1. COST-VOLUME-PROFIT RELATIONSHIP
CHAPTER 5

2. CVP Formula Sx = VCx + FC + P S= Selling Price X= Sales Volume
VC = Variable Cost per unit
FC = Fixed Cost
P= Profit
Very powerful equation
If all else fails just work the equation

3. Things you can find out using CVP formula
Breakeven points
Units to sell to get a certain profit
How many more to sell if Fixed Cost increased
Selling Price

4. Apply CVP Formula Selling Price $36 Variable Cost $24 per unit
Fixed Costs $12,000
Units 2,000
Profit= ?
Put in CVP formula

5. CONTRIBUTION MARGIN
The amount that contributes to fixed costs and profits i.e Contribution
Calculated In per unit, $ and in %
$100 Sales
60 VC
$ CM % Ratio ($40/$100= .40)
35 FC
$ NI

6. CONTRIBUTION MARGIN FORMAT Income Statement
SALES
-VARIABLE COST
=CONTRIBUTION MARGIN
- FIXED EXPENSES
NET OPERATING INCOME
Exercise 5-1 page 213

7. Application of CVP Data
Exercise 5-5 page 214
1- Increase advertising budget
2- Increase quality of product

8. BREAK EVEN (BE) IN UNITS & $
The units or $ that will cover the fixed costs with no profit.
Sx – VCx= FC BE in equation method
FC/CM% = BE$ CM Method
You can determine: BE in units, BE in $
Exercise pg 214

9. PROFIT PLANNING Answers these questions:
How many do I need to sell to make $100,000 profit
For example: If I reduce my fixed costs by $2,000 and increase my sales in units by 100 how will my profit change?

10. Target Profit Analysis
Formula for units to make a $ profit
FC + Profit
Unit CM
X sales price = Sales to attain target profit
Exercise 5-6 pg 214
1- equation method
2- CM approach

11. Margin of Safety (MS) Amount you can drop before losses are incurred
How much can our sales drop before we start losing money
Every company has a different % because each is structured differently
How much excess you have over break even.
How much you have after you cover your fixed costs.

12. Margin of Safety formula
Budgeted Sales – BE$ = MS$
MS$/Budgeted Sales=MS%
Example:
Sales $100,000
BE$ 87,500
MS$ $ 12,500 / 100,000 = 12.5%
Exercise 5-8 page 214

13. Operating Leverage (OL) pg 202
How sensitive income is to a % change in Sales $
How a % change in Sales volume will affect profits.
It is a Multiplier
If OL is high a small % change in Sales will reuslt in a higher change in NI

14. Operating Leverage Formula
Contribution Margin $
Net Income in $
It OL is 2 and sales increased by 5% then net income will increase by 10%
Exercise 5-9 pg 215

15. Operating leverage proof
Sales , ,000
VC , ,000
CM , ,000
FC , ,000
NI , , $4,000
OL ,000/5000= 8 times x 10%
80% x $5000 = $4000

16. CM Ratio Another way to determine effect on net income
Change in Net Income with the change in Total Sales
If we sell 10,000 more units, how would our net income increase?
10,000 X25%CM= 2500 change in units X $24 per unit = $60,000 increase in NI
How much would our net income increase if our sales increase by $240,000
$240,000 X 25% = $60,000

17. Sales Mix Multi Product CM
Proportions in which a company’s products are sold
Mix that will yield the greatest profit
Steps to determine
1- Total all sales
2- VC % for each product and total sales
3- = CM% for all sales
4- Determine total BE$ FC/CM%
5- Each product % of total sales X BE$
6- Use VC% for each product for VC
7- =CM for each product = total fixed costs
Page 206 Exhibit 5-4
Exercise 5-10, pg 215