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    Cost-Volume-Profit Analysis: © 2012 Pearson Prentice Hall. All Rights Reserved

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    Bartholomew Szold
    A firm has no profit or loss at the given sales level at Cost-Volume-Profit Analysis. A firm's Breakeven Point is the number of units sold at a given fixed cost. The time value of money (interest) is ignored in the calculation of contribution margin.

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    Cost-Volume-Profit Analysis: © 2012 Pearson Prentice Hall. All Rights Reserved

    Uploaded by

    Bartholomew Szold
    43 views18 pages
    A firm has no profit or loss at the given sales level at Cost-Volume-Profit Analysis. A firm's Breakeven Point is the number of units sold at a given fixed cost. The time value of money (interest) is ignored in the calculation of contribution margin.

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    A firm has no profit or loss at the given sales level at Cost-Volume-Profit Analysis. A firm's Breakeven Point is the number of units sold at a given fixed cost. The time value of money (interest) is ignored in the calculation of contribution margin.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    43 views18 pages

    Cost-Volume-Profit Analysis: © 2012 Pearson Prentice Hall. All Rights Reserved

    Uploaded by

    Bartholomew Szold
    A firm has no profit or loss at the given sales level at Cost-Volume-Profit Analysis. A firm's Breakeven Point is the number of units sold at a given fixed cost. The time value of money (interest) is ignored in the calculation of contribution margin.

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    You are on page 1of 18

    Cost-Volume-Profit Analysis

    2012 Pearson Prentice Hall. All rights reserved.

    A Five-Step Decision-Making Process in Planning and Control Revisited


    1.

    2.
    3. 4. 5.

    Identify the problem and uncertainties Obtain information Make predictions about the future Make decisions by choosing between alternatives, using cost-volume-profit (CVP) analysis Implement the decision, evaluate performance, and learn
    2012 Pearson Prentice Hall. All rights reserved.

    Foundational Assumptions in CVP


    Changes in production/sales volume are the sole cause

    for cost and revenue changes. Total costs consist of fixed costs and variable costs. Revenue and costs behave and can be graphed as a linear function (a straight line). Selling price, variable cost per unit, and fixed costs are all known and constant. In many cases only a single product will be analyzed. If multiple products are studied, their relative sales proportions are known and constant. The time value of money (interest) is ignored.
    2012 Pearson Prentice Hall. All rights reserved.

    Basic Formulae

    2012 Pearson Prentice Hall. All rights reserved.

    CVP: Contribution Margin


    Manipulation of the basic equations yields an

    extremely important and powerful tool extensively used in cost accounting: contribution margin (CM). Contribution margin equals revenue less variable costs. Contribution margin per unit equals unit selling price less unit variable costs.

    2012 Pearson Prentice Hall. All rights reserved.

    Contribution Margin
    Contribution margin also equals contribution margin

    per unit multiplied by the number of units sold. Contribution margin percentage is the contribution margin per unit divided by unit selling price.

    2012 Pearson Prentice Hall. All rights reserved.

    CostVolumeProfit Equation
    Revenue Variable Costs Fixed Costs = Operating

    Income
    Selling

    Sales Price * Quantity

    )(
    -

    Unit Sales Variable * Quantity Costs

    Fixed Costs

    Operating Income

    2012 Pearson Prentice Hall. All rights reserved.

    Breakeven Point
    At the breakeven point, a firm has no profit or loss at

    the given sales level.


    Sales Variable Costs Fixed Costs = 0

    Calculation of breakeven number of units Breakeven Units = Fixed Costs_ _ Contribution Margin per Unit

    Calculation of breakeven revenues


    Breakeven Revenue =

    Fixed Costs_ _ Contribution Margin Percentage

    2012 Pearson Prentice Hall. All rights reserved.

    Breakeven Point, extended: Profit Planning


    The breakeven point formula can be modified to

    become a profit planning tool.


    Profit is now reinstated to the BE formula, changing it to

    a simple sales volume equation. Quantity of Units = (Fixed Costs + Operating Income) Required to Be Sold Contribution Margin per Unit

    2012 Pearson Prentice Hall. All rights reserved.

    CVP: Graphically

    2012 Pearson Prentice Hall. All rights reserved.

    Profit Planning, Illustrated

    2012 Pearson Prentice Hall. All rights reserved.

    CVP and Income Taxes


    After-tax profit can be calculated by: Net Income = Operating Income * (1-Tax Rate) Net income can be converted to operating income for

    use in CVP equation


    Operating Income

    = II

    Net Income (1-Tax Rate)

    2012 Pearson Prentice Hall. All rights reserved.

    Sensitivity Analysis
    CVP provides structure to answer a variety of what-

    if scenarios. What happens to profit if:


    Selling price changes. Volume changes. Cost structure changes.

    Variable cost per unit changes. Fixed cost changes.

    2012 Pearson Prentice Hall. All rights reserved.

    Margin of Safety
    One indicator of risk, the margin of safety (MOS),

    measures the distance between budgeted sales and breakeven sales:


    MOS = Budgeted Sales BE Sales

    The MOS ratio removes the firms size from the

    output, and expresses itself in the form of a percentage:


    MOS Ratio = MOS Budgeted Sales

    2012 Pearson Prentice Hall. All rights reserved.

    Operating Leverage
    Operating leverage (OL) is the effect that fixed costs

    have on changes in operating income as changes occur in units sold, expressed as changes in contribution margin.
    OL = Contribution Margin

    Operating Income

    Notice these two items are identical, except for fixed

    costs.

    2012 Pearson Prentice Hall. All rights reserved.

    Effects of Sales-Mix on CVP


    The formulae presented to this point have assumed a

    single product is produced and sold. A more realistic scenario involves multiple products sold, in different volumes, with different costs. The same formulae are used, but instead use average contribution margins for bundles of products.

    2012 Pearson Prentice Hall. All rights reserved.

    Alternative Income Statement Formats

    2012 Pearson Prentice Hall. All rights reserved.

    2012 Pearson Prentice Hall. All rights reserved.

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