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Week-4, Session 8 CVP1
Week-4, Session 8 CVP1
Week-4, Session 8 CVP1
Week 8
Unit No Title
8.1 CVP and Its Assumptions
8.2 Explain how changes in activity affect contribution margin
and net operating income
8.3 CVP relationship in Equation Form
8.4 Prepare and interpret a cost-volume-profit (CVP) graph and
a profit graph
8.5 Usage of CM
8.6 Show the effects on net operating income of changes in
variable costs, fixed costs, selling price, and volume.
Unit 8.1: CVP
• Cost-volume-profit (CVP) analysis is a method
of cost accounting
• that looks at the impact that varying levels of
costs and volume have on operating profit
• The cost-volume-profit analysis, also commonly
known as break-even analysis,
• looks to determine the break-even point for
different sales volumes and cost structures
• which can be useful for managers making short-
term economic decisions.
Unit 8.1: Key Assumptions of CVP
Analysis
1. Selling price is constant.
2. Costs are linear and can be accurately
divided into variable (constant per unit) and
fixed (constant in total) elements.
3. In multiproduct companies, the sales mix is
constant.
4. In manufacturing companies, inventories do
not change (units produced = units sold).
sales mix
Unit 8.2
If Racing sells
430 bikes, its net
operating income
will be $6,000.
Unit 8.3: CVP Relationships in
Equation Form
The contribution format income statement can be
expressed in the following equation:
Profit
$200 = ($200,500 – $120,300)
Variable expenses)
– $80,000
Fixed expenses
– Fixed
CVP Relationships in Equation Form
Units
Preparing the CVP Graph
Draw a line parallel to the volume axis
to represent total fixed expenses.
Dollars
Units
Preparing the CVP Graph Units Sold
0 200 400 600
Sales $ - $ 100,000 $ 200,000 $ 300,000
Total variable expenses - 60,000 120,000 180,000
Contribution margin - 40,000 80,000 120,000
Fixed expenses 80,000 80,000 80,000 80,000
Net operating income (loss) $ (80,000) $ (40,000) $ - $ 40,000
Choose some sales volume, say 400 units, and plot the point representing
total expenses (fixed and variable). Draw a line through the data point
back to where the fixed expenses line intersects the dollar axis.
Dollars
Units
Preparing the CVP Graph
Units Sold
0 200 400 600
Sales $ - $ 100,000 $ 200,000 $ 300,000
Total variable expenses - 60,000 120,000 180,000
Contribution margin - 40,000 80,000 120,000
Fixed expenses 80,000 80,000 80,000 80,000
Net operating income (loss) $ (80,000) $ (40,000) $ - $ 40,000
Choose some sales volume, say 400 units, and plot the point representing
total sales. Draw a line through the data point back to the point of origin.
Dollars
Units
Preparing the CVP Graph
Break-even point
(400 units or $200,000 in sales) Profit Area
Dollars
$ 60,000
$ 40,000
$ 20,000
Profit
$0
$ 60,000
Break-even point, where
$ 40,000 profit is zero, is 400
units sold.
$ 20,000
Profit
$0
-$20,000
-$40,000
-$60,000
Usage of contribution
margin ration (CM ratio)
Contribution Margin Ratio (CM Ratio)
The CM ratio is calculated by dividing the total
contribution margin by total sales.
Racing Bicycle Company
Contribution Income Statement
For the Month of June
Total Per Unit CM Ratio
Sales (500 bicycles) $ 250,000 $ 500 100%
Less: Variable expenses 150,000 300 60%
Contribution margin 100,000 $ 200 40%
Less: Fixed expenses 80,000
Net operating income $ 20,000
Variable cost=300*150=45000