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    MAF CH 5

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    Asegid H/meskel
    Cost-volume-profit (CVP) analysis examines the relationships between selling prices, sales volume, costs, expenses, and profits. It is useful for decision making regarding pricing, product mix, and marketing strategies. The profit equation shows that profit equals total revenue minus total costs. Contribution margin is the amount leftover after variable costs to cover fixed costs and add to profit. Break-even volume is the sales level where profit is zero. Target volumes can be calculated to achieve a desired profit level. Graphs and the margin of safety metric are also used in CVP analysis. Income taxes must be considered when setting target profits.

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    MAF CH 5

    Uploaded by

    Asegid H/meskel
    50 views20 pages
    Cost-volume-profit (CVP) analysis examines the relationships between selling prices, sales volume, costs, expenses, and profits. It is useful for decision making regarding pricing, product mix, and marketing strategies. The profit equation shows that profit equals total revenue minus total costs. Contribution margin is the amount leftover after variable costs to cover fixed costs and add to profit. Break-even volume is the sales level where profit is zero. Target volumes can be calculated to achieve a desired profit level. Graphs and the margin of safety metric are also used in CVP analysis. Income taxes must be considered when setting target profits.

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    MAF ch 5

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    Cost-volume-profit (CVP) analysis examines the relationships between selling prices, sales volume, costs, expenses, and profits. It is useful for decision making regarding pricing, product mix, and marketing strategies. The profit equation shows that profit equals total revenue minus total costs. Contribution margin is the amount leftover after variable costs to cover fixed costs and add to profit. Break-even volume is the sales level where profit is zero. Target volumes can be calculated to achieve a desired profit level. Graphs and the margin of safety metric are also used in CVP analysis. Income taxes must be considered when setting target profits.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    50 views20 pages

    MAF CH 5

    Uploaded by

    Asegid H/meskel
    Cost-volume-profit (CVP) analysis examines the relationships between selling prices, sales volume, costs, expenses, and profits. It is useful for decision making regarding pricing, product mix, and marketing strategies. The profit equation shows that profit equals total revenue minus total costs. Contribution margin is the amount leftover after variable costs to cover fixed costs and add to profit. Break-even volume is the sales level where profit is zero. Target volumes can be calculated to achieve a desired profit level. Graphs and the margin of safety metric are also used in CVP analysis. Income taxes must be considered when setting target profits.

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    of 20

    Chapter Five

    Cost Volume Profit


    (CVP) Analysis
    Learning Objectives

    Understand the Cost Behavior Concepts

    Understand the concept of cost-volume-


    profit (CVP) analysis.

    Use of cost-volume-profit (CVP) analysis to


    analyze decisions.

    Target net profit after tax


    Summary of cost behavior
    concept
    What is CVP analysis?
    • Cost-volume-profit analysis is the examination
    of the relationships among selling prices, sales
    and production volume, costs, expenses, and
    profits.
    • Cost-volume-profit analysis is useful for
    managerial decision making. Some of the ways
    cost-volume-profit analysis may be used include:
    • Analyzing the effects of changes in selling prices on
    profits
    • Analyzing the effects of changes in costs on profits
    • Analyzing the effects of changes in volume on profits
    • Setting selling prices
    • Selecting the mix of products to sell
    • Choosing among marketing strategies
    Profit Equation
    The Income Statement

    Total revenues
    – Total costs
    = Operating profit

    The Income Statement written horizontally


    Operating profit = Total revenues – Total costs
    Profit = TR – TC
    Profit Equation
    Total revenue (TR)
    Average selling price per unit (P)
    × Units of output produced and sold (Q)
    TR = PQ

    Total cost (TC)


    [Variable cost per unit (V) × Units of output (Q)]
    + Fixed costs (F)
    TC = VQ + F
    Profit Equation

    Profit = Total revenue – Total costs


    = TR – TC
    TC = VQ + F

    Therefore, Profit = PQ – (VQ + F)

    Profit = (Price – Variable costs) × Units of output – Fixed costs


    = Q(P – V) – F
    Contribution Margin
    This is the difference between price and variable cost.

    It is what is leftover to cover fixed costs and then add to


    operating profit.

    Contribution margin = Price per unit – Variable cost per unit

    P–V
    CVP Example

    Contribution margin per unit = $2,880 ÷ 12,000 = $0.24


    Break-Even Volume in Units
    This is the volume level at which profits equal zero.
    Profit 0 = Q(P – V) – F
    If profit = 0, then Q = F ÷ (P – V)

    Fixed costs
    Break-even volume (in units) =
    Unit contribution margin
    = $1,500 ÷ $0.24

    = 6,250 prints
    Break-Even Volume in Sales Dollars

    Contribution margin percentage (contribution


    margin ratio) is the contribution margin as a
    percentage of sales revenue.

    Contribution Margin Percentage


    $0.24 ÷ $0.60 = 0.40 (or 40%)

    Break-even in Sales Dollars


    $1,500 ÷ 0.40 = $3,750
    Target profit
    Assume that management wants to have a
    profit of $1,800.
    How many prints must be sold?
    What is the target dollar sales?

    Target Volume in Units


    ($1,500 + $1,800) ÷ $0.24 = 13,750

    Target Volume in Sales Dollars


    ($1,500 + $1,800) ÷ 0.40 = $8,250
    CVP Summary: Break-Even
    Break-even volume Fixed costs
    (units) =
    Unit contribution margin

    Break-even volume Fixed costs


    =
    (sales dollars) Contribution margin ratio
    CVP Summary: Target Volume
    Target volume Fixed costs + Target profit
    (units) =
    Unit contribution margin

    Target volume Fixed costs + Target profit


    =
    (sales dollars) Contribution margin ratio
    Graphic Presentation
    Total cost
    TC = $1,500 + $0.36X

    $3,750

    6,250 prints
    Total revenue
    TR = $0.60X
    Margin of Safety
    The excess of projected or actual sales volume over
    break-even volume
    or
    The excess of projected or actual sales revenue over
    break-even revenue

    Suppose U-Develop sells 8,000 prints.


    At a break-even volume of 6,250, its margin of
    safety is:
    Sales – Break-even
    8,000 – 6,250 = 1,750 prints
    Extensions of the CVP Model:
    Income Taxes

    The owners of U-Develop want to generate after-tax


    operating profits of $1,800.

    The tax rate is 25%.

    What is the target operating profit?


    Target operating profit = TOP ÷ (1 – Tax rate)
    TOP = $1,800 ÷ (1 – 0.25)
    TOP = $2,400
    Extensions of the CVP Model:
    Income Taxes
    How many units must be sold?

    Fixed costs + [Target profit ÷ (1 – Tax rate)]


    Unit contribution margin

    ($1,500 + $2,400)
    = 16,250 prints
    $0.24
    Extensions of the CVP Model:
    Income Taxes
    Proof:
    Sales: 16,250 × $0.60 $9,750
    Variable costs: 16,250 × $0.36 5,850
    Contribution margin $3,900
    Fixed costs 1,500
    Net income before taxes $2,400
    Income taxes: $2,400 × 25% 600
    Net income $1,800
    End of Chapter 5

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