Chapter 8:Cost-Volume-Profit Analysis

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• Using Cost-Volume-Profit (CVP) Analysis allows a manager to graphically analyze the relationship between Costs, Volume and Profit.

• The Break-Even Point is the volume of activity where the company’s revenues are equal to expenses.

Cost-Volume-Profit Analysis Graph

Lost Area

Profit Area

Break Even Point

Volume = 7,000Sales=$150,000

Costs

Revenue

Variable Expenses

For 7,000 tickets

Fixed Expenses

CVP Analysis Equations

Fixed expenses + Target net profit = Number of sales units required Unit contribution margin to earn target net profit

Fixed expenses + Target net profit = Dollar sales required to earn Contribution margin ratio target net profit

Budgeted sales revenue - break-even revenue = Safety margin

Fixed expenses = Break-even point (in units)Unit contribution margin

Managerial Implications of ABC and CVP

• Activity-based Costing (ABC) can provide a better description of a company’s cost behavior and CVP relationships.

• An ABC CVP recognizes that some costs that are fixed with respect to sales volume may not be fixed with respect to other cost drivers.

Make sure that the Bala’s Beer Company practice problem from course pack is included after this slide.