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    1.3 CVP Analysis

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    Lea Gerodiaz
    CVP analysis examines how total revenues, costs, and operating income change with output levels, prices, variable costs, or fixed costs. It determines the break-even point where revenues equal costs and identifies the contribution margin ratio used to cover fixed costs and generate profit. CVP can analyze multiple products and their sales mix, degree of operating leverage, and the impact of assumptions through sensitivity analysis. Graphing the total revenue and total cost lines shows their intersection at the break-even point.

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    1.3 CVP Analysis

    Uploaded by

    Lea Gerodiaz
    94 views2 pages
    CVP analysis examines how total revenues, costs, and operating income change with output levels, prices, variable costs, or fixed costs. It determines the break-even point where revenues equal costs and identifies the contribution margin ratio used to cover fixed costs and generate profit. CVP can analyze multiple products and their sales mix, degree of operating leverage, and the impact of assumptions through sensitivity analysis. Graphing the total revenue and total cost lines shows their intersection at the break-even point.

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    CVP analysis examines how total revenues, costs, and operating income change with output levels, prices, variable costs, or fixed costs. It determines the break-even point where revenues equal costs and identifies the contribution margin ratio used to cover fixed costs and generate profit. CVP can analyze multiple products and their sales mix, degree of operating leverage, and the impact of assumptions through sensitivity analysis. Graphing the total revenue and total cost lines shows their intersection at the break-even point.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    94 views2 pages

    1.3 CVP Analysis

    Uploaded by

    Lea Gerodiaz
    CVP analysis examines how total revenues, costs, and operating income change with output levels, prices, variable costs, or fixed costs. It determines the break-even point where revenues equal costs and identifies the contribution margin ratio used to cover fixed costs and generate profit. CVP can analyze multiple products and their sales mix, degree of operating leverage, and the impact of assumptions through sensitivity analysis. Graphing the total revenue and total cost lines shows their intersection at the break-even point.

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    © All Rights Reserved
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    of 2

    COST-VOLUME-PROFIT (CVP) ANALYSIS

    Traditional Income Statement

    Sales xx
    Less: COGS (xx) Profit = ∆ in units above BEP x CM/u
    Gross Profit xx
    Less: OpEx (xx) Targeted Income as a Percent of Sales Revenue
    Operating Income xx

    Contribution Margin Income Statement

    Sales xx
    Less: Variable expenses (xx)
    Contribution Margin xx When expressed in net income, add back the
    Less: Fixed expenses (xx) income taxes to get operating income
    Operating Income xx

    Cost-Volume-Profit (CVP) Analysis

    - examines the behavior of total revenues, total


    costs, and operating income as changes occur
    in the output level, selling price, variable cost
    Variable cost ratio
    per unit, or fixed costs of a product
    - proportion of each sales used to cover
    Break-even point
    variable costs
    - that point of activity level where total
    Contribution margin ratio
    revenues equal total costs, thus, there is
    neither profit nor loss - proportion of each sales dollar available to
    cover fixed costs and provide for profit
    Operating Income Approach
    BEP in Sales
    Set OI = 0

    OI = Sales – Variable expenses – Fixed expenses

    Target Profit

    𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 + 𝑇𝑎𝑟𝑔𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡


    Sales =
    𝐶𝑀 𝑟𝑎𝑡𝑖𝑜
    Contribution Margin Approach
    Multiple-Product Analysis
    Total CM = Fixed expenses
    Direct fixed costs
    𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
    𝐵𝐸𝑢𝑛𝑖𝑡𝑠 = - fixed costs which can be traced to each
    𝐶𝑀/𝑢
    segment and would be avoided if the segment
    did not exist

    Common fixed costs

    - fixed costs that are not traceable to the


    Target Profit segments and that would remain even if one
    of the segments was eliminated
    Set OI = Target profit
    Sales Mix

    - relative combination of products being sold by


    a firm; the percentage of each product
    included in total sales
    Degree of Operating Leverage

    - a measure of the sensitivity of profit changes


    to change in sales volume. The greater the
    degree of operating leverage, the more the
    changes in sales activity will affect profits.

    Degree of Operating Leverage = CM / Operating Income

    Sensitivity Analysis
    Graphical Representation of CVP Relationship
    - a what-if technique that examines the impact
    of changes in underlying assumptions on an
    answer. The data can be varied as desired to
    see what impact changes have on the
    expected profit.

    The point where the total revenue line and the total
    cost line intersect is the break-even point.

    Assumptions of CVP Analysis

    1. When represented graphically, the behavior of


    total revenues and total costs are linear in
    relation to the output level within a relevant
    range and time period.
    2. The selling price, total fixed costs, and
    variable costs per unit are known and remain
    constant over the relevant range.
    3. What is produced is sold.
    4. The sales mix, when multiple products are
    sold, is assumed to be known and will remain
    constant as the level of total units sold
    changes.

    Risk and Uncertainty

    Margin of Safety

    - units expected to be sold or revenue expected


    to be earned above the break-even volume;
    indicates the amount by which actual or
    planned sales may be reduced without
    incurring a loss

    Operating Leverage

    - the use of fixed costs to extract higher


    percentage changes in profits as sales activity
    changes. The greater the fixed costs in
    relation to variable cost, the greater is the
    operating leverage available.

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