1. Chapter 3 Cost/Volume/Profit Relationships Principles of Food, Beverage, and Labour Cost Controls, Canadian Edition

2. Learning Objectives After reading this chapter, you should be able to: 3.1 State the cost/volume/profit equation and explain the relationships that exist among its components. 3.2 Define the terms variable rate and contribution rate. 3.3 Apply the formulas used to determine sales in dollars, sales in units, variable costs, fixed costs, profit, contribution rate, contribution margin, variable rate, and break-even point.

3. Costs can be fixed or variable VC are directly variable Fixed costs are stable Sales prices are constant Sales mix will remain constant Cost/Volume/Profit Assumptions

4. Cost/Volume/Profit Analysis CVP calculations can be done either on the dollar sales volume required to break even or achieve the desired profit, or on the basis of the number of units required. A cost/volume/profit (CVP) analysis helps predict the sales dollars and volume required to achieve desired profit (or break even) based on your known costs.

5. Cost/Volume/Profit Analysis Contribution margin for the overall operation is defined as the dollar amount that contributes to covering fixed costs and providing for a profit. Contribution margin is calculated for as follows: Total Sales - Variable Costs = Contribution Margin

6. Important Equations 1. Sales = VC + FC + Profit 2. Variable rate = VC/Sales 3. Contribution rate = 1 - VR

7. Cost/Volume/Profit Equation Sales = Sales cost + Labour cost + OH + Profit $325,000 = $108,875 + $81,250 + $97,500 + $37,375 This can be re-stated as: S = VC + FC + P

8. Cost/Volume/Profit Equation Calculate the components: VC = Food & Beverage Cost + Variable LC (40% Total Labour) FC = Fixed LC ( 60% Total Labour) + Overhead Based on the example: S ($325,000) = VC ($141,375) + FC ($146,250)+ Profit ($37,375)

9. Variable Rate We can calculate using the following: Ratio of variable cost to dollar sales Variable rate = VC/Sales VR = VC($141,375)/Sales($325,000) VR =.435

10. Contribution Rate We can calculate using the following: CR = 1 – VR 1 -.435 =.565 CR =.565

11. Losses Profits Large$$Small$$ 0 $$Small$$Large Break-Even Point Profitability can be viewed as existing on a scale. The midpoint on the scale, indicated by the zero, is called the break-even point. At the break-even point, operational expenses are exactly equal to sales revenue. The point at which the sum of all costs equals sales, thus profit = 0 BE=Break-Even Point

12. Break-Even Point Using the example: BE = Fixed Costs/CR BE = $146,250/.565 BE = $258,849 $325,000 - $258,850 = $66,150 Profit = Sales after BE x CR $66,150 x.565 = $37,375

13. Sales Dollars to achieve Desired Profit = Fixed Costs + Profit Contribution Rate CVP Calculations Use the following formula to determine the sales required to earn the profit desired:

14. Break-Even Point= FC + $0 CR CVP Calculations To determine break-even point, use the same formula with $0 for desired profit:

15. BE Calculation in $$ To determine the dollar sales required to break even, use the following formula: Break-Even Point in Sales = Fixed Costs Contribution Rate

16. Contribution Margin Calculate the CM, the difference between the selling price of the unit and the cost of the unit: Contribution Margin = Selling Price - Variable Cost per Unit

17. BE Calculation for Units In terms of the number of units that must be served in order to break even, use the following formula: Break-Even Point in Units Sold = Fixed Costs Contribution Margin per Unit

18. Key Terms Break-even point, p. 77 Contribution margin, p. 79 Contribution rate, p. 76 Cost/volume/profit equation, p. 72 Variable rate, p. 75

19. Chapter Web Links Encyclopedia: http://www.enotes.com/business-finance-encyclopedia/cost- volume-profit-analysis

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