CVP ANALYSIS

FORMAT OF COST SHEET

VARIABLE AND FIXED COST BEHAVIOR
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CVP Cost-volume-profit (CVP) analysis is the study of the effects of
SCENAR output volume on revenue (sales), expenses (costs), and net
income (net profit).
IO Per Unit Percentage of
Sales
Selling price $1.50 100%
Variable cost of each item 1.20 80
Selling price less variable cost $ .30 20%

Monthly fixed expenses:

Rent $3,000
Wages for replenishing and
servicing 13,500
Other fixed expenses 1,500
Total fixed expenses per month $18,000
BREAK-EVEN POINT
The break-even point is the level of sales at which revenue equals expenses and net
income is zero.

Sales - Variable expenses - Fixed expenses = Zero net income (break-even point)
CONTRIBUTION MARGIN
METHOD
Contribution margin Contribution margin ratio
Per Unit Per Unit %
Selling price $1.50 Selling price 100
Variable costs 1.20 Variable costs 80
Contribution margin $ .30 Contribution margin 20

$18,000 fixed costs ÷ $.30

= 60,000 units (break even)
CONTRIBUTION MARGIN
METHOD
60,000 units × $1.50 (Sales Price) = $90,000
in sales to break even
Or

$18,000 fixed costs

÷ 20% (contribution-margin percentage)
= $90,000 of sales to break even
EQUATION METHOD
Let N = number of units to be sold to break even.

Variable Fixed
Sales – Expenses – Expenses = net income
$1.50N – $1.20N – $18,000 = 0
$.30N = $18,000
N = $18,000 ÷ $.30
N = 60,000 Units
EQUATION METHOD
Let S = sales in dollars
needed to break even.

S – .80S – $18,000 = 0
.20S = $18,000
S = $18,000 ÷ .20
S = $90,000

Shortcut formulas:
Break-even = fixed expenses = $18,000 = 60,000
volume in units unit contribution margin .30

Break-even = fixed expenses = $18,000 = $90,000

volume in sales contribution margin ratio .2
COST-VOLUME-PROFIT GRAPH

$150,000 A
Net Income
138,000 Sales C
120,000 Net Income Area
Dollars
D
90,000 Variable
Total Break-Even Point Expenses
60,000Expenses 60,000 units
Net Loss
30,000 or $90,000
Area
18,000 B

0 10 20 30 40 50 60 70 80 90 100

Units (thousands)
TARGET NET PROFIT
Managers use CVP analysis to determine the total sales, in
units and dollars, needed to reach a target net profit.

Target sales $1,440 per month

– variable expenses is the minimum
– fixed expenses acceptable net income.
target net income
TARGET NET PROFIT
Target sales volume in units =
(Fixed expenses + Target net income) ÷ Contribution
margin per unit

Selling price $1.50

Variable costs 1.20
Contribution margin per unit $ .30

($18,000 + $1,440) ÷ $.30 = 64,800 units

Target sales dollars = sales price X sales volume in units

Target sales dollars = $1.50 X 64,800 units = $97,200.
TARGET NET PROFIT
Contribution margin ratio
Per Unit %
Selling price 100
Variable costs 80
Contribution margin 20

Target sales volume in dollars =

Fixed expenses + target net income
contribution margin ratio

Sales volume in dollars =

18,000 + $1,440 = $97,200
.20
CONTRIBUTION MARGIN
AND GROSS MARGIN
Sales price – Cost of goods sold = Gross margin

Sales price - all variable expenses =

Contribution margin

Per Unit
Selling price $1.50
Variable costs (acquisition cost) 1.20
Contribution margin and
gross margin are equal $ .30
CONTRIBUTION MARGIN AND
GROSS MARGIN
Suppose the firm paid a commission of $.12 per unit sold.

Contribution Gross
Margin Margin
Per Unit Per Unit
Sales $1.50 $1.50
Acquisition cost of unit sold 1.20 1.20
Variable commission .12
Total variable expense $1.32
Contribution margin .18
Gross margin $.30
SALES MIX ANALYSIS
Sales mix is the relative proportions or combinations of
quantities of products that comprise total sales.
Ramos Company Example
Wallets Key Cases
(W) (K) Total

Sales in units 300,000 75,000 375,000

Sales @ $8 and $5 $2,400,000 $375,000 $2,775,000
Variable expenses
@ $7 and $3 2,100,000 225,000 2,325,000
Contribution margins
@ $1 and $2 $ 300,000 $150,000 $ 450,000
Fixed expenses 180,000
Net income $ 270,000
SALES MIX ANALYSIS
Let K = number of units of K to break even, and
4K = number of units of W to break even.

Break-even point for a constant sales mix

of 4 units of W for every unit of K.
sales – variable – fixed = zero net income
expense expenses
[$8(4K) + $5(K)] – [$7(4K) + $3(K)] – $180,000 = 0
32K + 5K - 28K - 3K - 180,000 = 0
6K = 180,000
K = 30,000
W = 4K = 120,000
30,000K + 120,000W = 150,000 units.
If the company sells only key cases:
break-even point = fixed expenses
contribution margin per unit
= $180,000
$2
= 90,000 key cases

If the company sells only wallets:

break-even point = fixed expenses
contribution margin per unit
= $180,000
$1
= 180,000 wallets
Suppose total sales were equal to the budget of 375,000 units. However, Ramos
sold only 50,000 key cases and 325,000 wallets. What is net income?

Ramos Company Example

Wallets Key Cases
(W) (K) Total

Sales in units 325,000 50,000 375,000

Sales @ $8 and $5 $2,600,000 $250,000 $2,850,000
Variable expenses
@ $7 and $3 2,275,000 150,000 2,425,000
Contribution margins
@ $1 and $2 $ 325,000 $100,000 $ 425,000
Fixed expenses 180,000
Net income $ 245,000
NONPROFIT APPLICATION
Suppose a city has a $100,000 lump-sum budget appropriation to conduct a
counseling program. Variable costs per prescription are $400 per patient per day.
Fixed costs are $60,000 in the relevant range of 50 to 150 patients.

If the city spends the entire budget

appropriation, how many patients
can it serve in a year?

Variable + Fixed
Sales = expenses + expenses
$100,000 = $400N + $60,000
$400N = $100,000 – $60,000
N = $40,000 ÷ $400
N = 100 patients
NONPROFIT APPLICATION
If the city cuts the total budget appropriation by
10%, how many Patients can it serve in a year?

Budget after 10% Cut

$100,000 X (1 - .1) = $90,000

Variable + Fixed
Sales = expenses + expenses
$90,000 = $400N + $60,000
$400N = $90,000 – $60,000
N = $30,000 ÷ $400
N = 75 patients