CACC406 CH03
COSTVOLUMEPROFIT (CVP) ANALYSIS
(BREAKEVEN
ANALYSIS)
•
THE STUDY OF THE EFFECTS OF OUTPUT VOLUME ON (1)
REVENUE(SALES),
(2)
EXPENSES(COST),
(3)
NET PROFIT
•
CVP finds the following
o
BreakEven Point
o
Target NetProfit
•
Notforprofit organization uses this as well – resources are not unlimited!
•
Gives us knowledge of how cost fluctuate as volume changes helps mangers control costs
•
To apply CVP:
Classify costs as variable or fixed w/ respect to a single measure of the volume (activity
level)
BREAKEVEN POINT
•
It is the level of sales at which (revenue = expenses) and (income = 0)
•
There are 2 ways to find the breakeven point
1.
Contribution Margin Approach
2.
Income Statement Approach
•
Can be used to assess possible risks by determining the safety point (margin of safety)
•
MARGIN OF SAFETY = PLANNED UNIT SALES – BREAKEVEN UNIT SALES
o
shows how far sales can far below the planned level before losses occur
CONTRIBUTIONMARGIN APPROACH (P.97)
•
IS THE SHORTCUT OF THE INCOME STATEMENT EQUATION
•
Contribution Margin
is the marginal profit per unit sale
o
When contributionmargin % is low, great increases in volume are necessary before significant
increases in net profits can occur
(company are less willing to spend a great amount on
advertising)
o
As sales exceed the breakeven point, a high contributionmargin % increases profits faster than
does a
samall contribution margin %
o
Can be expressed as a (total/unit absolute amount), a ratio, and a percentage
Contribution ratio of 20% implies that variablecost ratio = 80%
Variablecost ratio = variable cost % = all variable costs divided by sales
INCOMESTATEMENT EQUATION APPROACH (P.98)
•
NET INCOME
= SALES – VARIABLE EXPENSES – FIXED EXPENSES
= (unit sales x no. of units) – (unit variable cost x no. of units) – (fixed expenses)
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= (no. of units)(unit sales – unit variable) – (fixed expenses)
•
At BreakEven Point, Net Income = 0
That means:
sales – variable expenses – fixed expenses = 0 (Now:
Solve for the wanted
values)
•
Variablecost ratio or percentage =
(variable cost per unit) / (sales price per unit)
o
This is another method to solve for sales dollar without computing the unit breakeven point
CVP/BREAKEVEN POINT – GRAPH
STEP 1:
Draw the axis
•
Horizontal
= sales units
•
Vertical
= sales and cost
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 Spring '09
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 Managerial Accounting, Revenue, Contribution Margin, Sales, Net Income

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