COST-VOLUME-PROFIT RELATIONSHIP
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Transcript COST-VOLUME-PROFIT RELATIONSHIP
COST-VOLUME-PROFIT
RELATIONSHIP
CHAPTER 5
CVP Formula
Sx
S=
= VCx + FC + P
Selling Price
X= Sales Volume
VC = Variable Cost per unit
FC = Fixed Cost
P= Profit
Very powerful equation
If all else fails just work the equation
Things you can find out using CVP formula
Breakeven points
Units to sell to get a certain profit
How many more to sell if Fixed Cost
increased
Selling Price
Apply CVP Formula
Selling Price $36
Variable Cost $24 per unit
Fixed Costs $12,000
Units 2,000
Profit= ?
Put in CVP formula
CONTRIBUTION MARGIN
The amount that contributes to fixed
costs and profits i.e Contribution
Calculated In per unit, $ and in %
$100 Sales
60 VC
$ 40 CM
35 FC
$ 5 NI
40% Ratio ($40/$100= .40)
CONTRIBUTION MARGIN FORMAT
Income Statement
SALES
-VARIABLE
COST
=CONTRIBUTION MARGIN
- FIXED EXPENSES
NET OPERATING INCOME
Exercise
5-1 page 213
Application of CVP Data
Exercise 5-5 page 214
1- Increase advertising budget
2- Increase quality of product
BREAK EVEN (BE) IN UNITS & $
The units or $ that will cover the fixed
costs with no profit.
Sx – VCx= FC BE in equation method
FC/CM% = BE$
CM Method
You can determine: BE in units, BE in $
Exercise 5-7 pg 214
PROFIT PLANNING
Answers these questions:
How many do I need to sell to make
$100,000 profit
For example: If I reduce my fixed costs by
$2,000 and increase my sales in units by
100 how will my profit change?
Target Profit Analysis
Formula for units to make a $ profit
FC + Profit
Unit CM
X sales price = Sales to attain target profit
Exercise 5-6 pg 214
1- equation method
2- CM approach
Margin of Safety (MS)
Amount you can drop before losses are
incurred
How much can our sales drop before we
start losing money
Every company has a different % because
each is structured differently
How much excess you have over break
even.
How much you have after you cover
your fixed costs.
Margin of Safety formula
Budgeted Sales – BE$ = MS$
MS$/Budgeted Sales=MS%
Example:
Sales $100,000
BE$
87,500
MS$ $ 12,500 / 100,000 = 12.5%
Exercise 5-8 page 214
Operating Leverage (OL) pg 202
How sensitive income is to a % change in
Sales $
How a % change in Sales volume will
affect profits.
It is a Multiplier
If OL is high a small % change in Sales will
reuslt in a higher change in NI
Operating Leverage Formula
Contribution Margin $
Net Income in $
It OL is 2 and sales increased by 5% then
net income will increase by 10%
Exercise 5-9 pg 215
Operating leverage proof
Sales 100,000
110,000
VC
60,000
66,000
CM
40,000
44,000
FC
35,000
35,000
NI
5,000
9,000 $4,000
OL
40,000/5000= 8 times x 10%
80% x $5000 = $4000
CM Ratio
Another way to determine effect on net income
Change in Net Income with the change in Total
Sales
If we sell 10,000 more units, how would our net
income increase?
10,000 X25%CM= 2500 change in units X $24
per unit = $60,000 increase in NI
How much would our net income increase if our
sales increase by $240,000
$240,000 X 25% = $60,000
Sales Mix
Multi Product CM
Proportions in which a company’s products are sold
Mix that will yield the greatest profit
Steps to determine
1- Total all sales
2- VC % for each product and total sales
3- = CM% for all sales
4- Determine total BE$ FC/CM%
5- Each product % of total sales X BE$
6- Use VC% for each product for VC
7- =CM for each product = total fixed costs
Page 206 Exhibit 5-4
Exercise 5-10, pg 215