cvp - 1 cost-volume-profit analysis a managerial planning tool
TRANSCRIPT
CVP - 1
COST-VOLUME-PROFIT ANALYSIS
A Managerial Planning Tool
CVP - 2
CVP ANALYSISAdvantages
Assists in establishing prices of products.
Assists in analyzing the impact that volume has on short-term profits.
Assists in focusing on the impact that changes in costs (variable and fixed) have on profits.
Assists in analyzing how the mix of products affects profits.
CVP - 3
CVP ANALYSISAdditional Items
Breakeven considerations
Target income goals
CVP - 4
LIMITATIONS OF CVP ANALYSIS
Requires accurate knowledge of revenue and cost amounts and behavior patterns
• Identification of fixed and variable components
Linear revenue and cost functions• Integration of concept of “relevant range”
No change in inventories
Constant sales mix
CVP - 5
Three Methods of Using the CVP Model
Operating Income Approach Contribution Approach Graphical Approach
CVP - 6
A CVP ExampleAssume the following: Total Per unit %of
Sales
Sales (400 Microwaves) $200,000 $500 100%
Less: Variable Expenses 120,000 300 60
Contribution Margin $ 80,000 $200 40%
Less Fixed Expenses 70,000
Net Income $10,000
1. What is the break-even point?
2. How much sales-revenue must be generated to earn
a before-tax profit $30,000?
3. How much sales-revenue must be generated to earn an after-tax profit of $30,000 and a 40% marginal tax rate?
CVP - 7
The Operating Income Approach for Breakeven Point
Sales - Variable costs - Fixed Costs = Net Income
Sales-Revenue Method:100%(Sales)- 60%(Sales) - $70,000 =0 (at BEP)
.4 (Sales) = $70,000
Sales = $175,000
Units-Sold Method:Let x = Number of microwaves at the break-even
point
$500(x) - $300(x) - $70,000 = 0 (at BEP)
$200 (x) = $70,000
x = 350 microwaves
CVP - 8
BEP (Revenue $) = (Fixed Costs + Net Income)/Contribution Ratio
= $70,000 + 0/.40
= $175,000
Units-Sold Method:
BEP (Revenue Units) = (Fixed Costs + Net Income)/Contribution
per microwave
= $70,000 + 0/$200 per microwave
= 350 units
The Contribution Approach for Breakeven Point
Sales-Revenue Method:
CVP - 9
The Operating Income Approach for Targeted Revenue
Sales - Variable costs - Fixed Costs = Net Income
Sales-Revenue Method:100%(Sales)- 60%(Sales) - $70,000 = $30,000
.4 (Sales) = $100,000
Sales = $250,000
Units-Sold Method:Let x = Number of microwaves at the break-even point
$500(x) - $300(x) - $70,000 = $30,000
$200 (x) = $100,000
x = 500 microwaves
CVP - 10
C-V-P and After-Tax Target Profits
Sales - Variable costs - Fixed Costs = Net Income/ (1-tax rate)
Sales-Revenue Method:100%(Sales)- 60%(Sales) - $70,000 = $30,000/(1-.4)
.4 (Sales) = $120,000
Sales = $300,000
Units-Sold Method:Let x = Number of microwaves at the break-even point
$500(x) - $300(x) - $70,000 = $30,000/(1-.4)
$200 (x) = $120,000
x = 600 microwaves
CVP - 11
The Contribution Approach for Targeted Revenue
Targeted(Revenue $) = (Fixed Costs + Net Income)/Contribution Ratio
= ($70,000 + $30,000)/.40
= $250,000
Units-Sold Method for Targeted Units Sold:
BEP (Revenue Units) = Fixed Costs + Net Income/Contribution
per microwave
= ($70,000 + $30,000)/$200 per microwave
= 500 units
Sales-Revenue Method for Targeted Revenue:
CVP - 12
COST-VOLUME-PROFITTraditional Format
Total $
Level of Activity
Total Revenue
Total FixedCosts
Total VariableCosts
BreakevenPoint
Total Costs
CVP - 13
COST-PROFIT-VOLUMEContribution Margin Format
Total Revenue
Total FixedCosts
Total VariableCosts
ContributionMargin
BreakevenPoint
Total $
Level of Activity
Total Costs
CVP - 14
Assume the following:
Regular Deluxe Total PercentUnit of Sales 400 200 600 ----
Sales Price per Unit $500 $750 ---- ----
Sales Revenue $200,000 $150,000 $350,000 100.0%
Less: Variable Expenses 120,000 60,000 180,000 51.4
Contribution Margin $ 80,000 $ 90,000 $170,000 48.6%
Less Fixed Expenses 130,000
Net Income $ 40,000
1. What is the break-even point?
2. How much sales-revenue of each product must be
generated to earn a before-tax profit $50,000?
A Multiple-Product Example