It deals with how operating profit is affected by changes in variable costs, fixed
costs, selling price per unit and the sales mix of two or more different products.

CVP Scenario
Amy Winston, the manager of food services for one of
Boeing’s
plants, is trying
to decide whether to rent a line of snack vending machines. Although individual
snack items have various acquisition costs and selling prices, Winston has
decided that an average selling price of $1.50 per unit and an average acquisition
cost of $1.20 per unit will suffice for purposes of this analysis. She predicts the
following revenue and expense relationship

CVP Scenario
Per Unit
Percentage of
Sales
Selling price
$1.50
100%
Variable cost of each item
1.20
80
Selling price less variable cost
$
.30
20%
Monthly fixed expenses:
Rent
$3,000
Wages for replenishing and
servicing
13,500
Other fixed expenses
1,500
Total fixed expenses per month
$18,000
100000
units

18,000
30,000
90,000
120,000
138,000
$150,000
0
10
20
30
40
50
60
70
80
90
100
Units (thousands)
Dollars
60,000
Total
Expenses
Sales
Net Income Area
Break-Even Point
60,000 units
or $90,000
Net Loss
Area
A
C
D
B
Fixed Expenses
Variable
Expenses
Net Income
Graphing the CVP Relationship

Assumptions of CVP Analysis
Expenses may be classified into variable and fixed categories.
The behavior of revenues and expenses is accurately portrayed and is linear
over the relevant range.
Selling prices per unit and variable costs per unit do not change with the level of
sales.

Assumptions of CVP Analysis
In multi product companies, the Sales Mix remains constant.
The inventory level does not change significantly during the period. That is, the
number of units sold equals the number of units produced.

Objective 5 Calculate break-even sales in
total dollars and total units

Methods to Calculate break-even sales
The
graphical
method
The
equation
method
The
contribution
margin
method
The break-even
point is the level
of sales at which
revenue equals
expenses and net
income is zero

Calculate break-even sales
Equation Method
Sales-Variable expenses-fixed expenses=net income
Unit sales
price*
number
of units
unit of
variable
costs *
number
of units
Fixed
Expenses
Net
Income

Calculate break-even sales
Equation Method
Let N = the number of units to be sold to break even. Then
for the vending machine example
Variable
Fixed
Sales
–
Expenses
–
Expenses = net income
$1.50N
–
$1.20N
–
$18,000 = 0
$.30N = $18,000
N = $18,000
÷
$.30
N = 60,000 Units
To express BEP in terms of dollar sales rather than the
number of units, multiply the number of units (60000) by
selling price per unit ($1.50) to find the BEP in terms of
dollar sales $90000

Calculate break-even sales
Contribution
–
Margin Method
Contribution Margin Method: The sales price per
unit minus the variable cost per unit (Marginal
income per unit that every unit sold generates.
Contribution margin
Per Unit
Selling price
$1.50
Variable costs
1.20
Contribution margin$ .30
Contribution margin ratio
Per Unit
%
Selling price
100
Variable costs
80
Contribution margin
20

Calculate break-even sales
Contribution
–
Margin Method
Total Contribution margin: Total number of units
sold times the unit contribution margin (Total
number of units sold * Unit contribution margin).

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- Contribution Margin, CVP analysis, Step, cost drivers affect cost behavior