Cost Behavior and

Cost-Volume-Profit
Analysis
Prepared by: 
 TABLE OF CONTENTS
01 02
COST BEHAVIOR COST PROFIT
VOLUME ANALYSIS

03 04
GRAPHICAL
MATHEMATICAL APPROACH TO CVP
APPROACH TO CVP ANALYSIS
ANALYSIS
0
COST
1
BEHAVIOR
 Cost Behavior
Cost Behavior is the manner in which a cost changes as a
related activity changes, the behavior of good of costs is
useful to managers for variety of reasons.

There are three(3) common cost behaviors:

1. Variable Costs
2. Fixed Costs
3. Mixed Costs
 Variable Cost
vary in total in direct proportion to changes in activity level.
However, variable cost per unit remains the same as activity
changes.

To illustrate, assume that Jason Sound Inc. produces stereo systems.

The parts for the stereo systems are purchased from suppliers for
$10 per unit and are assembled by Jason Sound Inc. for Model JS -12,
the direct materials costs for the relevant range of 5,000 to 3,000
units of production are shown below.
 Variable Cost
Number of Units od Direct Materials Cost per Total Direct Material
Model jS-12 produced Unit Cost

5,000 units $10 $50,000

10,000 10 100,00

15,000 10 150,000

20,000 10 200,000

25,000 10 250,000

30,000 10 300,000
 Variable Cost

As shown above, variable costs have the following

characteristics:
1. Cost per unit remains the same regardless of changes in the
activity base. For Model JS-12, the cost per unit is $ 10.

2. Total cost changes in proportion to changes in the activity

base. For Model JS -12, the direct materials cost for 10, 000
units ($ 100,000) is twice the direct materials cost for
5,000units ($ 50,000)
 Fixed Cost
 costs that remain constant in total regardless of changes in
activity level. However, per unit fixed costs declines as the level
of activity changes.

To illustrate, assume that Minton Inc. manufactures, bottles, and

distributes perfume. The production supervisor is Jane Sovissi, who is
paid a salary of $ 75,00 per year. For the relevant range of 50,000 to
300,000 bottles of perfume, the total fixed cost of $75,000 does not
vary as production increase. However, the fixed cost is spread over a
larger number of bottles, as shown below.
 Fixed Cost
Number of Bottles of Total Salary for Jane Salary per Bottle of
Perfume Produced Sovissi Perfume Produced

50,000 bottles $75,000 $1,500

100,000 75,000 0.750

150,000 75,000 0.500

200,000 75,000 0.375

250,000 75,000 0.300

350,000 75,000 0.250

 Fixed Cost
As shown above, fixed costs have the following characteristics:
1. Cost per unit changes inversely to changes in the activity
base. For Jane Sovissi’s salary, the cost per unit decreased
from $1.50 for 50,000 bottles produced to $0.25 for 300,000
bottles produced.

2. Total cost remains the same regardless of changes in the

activity base. Jane Sovissi’s salary of $75,000 remained
constant regardless of whether 50,000 bottles or 300,000
bottled were produce.
 Fixed Cost
Some examples of fixed costs and their related activity bases for various types of businesses are shown below.

Type of Business Fixed Cost Activity Base

University Building (straight-line) depreciation No. of Students

Passenger airline Airplane (straight-line) depreciation No. of miles flown
Manufacturing Plant manager salary No. of units produced
Hospital Property Insurance No. of patients
Hotel Property taxes No. of guests
Bank Branch manager salary No. of customer accounts
 Mixed Cost
 Costs that vary in total but not in proportion to change in activity
level.
Are costs that have characteristics of both variable and fixed cost.
Sometimes called semivariable or semifixed cost.
 Mixed Cost
To illustrate, assume that Simpson Inc. manufactures sails, using rented machinery.

The rental charges are as follows:

Rented Charge = $15,000 per year + $1 times each machine hour over
10,000 hours.

The rental charges for various hours used within the relevant range of 8,000 hours to 40,000 hours are as follows:

Hours Used Rental Charge

8,000 hours 15, 000

12,000 $ 17,000 {$ 15,000 + [(12,000 hrs. – 10,000 hrs.) x $ 1 ]}
20,000 $ 25,000 {$ 15,000 + [(20,000 hrs. – 10,000 hrs.) x $ 1 ]}
40,000 $ 45,000 {$ 15,000 + [(40,000 hrs. – 10,000 hrs.) x $ 1]}
0
Cost – Profit –
2
Volume
Analysis
INTRODUCTION
 INTRODUCTION
 Cost-Volume-Profit Analysis is the systematic
examination of the relationships among selling price,
sales, production volume, costs, expenses, and profits.
 Provides management with useful information for
decision making.
 It also referred to as breakeven analysis, can be used
to determine the breakeven point for different sales
volumes and cost structures.
CVP Analysis can be
used in:
1. Analyzing the effects of changes in
selling prices on profits.
2. Analyzing the effects of changes in
costs on profits.
3. Analyzing the effects of changes in
volume on profits.
4. Setting selling prices
5. Selecting the mix of products to sell
6. Choosing among marketing strategies
Contribution Margin Analysis
 Is a cost accounting technique used to analyze the
profitability of a product, business segment, or
company.
 It involves calculating and interpreting various
contribution margin metrics to make informed
decisions.

There are three (3) types of Contribution Margin Analysis:

1. Contribution Margin (CM)
2. Contribution Margin Ratio (CMR)
3. Unit Contribution Margin (UCM)
 Contribution
Margin
 The excess of sales over variable costs.

To illustrate, assume the following data for

Lambert Inc.:

Sales 50,000 units

Sales Price per Unit $20 per unit
Variable Cost per Unit $12 per unit
Fixed Cost $300,000
 Contribution
Margin Ratio
 The percentage of sales revenue that is
available to cover fixed costs and generate
profit.

For Lambert Inc,. The contribution margin ratio is

40% as computed on the excel using the formula
below.
 Unit
Contribution
Margin
• The contribution margin per unit of product
sold.
• It is most useful when the increase or
decrease in sales volume is measured in
sales units.
 FORMULA
Contribution Margin = Sales – Variable
Cost

Contribution
Contribution Margin Ratio = Margin
Sales

Unit Contribution Margin = Sales Price per Unit – Variable Cost per
Unit
 0
MATHEMATICA
L3APPROACH
TO CVP
ANALYSIS
The mathematical
approach to cost-
volume-profit analysis
uses equations to
determine the following:
1. Sales necessary to breakeven
2. Sales necessary to make a target
or desired profit
 Break-Even Point

Break-even
INTRODUCTION Sales Formula:

 The break-even Fixed Cost

point is the level of
operations at which Unit Contribution
a company’s Margin
revenues and
expenses are equal.
ILLUSTRATION
To illustrate, assume the following data for
Baker Corporation:

Fixed Cost
$90,000
Unit Selling Price $25
Unit Variable Cost $15
Unit Contribution Margin $10

The break-even point is 9,000 units, as

shown below.
Fixed Cost $90,000
= = 9,000 units
Unit Contribution $10
Margin
Summary of Effects of Changes
on Break-Even Point
Effect of Change
Direction of
Type of Change to Break-even
Change
Point
Increase Increase
Fixed Cost
Decrease Decrease

Incease Increase
Unit Variable Cost
Decrease Decrease

Increase Decrease
Unit Selling Price
Decrease Increase
 Target Profit
 At the break-even point, Fixed Cost + Target Profit
sales and costs are exactly Sales (Units) =
equal. However the goal of Unit Contribution Margin
most companies is to make
 a
Byprofit.
modifying the break-
To illustrate, assume the
even equation, the sales
following data for Waltham Co.:
required to earn a target
or desired amount of profit Fixed Cost
may be computed. For this 200,000
purpose, target profit is Target Profit
added to the break-even 100,000
equation as shown on the
Unit Selling Price 75
other side:
Unit Variable Cost 45
Unit Contribution Margin 30
0
4
GRAPHICAL
APPROACH TO
CVP ANALYSIS
Cost-Volume-Profit
Chart
 A cost-volume-profit chart,
sometimes called a break-even
chart, graphically shows sales,
costs, and related profit or loss for
various levels of units sold. It
assists in understanding the
relationship among sales, costs,
and operating profit or loss.
ILLUSTRATION
ILLUSTRATION
ILLUSTRATION
ILLUSTRATION
 Profit-Volume Chart
 Another graphic approach to cost-
volume-profit analysis is the profit-
volume chart.

 The profit-volume chart plots only the

difference between total sales and
total costs (or profits). In this way, the
profit-volume chart allows managers
to determine the operating profit or
loss for various levels of units sold.
ILLUSTRATION
ILLUSTRATION
ILLUSTRATION
ILLUSTRATION
 ILLUSTRATION
Original Chart Revised Chart
SPECIAL
0 COST-
VOLUME-
5
PROFIT
RELATIONSHIP
S
Sales Mix Consideration
ILLUSTRATION
ILLUSTRATION
Operating Leverage
ILLUSTRATION
ILLUSTRATION
ILLUSTRATION
Margin of Safety
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