QUESTIONS FOR WRITING AND DISCUSSION
CVP analysis allows managers to focus on
prices, volume, costs, profits, and sales
mix. Many different “what-if” questions can
be asked to assess the effect on profits of
changes in key variables.
The units-sold approach defines sales
volume in terms of units of product and
gives answers in these same terms. The
sales-revenue approach defines sales
volume in terms of revenues and provides
answers in these same terms.
Break-even point is the level of sales
activity where total revenues equal total
costs, or where zero profits are earned.
At the break-even point, all fixed costs are
covered. Above the break-even point, only
variable costs need to be covered. Thus,
contribution margin per unit is profit per
unit, provided that the unit selling price is
greater than the unit variable cost (which it
must be for break-even to be achieved).
The contribution margin is very likely
negative (variable costs are greater than
revenue). When this happens, increasing
sales volume just means increasing losses.
Variable cost ratio = Variable costs/Sales.
Contribution margin ratio = Contribution
margin/Sales. Also, Contribution margin
ratio = 1 – Variable cost ratio. Basically,
contribution margin and variable costs sum
to sales. Therefore, if contribution margin
accounts for a particular percentage of
sales, variable costs account for the rest.
The increase in contribution margin ratio
means that the amount of every sales dollar
that goes toward covering fixed cost and
profit has just gone up. As a result, the
break-even point will go down.
No. The increase in contribution is $9,000
(0.3 × $30,000), and the increase in
advertising is $10,000. This is an important
example because the way the problem is
increased revenue with increased fixed
cost. This comparison is irrelevant. The
contribution margin and fixed cost.
Sales mix is the relative proportion sold of
each product. For example, a sales mix of
4:1 means that, on average, of every five
units sold, four are of the first product and
one is of the second product.
Packages of products, based on the
expected sales mix, are defined as a single
product. Price and cost information for this
package can then be used to carry out CVP
A multiple-product firm may not care about
the individual product break-even points. It
may feel that some products can even lose
money as long as the overall picture is
profitable. For example, a company that
produces a full line of spices may not make
a profit on each one, but the availability of
even the more unusual spices in the line
may persuade grocery stores to purchase
from the company.