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