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Cost Volume Profit Analysis (CVP)
I
...

1
...
These changes may
affect the relationships among revenues, variable costs, and fixed costs at
various production levels
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CVP analysis allows management to determine the probable effects of changes
in sales volume, sales price, product mix, etc
...


Straightforward Assumptions
✓ Cost and revenue relationships are predictable and linear
...

✓ Unit selling prices and market conditions are constant
...

✓ Total variable costs change proportionally with volume, but unit variable costs
are constant over the relevant range
...

✓ Fixed costs (FC) remain constant over the relevant range of volume, but unit
fixed costs vary indirectly with volume
...


III
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Breakeven point in Units (BEP, units)
✓ The breakeven point is the level of output at which all fixed costs and
cumulative variable costs have been covered
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1 CVP analysis

✓ Each additional unit produced above the breakeven point generates
operating profit
...
UCM equals unit selling price minus
unit variable cost
...
has a product has a unit sales price
of $0
...
20
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Solution:
UCM = Unit selling price - Unit variable costs
= 0
...
20
= 0
...
40
= 25,000 units
2
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CMR is the ratio of contribution margin
(CM) to sales price on either a total or per-unit basis
...

➢ BEP (dollars) = FC / CMR
2 CVP analysis

Example:
John VicMan Manufacturing, Inc
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60 and a unit variable cost of $0
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Fixed costs are $10,000
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40 / 0
...
67%
BEP (dollars) = FC / CMR
= 10,000 / 66
...


Margin of Safety (MOS)
✓ The margin of safety is the excess of sales over breakeven sales
...

✓ The margin of safety can be expressed in either a dollar amount or a
percentage of sales
...


Target Operating Income (TOI)
1
...

✓ By treating target income as an additional fixed cost (FC), CVP analysis can
be applied
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➢ Target Sales (units) = (FC + TOI) / UCM

3 CVP analysis

➢ Target Sales (dollars) = (FC + TOI) / CMR
Example:
John VicMan Manufacturing, Inc
...
60 and a unit variable cost of $0
...
Fixed costs are $10,000
...

Solution:
Target Sales (units) = (FC + TOI) / UCM
= ($10,000 + $25,000) / $0
...
40
= 87,500 units
2
...

➢ Sales - Variable costs - Fixed costs = Operating Income
Example:
John VicMan Manufacturing, Inc has fixed costs of $150,000 and
variable costs of 85% would like to project the level of sales needed to
achieve a 10% return on sales
...
85) Sales - $150,000 = (0
...
15) Sales - $150,000 = (0
...
05) Sales = $150,000
Sales = $3,000,000
VI
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A variation of this problem asks for net income (an after-tax amount) instead of
operating income (a pretax amount)
...

✓ The only difference is that the target operating income is expressed in terms
of related net income
...
0 – Tax Rate)} / UCM
Example:
John VicMan Manufacturing, Inc
...
60 and a unit variable cost of $0
...
Fixed costs are $10,000
...
The effective tax rate is
40%
...
0 – 0
...
60)] / $0

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