cvp cost volume profit relationships
TRANSCRIPT
Cost-Volume-Profit
Relationships
CVP analysis is focusing on:
Prices of products Volume or level of activity Per unit variable costs Total fixed costs Mix of product sold
THE BASICS OF COST-VOLUME-PROFIT (CVP) ANALYSIS
ACOUSTIC CONCEPTS, INC.Contribution Income Statement
For the Month of June
Total Per Unit
Sales (400 speakers)… $100,000 $250
Less variable expenses.. 60,000 150
Contribution margin…. 40,000 $100
Less fixed expenses… 35,000
Net income………….. $ 5,000
Contribution Margin
Operating Leverage (OL)
It is a measure of the extent to which fixed costs are being used in an organization
Illustration: (the blueberry farm) Sterling Farm (SF) has a higher proportion of fixed co
sts than does Bogside Farm (BF). Total costs are the same $100,000 sales level. Previous illustration showed that with a 10% increase in sales, the net income of SF increases by 70%, whereas the net income of BF increases by only 40%. The reason is that ST has greater OL as a result of the greater amount of fixed cost in its cost structure.
OL..(cont`)
Contribution margin = Degree of operating leverageNet Income
Degree of Operating Leverage is a measure, at a given level of sales, of how a percentage change in sales volume will affect profits
Illustration: The degree of OL for the two farms at a $100,000 sales
level would be as follows:
BF: $40,000 / $10,000 = 4
SF: $70,000/ $10,000 = 7
OL..(cont`)
Automation: Risks and Rewards from a CVP Perspective
Structuring Sales Commissions
Model
XR7 Turbo
Selling Price $100 $150
Less variable expenses 75 132
Contribution margin $ 25 $ 18
The Concept of Sales Mix
Sales mix:
the relative combination in which a company`s products are sold
SOUND UNLIMITEDContribution Income Statement
For the Month of September
Le Louvre CD Le Vin CD Total
Amount Percent Amount Percent Amount Percent
Sales…………… $20,000 100 $80,000 100 $100,000 100
Less variable expenses....
15,000 75 40,000 50 55,000 55
Contribution margin......... $ 5,000 25 $40,000 50 45,000 45*
Less Fixed expenses….. 27,000
Net Income………. $18,000
Computation of the break even point:
Fixed expenses. $27,000 = $60,000
Overall CM ratio, 45%
* ($45,000 : $100,000) X 100% = 45%
Multiple Product Break Even Analysis
SOUND UNLIMITEDContribution Income Statement
For the Month of September
Le Louvre CD Le Vin CD Total
Amount Percent Amount Percent Amount Percent
Sales…………… $80,000 100 $20,000 100 $100,000 100
Less variable expenses....
60,000 75 10,000 50 70,000 30
Contribution margin......... $20,000 25 $10,000 50 30,000 30*
Less Fixed expenses….. 27,000
Net Income………. $ 3,000
Computation of the break even point:Fixed expenses. $27,000 = $90,000Overall CM ratio, 30%
* ($30,000 : $100,000) X 100% = 30%
Multiple product Break even analysis: a shift in sales mix
SOUND UNLIMITEDPer Unit Contribution Margin Analysis
For the Month of September and October
Sales Mix and per Unit Contribution Margin Analysis
Total Unit Sold Contribution Margin per
Unit
Total Contribution Margin
September October September October
Le Louvre CD 500 2,000 $10 $ 5,000 $20,000
Le Vin CD 2,000 500 20 40,000 10,000
2,500 2,500 $45,000 $30,000
Average per unit contribution margin
September ($45,000:2,500 units)……………………
October ($30,000:2,500 units)……………….
$18
$12
Assumptions of CVP Analysis
Selling price is constant throughout the entire relevant range
Costs are linear throughout the entire relevant range, and they can be accurately divided into variable and fixed elements
In multi product companies, the sales mix is constant
In manufacturing companies, inventories do not change