1. COST-VOLUME-PROFIT ANALYSIS A Managerial Planning Tool

2. COST-VOLUME-PROFIT Traditional Format
Total
Revenue
Total $
Total Costs
Breakeven
Point
Total Variable
Costs
Total Fixed
Costs
Level of Activity

3. CVP ANALYSIS Advantages
Assists in establishing prices of products.
Assists in analyzing the impact that volume has on short-term profits.
Assists in focusing on the impact that changes in costs (variable and fixed) have on profits.
Assists in analyzing how the mix of products affects profits.

4. CVP ANALYSIS Additional Items
Breakeven considerations
Target income goals
This traditional technique is still a powerful element within management accounting:
* Superb short-term planning and analytical tool
* Places emphasis on contribution margin of products/services
* Effective when coupled with “sensitivity analysis”
In today’s world, the name should be changed to CAP analysis (Cost-Activity-Profit)
Knowledge of the assumptions is essential to use of this technique

5. LIMITATIONS OF CVP ANALYSIS
Requires accurate knowledge of revenue and cost amounts and behavior patterns
Identification of fixed and variable components
Linear revenue and cost functions
Integration of concept of “relevant range”
No change in inventories
Constant sales mix

6. Three Methods of Using the CVP Model
Operating Income Approach
Contribution Approach
Graphical Approach

7. CVP Definitions Contribution margin Contribution margin ratio
Revenue – Variable costs
Contribution margin ratio
Revenue
*These items may be computed either in total or
per unit

8. A CVP Example Assume the following: Total Per unit %of Sales
Sales (400 Microwaves) $200, $ %
Less: Variable Expenses ,
Contribution Margin $ 80, $ %
Less Fixed Expenses ,000
Net Income $10,000
1. What is the break-even point?
2. How much sales-revenue must be generated to earn
a before-tax profit $30,000?
3. How much sales-revenue must be generated to earn an after-tax profit of $30,000 and a 40% marginal tax rate?

9. The Operating Income Approach for Breakeven Point
Sales - Variable costs - Fixed Costs = Net Income
Sales-Revenue Method:
100%(Sales)- 60%(Sales) - $70,000 =0 (at BEP)
.4 (Sales) = $70,000
Sales = $175,000
Units-Sold Method:
Let x = Number of microwaves at the break-even point
$500(x) - $300(x) - $70,000 = 0 (at BEP)
$200 (x) = $70,000
x = 350 microwaves

10. The Contribution Approach for Breakeven Point
Sales-Revenue Method:
BEP (Revenue $) = (Fixed Costs + Net Income)/Contribution Ratio
= $70, /.40
= $175,000
Units-Sold Method:
BEP (Revenue Units) = (Fixed Costs + Net Income)/Contribution
per microwave
= $70, /$200 per microwave
= 350 units

11. The Operating Income Approach for Targeted Pre-tax Income
Sales - Variable costs - Fixed Costs = Net Income
Sales-Revenue Method:
100%(Sales)- 60%(Sales) - $70,000 = $30,000
.4 (Sales) = $100,000
Sales = $250,000
Units-Sold Method:
Let x = Number of microwaves at the break-even point
$500(x) - $300(x) - $70,000 = $30,000
$200 (x) = $100,000
x = 500 microwaves

12. C-V-P and Targeted After-Tax Profits
Sales - Variable costs - Fixed Costs = Net Income/ (1-tax rate)
Sales-Revenue Method:
100%(Sales)- 60%(Sales) - $70,000 = $30,000/(1-.4)
.4 (Sales) = $120,000
Sales = $300,000
Units-Sold Method:
Let x = Number of microwaves at the break-even point
$500(x) - $300(x) - $70,000 = $30,000/(1-.4)
$200 (x) = $120,000
x = 600 microwaves

13. COST-VOLUME-PROFIT Traditional Format
Total
Revenue
Total $
Total Costs
Breakeven
Point
Total Variable
Costs
Total Fixed
Costs
Level of Activity

14. COST-PROFIT-VOLUME Contribution Margin Format
Total
Revenue
Total Costs
Total $
Breakeven
Point
Total Fixed
Costs
Total Variable
Costs
Contribution
Margin
Level of Activity

15. A Multiple-Product Example
Assume the following:
Regular Deluxe Total Percent
Unit of Sales
Sales Price per Unit $ $
Sales Revenue $200, $150, $350, %
Less: Variable Expenses , , ,
Contribution Margin $ 80, $ 90, $170, %
Less Fixed Expenses ,000
Net Income $ 40,000
1. What is the break-even point?
2. How much sales-revenue of each product must be
generated to earn a before-tax profit $50,000?