Unit 5: Cost-Volume-

Profit Analysis
Deonette Lambert
 1. Define the CVP analysis.
2. State the assumptions of CVP analysis.
3. Calculate contribution margin
4. Calculate and explain the following for companies
that sell a single product and those that sell
Objectives multiple products:
• contribution margin ratio and variable cost ratio
• breakeven point (in units and in $)
• Safety margin (in units and in $)
• Units to achieve desired profit before and after
tax
Define Cost-
Volume-Profit Tool used to assess the impact different levels
Analysis of activity and related costs have on the
operating profit of companies.
 1. The analysis applies to one product only or to more
than one product only if they are sold in a fixed
sales mix (fixed proportions).
2. The analysis assumes that price, total fixed costs,
Assumptions and unit variable costs can be accurately identified
and remain constant over the relevant range.
of CVP 3. The analysis assumes that what is produced is sold.

Analysis 4. For multiple-product analysis, the sales mix is

assumed to be known.
5. The selling price and costs are assumed to be
known with certainty.
 IN TOTAL
Sales XX
Less variable cost (XX)
Contribution Contribution Margin XX

Margin
PER UNIT
This is called Contribution Margin Per Unit (CMU)
CMU = SP - VCU
Single Product
Analysis
 Contribution Margin Ratio

Ratios in
CVP Analysis
Variable Cost Ratio
Ratios in CVP Analysis
Variable cost Ratio (VCR) Contribution Margin Ratio (CMR)
•  Variable cost ratio is the ratio of •  Contribution margin ratio is the
variable costs to sales ratio of contribution margin to
sales
• OR
• OR

VCR + CMR = 100% or 1 if we are using decimals.

Therefore,
VCR = 1 – CMR
CMR = 1 - VCR
 Answer
Ratio Example •Let’s
  calculate CMU
$
QUESTION
SP 200
Rackets, Inc. produces tennis
- VCU (150)
rackets. 10,000 tennis rackets are
sold per annum at $200 per unit. CMU 50
Variable cost per tennis racket is
$150.

Required:
CMR = 1 – VCR = 1 – 0.75 = 0.25 or 25%
Calculate the VCR and CMR
OR
 • 

• This is when the company makes no profit or

loss.
Break-even
Analysis • Formula

(Units)
Example – Breakeven (units)

Question Answer
Rackets, Inc. produces tennis rackets. • 
10,000 tennis rackets are sold per
annum at $200 per unit. Variable
cost per tennis racket is $150. Total
fixed cost is $500,000.

Required:
Calculate the Breakeven point in
units
 Example – Breakeven (units)
Data Changes in Variables and the effect on
•  the Breakeven point
• Change in cost – same effect on
the BE point
TFC or VCU ↑ = BE ↑
TFC or VCU ↓ = BE ↓

• Change in SP or CMU – opposite

effect on the BE point
SP or CMU ↑ = BE ↓
SP or CMU ↓ = BE ↑
QUESTION 1 and 2
QUESTION 3 and 4
Profit Formulae

Before-tax profit After-tax profit

•  • 
• Units to earn before-tax profit • Units to earn after-tax profit

*Profit is before-tax profit *Profit is after-tax profit

Structured Question 1

Question Formula Solution

1a)
Breakeven (units)

Question Formula Solution

1b)
Units to earn before
tax profit
Structured Question 1 (cont.)

Question Formula Solution

1c)
Units to earn after tax
profit
 • 
• Breakeven in dollars is also known as
 Sales at the breakeven point
 Breakeven in sales dollars

Break-even • Formula

Analysis ($)
OR
Structured Question 1 revisited
REMEMBER????
Question Formula Solution

1a)
Breakeven (units)

What if ????
Question Formula Solution
Breakeven in $ OR OR
$150
= BE(units) x selling price
$400
Structured Question 2

Question Formula Solution

2a)
Breakeven (units)

Question Formula Solution

2b)
Units to earn before
tax profit
Structured Question 2 (cont.)

Question Formula Solution

2c)
Units to earn after tax
profit
Question 3

Sales $100,000
Total variable cost $68,000
?
Contribution Margin ?
$32,000
Total fixed costs $20,000
Net income $12,000
Units Sold 100
Price ?
$1,000 $100,000/100 = $1,000
Variable cost per unit ?
$680 $68,000/100 = $680
Contribution margin per unit ?
$320 $32,000/100 = $320 OR $1,000 - $680 = $320
Contribution ratio ?0.32 CMU/SP = $320/$1,000 = 0.32 or 32%
Breakeven point in units ?
$62.5 units TFC/CMU = $20,000/$320 = 62.5 units
What if?

Sales $62,500
Total variable cost ?
NET INCOME OF
Contribution Margin ?
$20,000 $0 means that this
Total fixed costs $20,000 is the Breakeven
point
Net income $0

REMEMBER!!!
Contribution Margin at the Breakeven point = Total Fixed Cost
Structured Question 4

 •
Solution
•  What we know
• Breakeven units = 2,000 How do we determine TFC?
• CMU = $20 TFC = CM @ BE point
= $20 x 2,000 = $40,000
• Required?
• Units to attain desired
profit of $45,000

= 4,250 units
 • Safety margin tells us how far sales can fall before
losses are incurred.

• Safety Margin = Sales @ profit level – Breakeven

 SM(units) or SM($)

Safety
Margin (SM) • SM(units) = Sales(units) @ profit level – BE(units)

• SM($) = Sales ($) @ profit level – BE($)

OR
= SM(units) x Selling Price
 What is the contribution
margin ratio (CMR)?
Structured Question 5
Complete the
• What do we know? • Solution BE column 1st to
• Safety margin = $20,000 determine TFC
• Breakeven ($) =$220,000
• VCR = 0.25 or 25% BE point Profit Level
$ $
VCR =
• Required? 25% Sales 220,000 240,000
• What is the Net Income? Total variable cost
(55,000) (60,000)
Contribution Margin
Total fixed costs 165,000 180,000
• Remember! Net income (165,000) (165,000)
?
0
• SM = Sales @ profit level – BE 15,000
$20,000 = Sales @ profit level - $220,000
What is profit @
$240,000 = Sales @ profit level BE?
Class Start Time
Hello everyone,

Our class session will commence at 1:10 p.m. I am providing 10 minutes for others
to join the session.

Is anyone NOT in a group? Kindly indicate in the Chat.

Best regards,

Deonette
 Structured Question 6

 • Solution

• Required?
• By how much can Kangas Company’s sales decline
before losses are incurred?

• This is asking for the safety margin (SM)

SM = 2,000 – 1,692 = 308

SM(units) = Sales(units) @ profit level – BE(units)
Multiple Product
Analysis
Structured Question 1
Multi-product Analysis
Breakeven for Multi-product

Procedure Question 1 - Solution

• Step 1 • Step 1
• Calculate/Identify the CMU for Product C Product D
each product CMU $9 $7

Step 2
• Step 2
• Calculate/Identify the sales mix Product C Product D

• Sales mix is the ratio of one Sales mix 6 4

product that’s sold to another
 Breakeven for Multi-product (cont.)

Procedure Question 1 - Solution

•  Step 3 •  Step 3
• Calculate weighted average CMU Product C Product D Total
(WA CMU) CMU $9 $7
Sales mix 6 4 10
TCM per product $54 $28 $82
 Breakeven for Multi-product (cont.)

Procedure Question 1 - Solution

•  Step 4 •  Step 4
• Calculate Breakeven (units) BE (all products)
• THIS IS FOR ALL PRODUCTS AND IS
NOT THE LAST STEP!!

BE units for all products

 Breakeven for Multi-product (cont.)

Procedure Question 1 - Solution

•  Step 5 •  Step 5
• Calculate Breakeven (units) for each BE (Product C)
product
• (units)
BE (Product D)
• If required calculate BE in $
• ($)
elling price
Structured Question 2
Multi-product Analysis
Breakeven for Multi-product

Procedure Question 2 (a) - Solution

• Step 1 • Step 1
• Calculate/Identify the CMU for Product E Product Z
each product CMU $25 $20

Step 2
• Step 2
• Calculate/Identify the sales mix Product C Product D

• Sales mix is the ratio of one Sales mix 8 2

product that’s sold to another
 Breakeven for Multi-product (cont.)

Procedure Question 2 (a) - Solution

•  Step 3 •  Step 3
• Calculate weighted average CMU Product C Product D Total
(WA CMU) CMU $25 $20
Sales mix 8 2 10
TCM per product $200 $40 $240
 Breakeven for Multi-product (cont.)

Procedure Question 2 (a) - Solution

•  Step 4 •  Step 4
• Calculate Breakeven (units) BE (all products)
• THIS IS FOR ALL PRODUCTS AND IS
NOT THE LAST STEP!!

BE units for all products

 Breakeven for Multi-product (cont.)

Procedure Question 2 (a) - Solution

•  Step 5 •  Step 5
• Calculate Breakeven (units) for each BE (Product E)
product
• (units)
BE (Product Z)
• If required calculate BE in $
• ($)
elling price
 Units to attain Target Profit
Procedure
Question 2 (b) - Solution
•  Steps 1, 2, 3, 5 are the same • Step
  4 - Units to earn before tax profit (all
• Step 4 products)
• Calculate Units to earn desired profit
(all products)

• Units to earn before tax profit • Step 5: Units to earn desired profit (DP)
DP (Product E)

DP (Product Z)
Structured Question 3
Multi-product Analysis
 Breakeven for Multi-product
Procedure
• Step 1 Question 3 (a) - Solution
• Calculate/Identify the CMU for each • Step 1
product
Economy Standard Deluxe

CMU $2 $7 $11

• Step 2
• Calculate/Identify the sales mix Step 2
• Sales mix is the ratio of one product Economy Standard Deluxe
that’s sold to another
Sales 18,000/6,000 = 12,000/6000 = 6,000/6,000 =
• To calculate sales mix, find the highest mix 3 2 1
common factor (HCF) and divide the
sales by the HCF.
 Breakeven for Multi-product (cont.)

Procedure Question 3 (a) - Solution

•  Step 3 •  Step 3
• Calculate weighted average CMU Economy Standard Deluxe Total
(WA CMU)
CMU $2 $7 $11
Sales mix 3 2 1 6
TCM per product $6 $14 $11 $31
 Breakeven for Multi-product (cont.)

Procedure Question 3 (a) - Solution

•  Step 4 •  Step 4
• Calculate Breakeven (units) BE (all products)33,000
• THIS IS FOR ALL PRODUCTS AND IS
NOT THE LAST STEP!!

BE units for all products

 Breakeven for Multi-product (cont.)
Question 3 (a) - Solution
Procedure
•  Step 5
•  Step 5 BE (Economy)
• Calculate Breakeven (units) for
each product BE (Economy $) =16,500 x $10 = $165,000
• (units)
BE (Standard)
• If required calculate BE in $ BE (Standard $) = 11,000 x $20 = $220,000
• ($)
selling price
BE (Deluxe)
BE (Deluxe $)= 5,500 x $35 = $192,500
 Units to attain Target Profit
Procedure
Question 3 (b) - Solution
•  Steps 1, 2, 3, 5 are the same • Step
  4 - Units to earn before tax profit
• Step 4 (all products)
• Calculate Units to earn desired profit
(all products)

• Units to earn before tax profit

• Step 5 – Units to earn desired profit (DP)
DP (Economy)
DP (Standard)
DP (Deluxe)
Safety Margin (SM) – Question 3 (c)
• SM(units) = Sales(units) @ profit level – BE(units)

Must do for each product!!

SM (Economy) = 18,000 – 16,500 = 1,500 units

SM (Standard) = 12,000 – 11,000 = 1,000 units
SM (Deluxe) = 6,000 – 5,500 = 500 units
Summary

1. What is CVP analysis?

2. State two assumptions of CVP analysis.
3. Calculate contribution margin
4. Contribution margin ratio and variable cost ratio
5. Calculate and explain the following for companies that sell a single
product and those that sell multiple products:
• Breakeven point (in units and in $)
• Units to achieve desired profit before and after tax
• Safety margin (in units and in $)