Chapter 4

Chapter -4
Cost Volume Profit Analysis

4. Cost-Volume-Profit (CVP) Analysis
 A model relating revenues (R), costs (C) and volume
(V) and their effects on company profit
 Assumptions
 Changes in R and C are due to change in V
 Linear relationship over the relevant range
 Cost can be divided into variable and fixed
 Unit selling price, VC and FC are known/constant
 Basic question – how many units should be sold to
 Cover all costs (VC+FC) – breakeven point
 R=VC + FC
 Earn target profit
 R=VC + FC + target profit
Cost-Volume-Profit Graph
450,000
400,000
350,000
300,000
250,000
Dollars
200,000
150,000
100,000
Fixed expenses
50,000
100 200 300 400 500 600 700 800

Units
450,000
400,000
350,000
300,000
250,000
Dollars
nse s
200,000
expe
ota l
150,000
T Fixed expenses
100,000
50,000
100 200 300 400 500 600 700 800

Units
450,000
400,000
350,000
300,000
250,000
Dollars
nse s
200,000
ex p e
150,000
To tal
100,000
Fixed expenses
50,000
100 200 300 400 500 600 700 800

Units
450,000
le s
sa
400,000
ta l
350,000
To
300,000
250,000
Dollars
nse s
200,000
ex p e
150,000
To tal
100,000
Fixed expenses
50,000
100 200 300 400 500 600 700 800

Units
450,000
le s
400,000
a l sa
350,000
To t a re a
Break-even fi t
300,000 point Pr o
250,000
se s
Dollars
x p e n
200,000
ta l e
150,000 To Fixed expenses
r e a
100,000
s a
s
Lo
50,000
100 200 300 400 500 600 700 800

Units
Profit-Volume Graph
Some
Some managers
managers like like the
the profit-volume
profit-volume
graph
graph because
because itit focuses
focuses onon profits
profits and
and volume.
volume.
100,000
80,000
60,000
Break-even
point r ea
it a
40,000
r of
20,000 P
Profit
0 `
(20,000) 100 200 300 400 500 600 700
r ea Units
(40,000) s a
os
(60,000)
L
Break-even Analysis – Single Product
A. Break-even volume Total fixed costs
=
(units) Unit contribution margin
B. Break-even volume Total fixed costs

=
(sales dollars) Contribution margin ratio
C. Unit contribution
margin = Unit selling price – unit variable cost
D. Unit contribution Unit contribution margin

margin ratio = Unit selling price
Break-even Analysis …
E. Target volume Total fixed costs + Target profit
=
(units) Unit contribution margin
F. Target volume Total fixed costs + Target profit

=
G. Target volume Total fixed costs + After tax target profit
=
H. After tax target Target profit
=
profit 1-tax rate
Exercise-1
ABC Printers provides photocopy services to its
customers. The unit variable cost and selling price are
Br 0.20 and Br 0.50, respectively, while monthly fixed
costs total Br. 1,500.
Required:
a) How many pages must ABC copy in a month to breakeven?
b) How many pages must ABC copy to earn Br. 900 profit per
month?
c) How much sales revenue should ABC earn in a month to
breakeven?
d) How many pages must ABC copy to earn Br. 700 profit after
30% income tax?
e) If price per page is increased to Br. 75, how many pages must
ABC copy in a month to breakeven? (sensitivity analysis)
Break-even Analysis – Multiple Products
A. Break-even volume Total fixed costs

=
(units) Weighted average unit contribution margin
B. Break-even volume Total fixed costs
=
(sales dollars) Weighted average contribution margin ratio
C. Weighted average unit

CM =  M UCM i i
D. Weighted average unit Weighted average unit contribution margin

CM ratio = Weighted average unit selling price
E. Weighted average unit

selling price =  M USP i i
Break-even Analysis …
F. Target volume Total fixed costs + Target profit
(units) =
Weighted average unit contribution margin
G. Target volume Total fixed costs + Target profit

=
(sales dollars) Weighted average unit contribution margin ratio
H. Target volume Total fixed costs + After tax target profit

=
(sales dollars) Weighted average unit contribution margin ratio
CVP Analysis with Multiple Products
For a company with more than one product,
sales mix is the relative combination in which
a company’s products are sold.
Different products have different selling
prices, cost structures, and contribution
margins.
Let’s assume Curl sells surfboards and sail
boards and see how we deal with break-
even analysis.
Curl provides us with the following information:

Unit Unit Number
Selling Variable Contribution of
Description Price Cost Margin Boards
Surfboards $ 500 $ 300 $ 200 500
Sailboards 1,000 450 550 300
Total sold 800
Numbe r % of
De scription of Boa rds Tota l
Surfboa rds 500 62.5% (500 ÷ 800)
Sa ilboa rds 300 37.5% (300 ÷ 800)
Tota l sold 800 100.0%
Weighted-average unit contribution margin

Contribution Weighted
Description Margin % of Total Contribution
Surfboards $ 200 62.5% $ 125.00
Sailboards 550 37.5% 206.25
Weighted-average contribution margin $ 331.25
$200 × 62.5%
$550 × 37.5%
Break-even point
Break-even Fixed expenses
=
point Weighted-average unit contribution margin
Break-even $170,000
=
point $331.25
Break-even
= 514 combined unit sales
point
Break-even point
Break-even
= 514 combined unit sales
point
Breakeven % of Individual
Description Sales Total Sales
Surfboards 514 62.5% 321
Sailboards 514 37.5% 193
Total units 514
Exercise-2
In addition to photocopying services, ABC Printers provides
secretarial and printing services. The unit variable cost and selling
price are Br 0.75 & Br 1.00, for secretarial, respectively, and Br 0.25
& Br 0.75 for printing, respectively. Its monthly fixed costs for all
services total Br 3,000. The company sells printing, photocopying
and secretarial services in the ratio of 2:5:3.
Required:
a) How many pages must ABC print/copy/write in a month to breakeven?
b) How many pages must ABC print/copy/write to earn Br. 900 profit per
month?
c) How much sales revenue should ABC earn in a month to breakeven?
d) How many pages must ABC print/copy/write to earn Br.700 profit after
30% income tax?
e) If sales mix is changed to 4:4:2, how many pages must ABC
print/copy/write in a month to breakeven? (sensitivity analysis)

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Chapter -4

Cost Volume Profit Analysis

100 200 300 400 500 600 700 800

100 200 300 400 500 600 700 800

100 200 300 400 500 600 700 800

100 200 300 400 500 600 700 800

100 200 300 400 500 600 700 800

(20,000) 100 200 300 400 500 600 700

B. Break-even volume Total fixed costs

D. Unit contribution Unit contribution margin

F. Target volume Total fixed costs + Target profit

A. Break-even volume Total fixed costs

C. Weighted average unit

D. Weighted average unit Weighted average unit contribution margin

E. Weighted average unit

G. Target volume Total fixed costs + Target profit

H. Target volume Total fixed costs + After tax target profit

Curl provides us with the following information:

Weighted-average unit contribution margin

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