6

Cost Volume Profit Analysis

Chapter 6
INTRODUCTION

The Profit Function

Breakeven Analysis
Differential Cost Analysis
Slide 1

The Profit Equation

Operating
Profit

Total
Revenue

Total
Costs

Operating profit equals total revenue

less total costs.

Slide 2

The Profit Equation

Operating
Profit

Slide 3

=
=

Total
Revenue

Total
Costs

TR

TC

The Profit Equation

Total
=
Revenue

TR

Slide 4

Average Selling
Units of

Price Per Unit

Output

The Profit Equation

Total
Costs

TC

Slide 5

Variable Costs
Units of
Fixed

+
Per Unit
Output
Costs

(V

X) + F

Slide 6

The Profit Equation

Now, well expand our
original equation for profits!

(P X) - [(V X) + F]

Slide 7

The Profit Equation

Now, well expand our
original equation for profits!

(P X) - [(V X) + F]

(P V)X F

Example
Here is the information from the Hap Bikes:

Total
Sales (500 bikes)
$ 250,000
Less: variable expenses
150,000
Contribution margin
$ 100,000
Less: fixed expenses
80,000
Net income
$ 20,000

Slide 8

Per Unit
$
500
300
$
200

Percent
100%
60%
40%

Example

Slide 9

(P V)X F

Finding Target Volumes

The formula to find a volume expressed in
units for a target profit is . . .
Target
Volume
(units)

Fixed costs + Target profit

Contribution margin per unit

How many bikes must Hap sell to

earn an annual profit of $100,000?

Slide 10

Finding Target Volumes

Target
Volume
(units)

Slide 11

Fixed costs + Target profit

Contribution margin per unit

Proof
If Hap sells 900 bikes, its operating profit
would be . . .

Slide 12

(P V)X F

Finding the Break-Even Point

The Break-Even Point is the volume level
where profits equal zero.
To find the break-even point in units,
units we use
the target volume in units equation and set
the profit to zero.
To find the break-even point in sales dollars,
dollars
we use the target volume in sales dollars
equation and set the profit to zero.

Slide 13

Break-Even in Units
Lets use the Hap Bikes information again.

Total
Sales (500 bikes)
$ 250,000
Less: variable expenses
150,000
Contribution margin
$ 100,000
Less: fixed expenses
80,000
Net income
$ 20,000

Per Unit
$
500
300
$
200

Percent
100%
60%
40%

Contribution margin ratio

Slide 14

Break-Even in Units

Break-Even
=
Volume
(units)

Slide 15

Fixed costs + Target profit

Contribution margin per unit

Break-Even in Sales Dollars

Break-Even
=
Volume
(sales $)
=

Slide 16

Fixed costs + Target profit

Contribution margin ratio
$80,000 + $0
.40

Target Volume in Sales Dollars

We can calculate the target volume in sales
dollars using the contribution margin ratio.
ratio
Contribution margin per unit
Sales price per unit

Slide 17

Target Volume in Sales Dollars

The equation for finding the target volume in

sales dollars is . . .
Target
Volume =
(sales $)

Slide 18

Fixed costs + Target profit

Contribution margin ratio

Graphic Presentation

Consider the following information for Hap Bikes:

Income
300 units
Sales
$ 150,000
Less: variable expenses
90,000
Contribution margin
$
60,000
Less: fixed expenses
80,000
Net income (loss)
$ (20,000)

Slide 19

Income
400 units
$ 200,000
120,000
$
80,000
80,000
$
-

Income
500 units
$ 250,000
150,000
$ 100,000
80,000
$ 20,000

Graphic Presentation
450,000
400,000

Dollars

350,000
300,000
250,000
200,000
150,000
100,000
50,000
Slide 20

100

200

300

400

500

600

Volume per period (X)

700

800

Graphic Presentation
450,000
400,000

Dollars

350,000
300,000
250,000
200,000

Break-even point

150,000
100,000
50,000
Slide 21

100

200

300

400

500

600

Volume per period (X)

700

800

Using CVP to Analyze Different

Cost Structures

Cost structure - The proportion of fixed and

variable to total costs of an organization.

Operating leverage - The extent to which an
organizations costs structure is made up of
fixed costs.
Lets look at an example of different costs
structures for different companies.

Slide 22

Using CVP to Analyze Different

Cost Structures
High
Variable
Company
%
(50,000 units)
Sales
$
500,000 100%
Variable costs
400,000 80%
Contribution margin
100,000 20%
Fixed costs
40,000
8%
Operating profit
$
60,000 12%
Break-even units
Contribution margin
per unit
$

Slide 23

Hi Fixed
Company
%
(50,000 units)
$
500,000 100%
100,000 20%
400,000 80%
340,000 68%
$
60,000 12%

20,000
2.00

42,500
$

8.00

Using CVP to Analyze Different

Cost Structures
High
Variable
Company
%
(50,000 units)
Sales
$
500,000 100%
Variable costs
400,000 80%
Contribution margin
100,000 20%
Fixed costs
40,000
8%
Operating profit
$
60,000 12%
Break-even units
Contribution margin
per unit
$

Hi Fixed
Company
%
(50,000 units)
$
500,000 100%
100,000 20%
400,000 80%
340,000 68%
$
60,000 12%

20,000
2.00

42,500
$

8.00

Lets see what happens when both companies

experience a 10% increase in sales.
Slide 24

Using CVP to Analyze Different

Cost Structures
High
Variable
Company
%
(55,000 units)
Sales
$
550,000 100%
Variable costs
440,000 80%
Contribution margin
110,000 20%
Fixed costs
40,000
7%
Operating profit
$
70,000 13%
Break-even units
Contribution margin
per unit
$

Slide 25

Hi Fixed
Company
%
(55,000 units)
$
550,000 100%
110,000 20%
440,000 80%
340,000 62%
$
100,000 18%

20,000
2.00

42,500
$

8.00

Margin of Safety

Excess of projected (or actual) sales over

the break-even volume.

The amount by which sales can fall before
the company is in the loss area of the
break-even graph.
Sales Break-even
volume sales volume

Slide 26

= Margin of Safety

Margin of Safety
Hap is currently selling 500 bikes, and we
calculated the break-even to be 400 units
($80,000 fixed costs $200 contribution margin).

Slide 27