Malaysia Melaka in 2018. Currently, her research work concerns on simulation,
optimization, operation research, and supply chain management.
Email: [email protected]

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