Cost-Volume-Profit Analysis: © 2009 Pearson Prentice Hall. All Rights Reserved

Cost-Volume-Profit Analysis
2009 Pearson Prentice Hall. All rights reserved.
A Five-Step Decision Making

Process in Planning & Control
Revisited
1. Identify the problem and uncertainties
2. Obtain information
3. Make predictions about the future
4. Make decisions by choosing between
alternatives, using Cost-Volume-Profit (CVP)

analysis
5. Implement the decision, evaluate performance,
and learn
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
Basic Formulae
CVP: Contribution Margin

Manipulation of the basic equations yields an
extremely important and powerful tool

extensively used in Cost Accounting: the
Contribution Margin
Contribution Margin equals sales less variable
costs
CM = S VC
Contribution Margin per Unit equals unit
selling price less variable cost per unit

CMu = SP VCu
Contribution Margin,
continued
Contribution Margin also equals contribution
margin per unit multiplied by the number of

units sold (Q)
CM = CMu x Q
Contribution Margin Ratio (percentage) equals
contribution margin per unit divided by Selling

Price
CMR = CMu SP
Interpretation: how many cents out of every sales
dollar are represented by Contribution Margin

Basic Formula Derivations

The Basic Formula may be further rearranged
and decomposed as follows:

Sales VC FC = Operating Income
(OI)
(SP x Q) (VCu x Q) FC = OI
Q (SP VCu) FC = OI
Q (CMu) FC = OI
Remember this last equation, it will be used
again in a moment
Breakeven Point
Recall the last equation in an earlier slide:
Q (CMu) FC = OI
A simple manipulation of this formula, and setting
OI to zero will result in the Breakeven Point

(quantity):
BEQ = FC CMu
At this point, a firm has no profit or loss at the
given sales level

If per-unit values are not available, the Breakeven
Point may be restated in its alternate format:
BE Sales = FC CMR
Breakeven Point, extended:

Profit Planning
With a simple adjustment, 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

Q = (FC + OI)
CM
CVP: Graphically
Profit Planning, Illustrated
CVP and Income Taxes

From time to time it is necessary to move back
and forth between pre-tax profit (OI) and aftertax profit (NI), depending on the facts presented
After-tax profit can be calculated by:
OI x (1-Tax Rate) = NI
NI can substitute into the profit planning
equation through this form:

OI = I I
NI
I
(1-Tax Rate)
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
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
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
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.
Multiple Cost Drivers

Variable costs may arise from multiple cost
drivers or activities. A separate variable cost

needs to be calculated for each driver.
Examples include:
Customer or patient count
Passenger miles
Patient days
Student credit-hours
Alternative Income Statement

Formats

Cost-Volume-Profit Analysis: © 2009 Pearson Prentice Hall. All Rights Reserved

Uploaded by

Copyright:

Available Formats

Cost-Volume-Profit Analysis: © 2009 Pearson Prentice Hall. All Rights Reserved

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cost-Volume-Profit Analysis: © 2009 Pearson Prentice Hall. All Rights Reserved

Uploaded by

Copyright:

Available Formats

Cost-Volume-Profit Analysis

2009 Pearson Prentice Hall. All rights reserved.

A Five-Step Decision Making

alternatives, using Cost-Volume-Profit (CVP)

2009 Pearson Prentice Hall. All rights reserved.

CVP: Contribution Margin

extremely important and powerful tool

Contribution Margin per Unit equals unit

selling price less variable cost per unit

Contribution Margin also equals contribution

margin per unit multiplied by the number of

Contribution Margin Ratio (percentage) equals

contribution margin per unit divided by Selling

dollar are represented by Contribution Margin

Basic Formula Derivations

and decomposed as follows:

Remember this last equation, it will be used

2009 Pearson Prentice Hall. All rights reserved.

OI to zero will result in the Breakeven Point

At this point, a firm has no profit or loss at the

given sales level

Breakeven Point, extended:

Point formula can be modified to become a

changing it to a simple sales volume equation

2009 Pearson Prentice Hall. All rights reserved.

2009 Pearson Prentice Hall. All rights reserved.

Profit Planning, Illustrated

2009 Pearson Prentice Hall. All rights reserved.

CVP and Income Taxes

NI can substitute into the profit planning

equation through this form:

2009 Pearson Prentice Hall. All rights reserved.

Variable cost per unit changes

2009 Pearson Prentice Hall. All rights reserved.

(MOS) measures the distance between

The MOS Ratio removes the firms size from

the output, and expresses itself in the form of

2009 Pearson Prentice Hall. All rights reserved.

fixed costs have on changes in operating

Notice these two items are identical, except

for fixed costs

2009 Pearson Prentice Hall. All rights reserved.

Effects of Sales-Mix on CVP

assumed a single product is produced and

Multiple Cost Drivers

drivers or activities. A separate variable cost

2009 Pearson Prentice Hall. All rights reserved.

Alternative Income Statement

2009 Pearson Prentice Hall. All rights reserved.

2009 Pearson Prentice Hall. All rights reserved.

You might also like