Portfolio activity unit 3

02.12.2021

Managerial Accounting

BUS5110

Professor: Dr. Victor Lee

In the case CVP is not operating at breakeven or indicates operation issues (negatively exceeding
the Breakeven Point) we usually check the impact on a company financially. Respectively on the
running expenses and operating income from the income statement and the net cash yield from
operating activities from the cash flow statements (Walther & Skousen, 2009).
We should understand the definition of Cost-Volume-Profit (CVP) Analysis and the impact on
the financial information, to analyze the mentioned case.
According to the Corporate Finance Institute (n.d.) Cost-Volume-Profit Analysis (CVP analysis),
also commonly referred to as Break-Even Analysis, is a way for companies to determine how
changes in costs (both variable and fixed) and sales volume affect a company’s profit. With this
information, companies can better understand overall performance by looking at how many units
must be sold to break even or to reach a certain profit threshold or the margin of safety.
The main components of CVP analysis are:
1.      CM ratio and variable expense ratio
2.      Break-even point (in units or dollars)
3.      Margin of safety
4.      Changes in net income
5.      Degree of operating leverage
CVP helps in determining the sales volume needed to cover costs and breakeven. The breakeven
point in units is the number of units that need to be sold to reach zero profit. Breakeven results
when Sales = Total variable costs + Total fixed cost or Breakeven Sales Volume = Contribution
margin over the fixed cost (Kenton, 2021). The advantages of CVP lies in the assumptions it
creates, considering sales price and the fixed and variable cost per unit are fixed. The costs are
set within a considered production level. Entirely constructed units are expected to be marketed,
and all fixed cost needs are stable. As a matter of fact, CVP also assumes that all differences in
expenses happen due to variations in activity level. Semi-variable expenses need to be broken
among expense groups using a scatter diagram or statistical regression (Kenton, 2021).
Additionally, the part of operating costs in the income statement is related to the cost of running
a business besides the costs of things that have been sold. Profit = Total sales − Total variable
costs − Total fixed costs. Operating income is cash-result from sales revenue. So, when a
company is not running at breakeven, this account would be zero or a negative amount, and any
further interest and taxes that have to be paid would be taken from retained incomes or different
fund sources such as investments or the sale of common stock shares (Adkins, 2019). Net cash is
the outstanding money collected from buyers after clearing suppliers’ payment, salaries, interest,
and taxes. So, when a business is not operating at breakeven, this record will have a negative
value indeed (Adkins, 2019).
During the discussion forum I understood that for decision making the contribution margin will
help the company management to continue, increase, or stop producing a specific product.
Contribution margin is also important for investors and business analysis for the purpose of
investments and professional consultations.
The hardest part in the above-mentioned situations involves determining how these changes will
affect sales patterns – will sales remain relatively similar, will they go up, or will they go down?
Once sales estimates become somewhat reasonable, it then becomes just a matter of number
crunching and optimizing the company’s profitability (Corporate Finance Institute).

Reference:
Adkins, W. (2019, March 1). What Is the Difference Between Operating & Non-Operating
Expenses? Small Business - Chron.com. https://smallbusiness.chron.com/difference-between-
operating-nonoperating-expenses-39827.html.
Corporate Finance Institute (n.d.). CVP Analysis Guide,
https://corporatefinanceinstitute.com/resources/knowledge/finance/cvp-analysis-guide/
Kenton, W. (2020, September 16). Understanding Cost-Volume-Profit – CVP Analysis.
https://www.investopedia.com/terms/c/cost-volume-profit-analysis.asp
Walther, L. M., & Skousen, C. J. (2009). Managerial and Cost accounting: Break-Even and
Target Income. https://bookboon.com/en/basics-of-accounting-information-processing-ebook