cvp analysis

Identify how changes in volume affect costs

Total variable costs change in direct proportion to changes in the volume of activity◦ If activity increases, so does the cost

Unit variable cost remains constant


Units produce

d

Direct materials cost per

unit

Total direct

materials cost

100 $25 $2,500200 $25 5,000300 $25 7,500400 $25 10,000500 $25 12,500

Do not change over wide ranges in volume Examples:

◦ Straight-line depreciation◦ Salaries

Fixed cost per unit is inversely proportional to activity◦ The more activity, the less the fixed cost per unit


Have both a fixed and variable component Example:

◦ Utilities that charge a set fee per month, plus a charge for usage


$0$500

$1,000$1,500$2,000$2,500$3,000$3,500$4,000$4,500

$0 $10,000 $20,000 $30,000 $40,000

Total Sales

Sale

s C

ompe

nsat

ion

9

Variable

Fixed

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Band of volume: ◦ Where total fixed costs remain constant and

variable cost per unit remains constant Outside the relevant range, costs can differ

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Use CVP analysis to compute breakeven points

Sales level at which operating income is zero◦ Sales above breakeven result in a profit◦ Sales below breakeven result in a loss

Two methods:◦ Income statement approach◦ Contribution margin approach


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Sales – Variable costs – Fixed costs = Operating income

Selling price per

unit x units sold

Variable cost per unit x

units sold

Fixed costs

Operating income

Set to zero

Solve for units sold


Sales revenue per unit

Variable costs per

unit

Contribution margin per unit

Fixed costs

Contribution margin per unit

Breakeven point in

units


Sales revenue

Contribution margin

ratioContribution margin

Fixed costs

Contribution margin ratio

Breakeven point in sales

dollars

Use CVP analysis for profit planning, and graph the CVP relations


Fixed costs + Desired operating income

Contribution margin ratio

Target sales in dollars

$0

$5,000

$10,000

$15,000

$20,000

0 500 1,000 1,500

Volume of Units

Dol

lars

Revenues

22

•


$0

$5,000

$10,000

$15,000

$20,000

0 500 1,000 1,500Volume of Units

Dol

lars

RevenuesFixed costs


24

$0

$5,000

$10,000

$15,000

$20,000

0 500 1,000 1,500Volume of Units

Dol

lars Revenues

Fixed costsTotal cost


$0

$5,000

$10,000

$15,000

$20,000

0 500 1,000 1,500

Volume of Units

Dol

lars

25

Breakeven point

Profit

Loss


Use CVP methods to perform sensitivity analysis

Management tool to predict how changes in sale prices, cost or volume affects profits

“What-if?” analysis



All would impact breakeven point


Cause Effect ResultChange Contributi

on marginBreakeven

pointSelling price increases Increase DecreaseSelling price decreases Decrease Increase

Variable cost per unit increases Decrease IncreaseVariable cost per unit decreases

Increase Decrease

Fixed costs increase No effect Increase Fixed costs decrease No effect Decrease

Excess of expected sales over breakeven sales

Cushion company can absorb without incurring a loss


Expected sales in units

Breakeven sales in units

Margin of safety in

units

Expected sales in dollars

Breakeven sales in dollars

Margin of safety in dollars

Calculate the breakeven point for multiple product lines or services

Selling prices and variable costs differ for each product◦ Different contribution to profits

Weighted-average contribution margin computed

Sales mix provides weights◦ Combination of products that make up total sales


Calculate weighted average contribution margin per unit


Product A Product B TotalSales price per unit $100 $150Variable cost per unit 58 60Contribution margin per unit 42 90Sales mix per unit 5 3 8Contribution margin 210 270 480Weighted average contribution margin $60

A company has two products with the sales prices and variable costs per unit indicated

in the table

The sales mix weight is multiplied by the

product’s contribution margin

Last year, the company sold 5,000 units of A and 3,000 units of B. This results in a sale

mix of 5:3

The sales mix weights are added as well as

the products’ contribution margins

$480 divided by 8 results in a weighted average contribution

margin of $60

Calculate breakeven point for the package of products


Fixed costs

Weighted average contribution margin per unit

$600,000

$6010,000 units

assumed

Calculate the breakeven point for each product line◦ Multiply the package breakeven point by each

product line’s proportion of the sales mix


Breakeven point Product A

10,000 x 5/8 6,250 units

Breakeven point Product B

10,000 x 3/8 3,750 units

cvp analysis

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