cvp analysis

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Slide 1

Cost Volume Profit AnalysisChapter 6

INTRODUCTIONINTRODUCTION

The Profit FunctionThe Profit Function

Breakeven AnalysisBreakeven Analysis

Differential Cost AnalysisDifferential Cost Analysis

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Slide 2

The Profit Equation

OperatingProfit

TotalRevenue

TotalCosts = –

Operating profit equals total revenue Operating profit equals total revenue less total costs.less total costs.

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Slide 3

The Profit Equation

OperatingProfit

TotalRevenue

TotalCosts

= TR – TC

= –

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Slide 4

The Profit Equation

TotalRevenue

Average SellingPrice Per Unit

Units ofOutput

= ×

TR = P × X

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Slide 5

The Profit Equation

TotalCosts

Variable CostsPer Unit

Units ofOutput

= ×

TC = (V × X) + F

FixedCosts+

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Slide 6

The Profit Equation

Now, we’ll expand our Now, we’ll expand our original equation for profits!original equation for profits!

(P × X) - [(V × X) + F]=

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Slide 7

The Profit Equation

Now, we’ll expand our Now, we’ll expand our original equation for profits!original equation for profits!

(P × X) - [(V × X) + F]=

(P – V)X – F=

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Slide 8

Example

Here is the information from the Hap Bikes:

Total Per Unit PercentSales (500 bikes) 250,000$ 500$ 100%Less: variable expenses 150,000 300 60%Contribution margin 100,000$ 200$ 40%

Less: fixed expenses 80,000 Net income 20,000$

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Slide 9

Example

(P – V)X – F=

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Slide 10

Finding Target Volumes

The formula to find a volume expressed in units for a target profit is . . .

TargetVolume(units)

=Fixed costs + Target profit

Contribution margin per unit

How many bikes must Hap sell to earn an annual profit of $100,000?

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Slide 11

Finding Target Volumes

TargetVolume(units)



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Slide 12

Proof

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

(P – V)X – F=

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Slide 13

Finding the Break-Even Point

The Break-Even Point Break-Even Point is the volume level where profits equal zero.

To find the break-even point in unitsunits, we use the target volume in units target volume in units equation and set the profit to zero.

To find the break-even point in sales dollarssales dollars, we use the target volume in sales dollars target volume in sales dollars equation and set the profit to zero.

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Slide 14

Break-Even in Units

Let’s use the Hap Bikes information again.

Total Per Unit PercentSales (500 bikes) 250,000$ 500$ 100%Less: variable expenses 150,000 300 60%Contribution margin 100,000$ 200$ 40%

Less: fixed expenses 80,000 Net income 20,000$

Contribution margin ratio

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Slide 15

Break-Even in Units

Break-EvenVolume(units)



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Slide 16

Break-Even in Sales Dollars

= $80,000 + $0 .40

Fixed costs + Target profit Contribution margin ratio

Break-EvenVolume(sales $)

=

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Slide 17

Target Volume in Sales Dollars

We can calculate the target volume in sales dollars using the contribution margin ratiocontribution margin ratio.

Contribution margin per unit Sales price per unit

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Slide 18

Target Volume in Sales Dollars

The equation for finding the target volume in sales dollars is . . .

Fixed costs + Target profit Contribution margin ratioContribution margin ratio

TargetVolume(sales $)

=

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Slide 19

Graphic Presentation

Consider the following information for Hap Bikes:

Income 300 units

Income 400 units

Income 500 units

Sales 150,000$ 200,000$ 250,000$Less: variable expenses 90,000 120,000 150,000 Contribution margin 60,000$ 80,000$ 100,000$Less: fixed expenses 80,000 80,000 80,000 Net income (loss) (20,000)$ -$ 20,000$

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Slide 20

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

- 100 200 300 400 500 600 700 800


Volume per period (X)

Dol

lars

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Slide 21

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

- 100 200 300 400 500 600 700 800


Break-even point

Dol

lars

Volume per period (X)

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Slide 22

Using CVP to Analyze Different Cost Structures

Cost structure Cost structure - The proportion of fixed and variable to total costs of an organization.

Operating leverage Operating leverage - The extent to which an organization’s costs structure is made up of fixed costs.

Let’s look at an example of different costsLet’s look at an example of different costsstructures for different companies.structures for different companies.

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Slide 23


High Variable Company %

Hi Fixed Company %

(50,000 units) (50,000 units)Sales 500,000$ 100% 500,000$ 100%Variable costs 400,000 80% 100,000 20%Contribution margin 100,000 20% 400,000 80%Fixed costs 40,000 8% 340,000 68%Operating profit 60,000$ 12% 60,000$ 12%

Break-even units 20,000 42,500 Contribution margin per unit 2.00$ 8.00$

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Slide 24


Let’s see what happens when both companiesLet’s see what happens when both companiesexperience a 10% increase in sales.experience a 10% increase in sales.


Hi Fixed Company %



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Slide 25



Hi Fixed Company %



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Slide 26

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 Sales Break-even volume sales volumevolume sales volume = = Margin of SafetyMargin of Safety––

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Slide 27

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).

cvp analysis

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