The process will never betray the results

(Carin Mayn)

Oleh: Dr. Judith Felicia Pattiwael Irawan

 COST-
VOLUME-
PROFIT
ANALYSIS

Oleh:
Dr. Judith Felicia Pattiwael Irawan
 Cost-Volume-Profit Analysis
To manage business, we have to know:
1. how costs respond to changes in sales volume
2. what are the effect of costs and the revenue on
profits
Cost Behaviour Analysis is the study of how
specific costs respond to changes in the level of
business activity.
Cost-Volume-Profit Analysis is the study of the
effects of changes in costs and revenue on a
company’s profits (how operating income changes
with changes in output level and selling prices)
 There are Three Tools in CVP Analysis

1. The CVP /Contribution Margin Method

2. The Equation Method
3. The Graph Method

Oleh: Dr. Judith Felicia Pattiwael Irawan

 Sales Revenue
CVP (Variable Costs)
Income Contribution Margin
Statement (Fixed Costs) -
or Operating Income
Contributio + NonOperating Revenues and Gains
n Income - NonOperating Expenses and Losses
Statement Income Taxes
 Contribution Margin = TR – TVC
= (P – Vc/unit) x Q
= CM% x Revenue
Contribution Margin Per Unit = CM: Q
= P – Vc/unit

Contribution Margin Ratio/ Percentage (CM%) = CM : Revenue

Terms = CM per unit / P
= (P – Vc/unit) /P

Breakeven Point = FC
(P – VC/unit)
Breakeven Revenue = FC
CM%
 Target Operating Income
Revenue
Variable Costs - Rumus:
Contribution Margin Q need = Fixed Cost + TOI
Fixed Cost - to be sold Contribution Margin/unit
Operating Income

R need = Fixed Cost + TOI

to be earned Contribution Margin %
Revenue Target Net Income
Variable Costs - Rumus:
Contribution Margin Q need = Fixed Cost + TNI/(1-TR)
Fixed Cost - to be sold Contribution Margin/unit
Operating Income
Income Tax – R need = Fixed Cost + TNI/(1-TR)
Net Icome to be earned Contribution Margin %
Graph Method: Cost-Volume Graph

R,FC, TVC, TC R
TC

Rbep TVC

FC

Q (units)
0 Qbep
 Graph Method: Cost- Volume Graph

R,FC, VC, TC TR
operating TC
income area
Rbep = TC

operating FC
loss area
Number of Units

0 Q’ Qbep
 For Example: Emma Jones
Emma Jones is young entrepreneur who recently used GMAT
Success, a test-prep book and software package for the business
school admission test. Emma loved the book and program so
much that after graduating she signed a contract with GMAT
Success’s publisher to sell the learning materials. She recently
sold them at a college fair in Boston and is now thinking of
selling them at college fair in Chicago. Emma can purchase each
package (book and software) from the publisher and receiving a
full $120 refund per package. She will sell at price $200 per
package and must pay $2,000 to rent a booth at the fair. She will
incur no other costs.
Should she rent the booth or not?.

Oleh: Dr. Judith Felicia Pattiwael Irawan

Break Even Analysis
Break-Even Number of unit : Q = Fixed Cost = $ 2,000 = 25 unit
CM/unit 80
Proof : Revenue : 25 x $ 200 = $ 5,000
Variable Costs - : 25 x $ 120 = 3,000
Contribution Margin = 2,000
Fixed Costs - 2,000
Operating Income 0
Break-Even Revenues
Break-Even Revenues : RBEP = FC
CM%
CM% = ($200 - $120) = 0,4
$2,000
RBEP = FC = $ 2,000 = $5,000
CM% 0,4
 Graph Method: Cost- Volume Graph
TR,TFC, TVC, TC TR = 200/unit x Q = a + b Q
( 0, 0 ) & ( 25 , 5,000)

TC = TFC + TVC
= 2,000 + 120/unit x Q

Rbep = 5,000 TVC = 0 +120/unit x Q

( 0, 0) & ( 25, 3,000)

FC = 2,000
FC : (0 , 2,000) & ( 25 , 2,000)

0 Qbep = 25 Number of Units

Oleh: Dr. Judith Felicia Pattiwael Irawan
For Example:
Emma Jones
Target Operating Income
for GMAT Success

Suppose Emma wants to earn

an
operating income of $1,200
How many unit must she sell?
How much revenue needed to earn
 Number of units = FC + Target Operating Income
required to be sold Contribution Margin per unit
Target = $2,000 + $1,200
$ 80 per unit
Operating = 40 units

Income
for GMAT Revenues needed =
to earn
FC + Target Operating Income
CM%

Success =
0,40
$2,000 + $1,200

= $8,000

Oleh: Dr. Judith Felicia Pattiwael Irawan

For Example:
Emma Jones
Target Net Income
for GMAT Success

Suppose Emma may be interested in

knowing the quantity of units of
GMAT Success she must sell
to earn a net income
$960,
assuming an income tax rate of 40%
 Target net income = $960
Tax Rate = 40%

Quantity of units = FC + Target Net Income = $2,000 + ($960:0,6)

required to be sold [ 1 – Tax Rate] . $80 per unit
.

CM per unit
= 45 unit

Revenue needed = FC + Target Net Income = $2,000 + $960:0,6)

to earn [ 1 – Tax Rate] . 0,40
CM %

= $9,000

Oleh: Dr. Judith Felicia Pattiwael Irawan

For Example:
Emma Jones Decision to Advertise
Decision
Making Suppose Emma anticipates selling 40 units
of the GMAT SUCCESS package at the fair.
(1) Emma is considering advertising the product
and its features in the fair brochure.
The advertising will be a fixed cost of
$500. Emma thinks that advertising will
increase sales by 10%
Should Emma advertise?.
 Using CVP Analysis for Decision Making
40 packages sold Increase 10% Difference
with packages sold
Decision to Advertise No (44 packages)
Advertising with (3) = (2) –(1)
Advertising
(1) (2)
Revenues ($200x40; $200x44) $8,000 $8,800 $800
Variable Costs 4,800 5,280 480
($120x40; $120x44)
Contribution Margin 3,200 3,520 320
($80x40; $80x44)
Fixed Costs 2,000 2,500 500
Operating Income $1,200 $1,020 $(180)
If Emma Advertising, CM will increase by $320 and FC will increase by $500,
resulting Operating Income will decrease from $1,200 to $1,020, so Emma should
For Example:
Emma Jones Decision to Reduce the Selling Price
Decision
Emma is contemplating whether to reduce
Making the selling price to $175.
(2) At this price, she thinks she will sell 50 units.

At this quantity, the test-prep package company that

supplies GMAT SUCCESS will sell
the packages to Emma for $115 per unit.
Should Emma reduce the selling price?.
 Using CVP Analysis for Decision Making
Reducing The Selling Price 40 packages sold 50 packages sold Difference
(2) (3) = (2) –(1)
(1)

Revenues ($200x40; $175x50) $8,000 $8,750 $750

Variable Costs 4,800 5,750 950
($120x40; $115x50)
Contribution Margin 3,200 3,000 (200)
($80x40; $60x50)
Fixed Costs 2,000 2,000 0
Operating Income $1,200 $1,000 $(200)
the FC of $2,000 will not change.
Because the price will reduce CM by 200, it will also reduce Emma’s operating income by
$200.
Emma should not reduce the selling price
For Example:
Emma Jones
Decision Determining Target Prices
Making
(3) Emma could also ask
“At what price can I sell 50 units (purchased
at $115 per unit) and continue to earn
an operating income of $1,200?
Formula: Proof :

Q = FC + TOI Revenue $179 x 50 units = $8,950

CM per unit Variable Costs $115 x 50 units = 5,750
Q = FC +TOI Contribution Margin 3,200
(P – VC/unit) Fixed Costs - 2,000
50 = 2,000 + 1,200 Operating Income 1,200
(P – 115)
P – 115 = 3,200
50
P - 115 = 64
P = 64 + 115
P = 179
Margin of Safety

If the predicted data are not achieved or if an underlying assumption

changes then…..an important technique is Margin of Safety

The margin of safety answer question:

If budgeted revenues are above the breakeven point and drop,
how far can they fall below budget before the breakeven point is
reached?.
Margin of Safety

Margin of safety = Budgeted - Breakeven

in dollars Revenues Revenues

Margin of safety = Budgeted - Breakeven

in units Sales Sales
(units) (units)

Margin of safety = Margin of safety in dollars

percentage Budgeted (or Actual) Revenues
For Example: Emma Jones

Margin of Safety
for GMAT Success

Assume that Emma has fixed costs of $2,000, selling price

$200, and variable costs per unit of $120.
If Emma sells 40 units, compute the margin of safety in
units, in dollars and in percentage.
 Margin of Safety
Q = 40 units
For GMAT Success
Revenues $8,000
Margin of safety = Budgeted - Breakeven
in dollars Revenues Revenues
= $8,000 - $5,000 = $3,000

Margin of safety =Budgeted - Breakeven

Q bep = 25 units in units Sales Sales
R bep = $5,000 (units) (units)
= 40 units – 25 units
= 15 units

Margin of safety = Margin of safety in dollars

percentage Budgeted (or Actual) Revenues
= $3,000 / $8,000
= 37,5%

If revenues fall by more than 37,5%, Emma would suffer a loss.

For Example: Emma Jones
Margin of Safety
for GMAT Success

Emma has fixed costs of $2,000, selling price $200,

and variable costs per unit of $120.

How if Emma expects to sell only 30 units?.

 Margin of Safety
For GMAT Success

Q = 30 units Margin of safety = Budgeted - Breakeven

Revenues $6,000 in dollars Revenues Revenue
= $6,000 - $5,00
= $1,000
Margin of safety =Budgeted Sales – Breakeven Sales in units (units)
(units) (units)
Q bep = 25 units = 30 units – 25 units
R bep = $5,000 = 5 units
Margin of safety = Margin of safety in dollars
percentage Budgeted (or Actual) Revenues
= $1,000 / $6,000
= 16,67%

If revenues fall by more than 16,67%, Emma would suffer a loss.

 Sales Mix

Apply CVP analysis to a company producing

multiple products

Sales Mix is the quantities (or proportion) of various

products (or services) that constitute a company’s total
unit sales.
Assume: sales mix of products remains constants as total
units sold changes
For Example: Emma

Sales Mix
For GMAT Success and GRE Guarantee

Suppose Emma is now budgeting for a

subsequent college fair in New York.
She plans to sell two different test-prep
packages-GMAT Success and GRE Guarantee.
For Example: Emma

Sales Mix
For GMAT Success and GRE Guarantee
Emma can purchase each package (book and software) from the
publisher and receiving a full $120 refund per package for GMAT
Success and $70 per package for GRE Guarantee. She will sell at
price $200 per package for GMAT Success and $100 per package
for GRE Guarantee and must pay $4,500 to rent a booth at the fair.
She will incur no other costs.
Calculate Operating Income if expected sales 60 units for GMAT
Success and 40 units for GRE Guarantee.
Back to 60 : 40 GMAT GRE Total
Success Guarantee
Expected Sales 60 40 100

Revenue, $12,000 $4,000 $16,000

$200 and $100 per unit
Variable Costs, 7,200 2,800 10,000
$120 and $70 per unit
Contribution Margin, $4,800 $1,200 $6,000
$80 and $30 per unit
Fixed Costs $4,500

Operating Income $1,500

Bundle = Keranjang

Sales Mix
GMAT Success : GRE Guarantee

= 60 units sales : 40 units sales

= 3 units in bundle : 2 units in bundle
Sales Mix
For GMAT Success and GRE Guarantee

Expected Number of Contribution Contribution

Sales Unit each Margin per Margin of the
Bundle unit Bundles
(1) (2) (3) = (1)x(2)
GMAT 60 3 $80 $240
Success
GRE 40 2 $30 $60
Guarantee
Total 100 $300
 Break-Even point in bundles :

Qbep = Fixed Costs

CM per bundle
= $ 4,500
$ 300 bundles
= 15 bundles $30 $30
$80
GMAT Success = 15 bundles x 3 units $80 $80
= 45 units
GRE Guarantee = 15 bundles x 2 units
= 30 units
 Breakeven point in units
Break even point in units for GMAT Success
= 15 bundles x 3 units per bundle = 45 units
Break even point in units for GRE Guarantee
. = 15 bundles x 2 units per bundle = 30 units
Total number of units to breakeven = 75 units
___________________________________________________________________________________________________________________________________

Break even point in dollars

Breakeven point in dollar for GMAT Success
= 45 bundles units x $200 per unit = $ 9,000
Breakeven point in units for GRE Guarantee
. = 30 bundles units x $100 per unit = $ 3,000
Total Breakeven Revenues = $12,000
Sales Mix
For GMAT Success and GRE Guarantee

Expected Number of Unit Selling Price for Revenue of the

Sales each Bundle GMAT Success and Bundles
GRA Guarantee
(1) (2) (3) = (1)x(2)
GMAT 60 3 $200 $600
Success
GRE 40 2 $100 $200
Guarantee
Total 100 $300 $800

Contribution Margin = Contribution Margin of the bundle

percentage for the Revenue of the bundle
bundle = $300 = 37,5%
$800
For Example: Emma Jones

Emma Jones is young entrepreneur who recently used GMAT

Success, a test-prep book and software package for the business
school admission test. Emma loved the book and program so
much that after graduating she signed a contract with GMAT
Success’s publisher to sell the learning materials.
She recently sold them at a college fair in Boston and is now
thinking of selling them at college fair in Chicago.
Emma can purchase each package (book and software) from the
publisher and receiving a full $120 refund per package.
She will sell at price $200 per package and must pay $2,000 to
rent a booth at the fair. She will incur no other costs.
For Example: Emma Jones
Cost Planning
for GMAT Success
Suppose the Chicago fair organizers offer Emma three rental
alternatives:
Option 1: $2,000 fixed fee
Option 2 : $800 fixed fee plus 15% of GMAT Success revenues
(variable rental fees per unit)
Option 3: 25% of GMAT Success revenue with no fixed fee
(variable rental fees per unit)

Emma is interested in how her choice of rental agreement will affect the
income she earns and the risks she faces
Breakeven point

Option 1: Qbep = = = 25 units

Option 2: Qbep = = = 16 units

Option 3: Qbep = = = 0 units

 Cost Planning
Option I : OI = 200 Q – 120 Q – 2,000 = 80Q – 2,000
Option II : OI = 200Q – 120Q – 30Q – 800 = 50Q – 800
Option III : OI = 200Q – 120Q – 50Q – 0 = 30Q

Option 1 dan Option 2

80 Q – 2,000 = 50Q – 800 30Q = 1,200
Q = 40 ; OI = 80 x 40 – 2,000 = 1,200
Option 1 dan Option 3
80 Q – 2,000 = 30Q 50Q = 2,000
Q = 40 ; OI = 50 x 40 – 800 = 1,200
Option 2 dan Option 3
50 Q – 800 = 30Q 20Q = 800
Q = 40 ; OI = 30 x 40 = 1,200
 Graph Method: Profit- Volume Graph
for GMAT Success

OPERATING INCOME Option 1

Option 2

Option 3

1,200
operating income

Qbep = 0, Qbep = 16 , Qbep = 25, Q = 40 Q (u nits)

operating loss

-800 area

-2,000
A Strategic Decision
Emma’s choices will be influenced by her confidence in the level of
demand for GMAT Success packages and her willingness to risk losses
if demand low.

• If Emma’s tolerance for risk is high, she will choose Option 1,

with its high potential rewards.

• If, however, Emma is risk averse, she will prefer Option 3,

where the rewards are smaller if sales are high but where she
never suffers a loss if sales are low
 Operating Leverage (I)
The risk-return tradeoff across alternative cost structure can be
measured as Operating Leverage

Degree of = Contribution Margin

Operating Leverage Operating income

Operating Leverage calculates the effect of sales fluctuations on

operating income
 Operating Leverage
For GMAT Success

In the GMAT Success example,

Option 1: a 1% change in sales and contribution margin will
result in 2.67% (= 1% x 2.67 )change in operating income

Option 2: a 1% change in sales and contribution margin will

result in 1.67% (= 1% x 1.67 ) change in operating income

Option 3: a 1% change in sales and contribution margin will

result in 1.00% (= 1% x 1.00 ) change in operating income
 Operating Leverage
For GMAT Success
In the GMAT Success example,
For example: a sales increase of 50%
From 40 units to 60 units:
Option 1: operating income will increase by 2.67% x 50% = 133,5%
from 1,200 to 2,800 (=1,200 + 1,200 x 133,5%)
degree of operating leverage become
1.71 = (60 x $80):2,800
Option 2: operating income will increase by 1.67% x 50% = 83%
from 1,200 to 2,200 (=1,200 + 1,200 x 83%)
degree of operating leverage become
1.36 = (60 x $50):2,200
Option 3: operating income will increase by 1.00% x 50% = 50%
from 1,200 to 1,800 (=1,200 + 1,200 x 50%)
degree of operating leverage become
1.00 = (60 x $30):1,800
 Decision Model

It is a simple approach to recognizing

under risk, which is the possibility that an actual
amount will deviate from an expected amount.
CVP Analysis can be used to make strategic decision by
estimating the expected probability of these choices.
Sensitivity Analysis gives a good feel for
a decision’s risk.
 Decision Model and Under Risk

Role of a Decision
Under risk is the possibility that an actual amount will
deviate from an expected amount. In the face of under
risk conditions, by estimating the expected probability
of these choices, managers rely on decision model
to make the right choices.

Oleh: Dr. Judith Felicia Pattiwael Irawan

 Decision Model and Under Risk
Steps in decision model
The formal model of taking a decision:
Step1. Identify a choice criterion
Step2. Identify the set of alternative actions that can be taken
Step3. Identify the set of events that can occur.

An event is a possible relevant occurrence.

Step4. Assign a probability to each event that can occur.
A probability is the likelihood or chance that an event will occur.
A probability distribution describes the likelihood
Step5. Identify the set of possible outcomes.
 For Example: Emma Jones
Emma Jones is young entrepreneur who recently used GMAT Success,
a test-prep book and software package for the business school admission
test. Emma loved the book and program so much that after graduating
she signed a contract with GMAT Success’s publisher to sell
the learning materials.
She recently sold them at a college fair in Boston and is now thinking of
selling them at college fair in Chicago. Emma can purchase each
package (book and software) from the publisher and receiving a full
$120 refund per package. She will sell at price $200 per package and
must pay $2,000 to rent a booth at the fair. She will incur no
other costs.
Oleh: Dr. Judith Felicia Pattiwael Irawan
 For Example: Emma Jones
Decision Model and Under Risks
For GMAT Success
Emma might forecast sales at 40 units. Suppose that Emma, on the basis of
past experience, assesses 60% a chance (pessimistic condition) that she will sell
30 units and 40% (optimistic condition) she will sell 60 units.
Under 3 alternatives:
A1: $2,000 fixed fee
A2: $800 fixed fee plus 15% of GMAT Success Revenues
A3: 25% of GMAT Success revenues with no fixed fee
Which alternative should Emma choose?.

Oleh: Dr. Judith Felicia Pattiwael Irawan

 Model of Taking a Decision for Emma:

Step1. Identify a choice criterion/target

Emma’s choice criterion is to maximize expected operating income
at the Chicago college fair.

Step2. Identify the set of alternative actions that can be taken

Emma’s three possible actions:
a1. = Pay $2,000 fixed fee
a2. = Pay $800 fixed fee plus 15% of GMAT Success Revenues
a3. = Pay 25% of GMAT Success revenues with no fixed fee

Oleh: Dr. Judith Felicia Pattiwael Irawan

 Model of Taking a Decision for Emma (continue):
Step3. Identify the set of event that can occur.
An event is a possible relevant occurrence.
Emma estimates that sales will be either 30 or 60 units:
x1 = 30 units; x2 = 60 units

Steps4. Assign a probability to each event that can occur.

A probability is the likelihood or chance that an event will occur.
A probability distribution describes the likelihood
Suppose that Emma, on the basis of past experience, assesses
a 60% chance that she will sell 30 units and 40% that she will sell 60
units: P(x1 = 30 units) = 0,60; P(x2 = 60 units) = 0,40
Oleh: Dr. Judith Felicia Pattiwael Irawan
 Model of Taking a Decision for Emma (continue):

Step5. Identify the set of possible outcomes

The outcome are the six possible operating incomes displayed
in the decision table:

Oleh: Dr. Judith Felicia Pattiwael Irawan

 Decision Model and Under Risk Selling price = $200
For GMAT Success Package costs = $120
Action Variable Fixed Operating Income
The Chicago fair offer Emma three rental Costs Fee
alternatives: P(unit Sold = P(unit Sold =
(%) ($)
30 units) = 60 units) = 0,4
0,6
Pay $2,000 fixed fee 0 2,000 80Q – 2000= 80Q – 2000
$400(1) $2,800(2)
Pay $800 fixed fee, 30 Q 800 50Q – 800= 50Q-800 =
plus 15% of revenues $700(3) $2,200(4)
Pay 25% of revenues, 50 Q 0 30Q= 30Q=
with no fixed fee $900(5) $1,800(6)
(1) Operating income = [($200 - $120) (30)] - $0 - $2,000 = $ 400
(2) Operating income = [($200 - $120) (60)] - $0 - $2,000 = $2,800
(3) Operating income = {[($200 - $120)-(15% x $200)] (30)} - $800 = $ 700
(4) Operating income = {[($200 - $120)-(15% x $200)] (60)} - $800 = $2,200
(5) Operating income = {[($200 - $120)-(25% x $200)] (30)} - $0 = $ 900
(6) Operating income = {[($200 - $120)-(25% x $200)] (60)} - $0 = $1,800
Expected Value
Probability Operating
Income
(1) Operating income = ($200 - $120) (30) - $2,000 = 0,6 $ 400
(2) Operating income = ($200 - $120) (60) - $2,000 =
0,4 $2,800
(3) Operating income = ($200 - $120)-(15% x $200)) (30) - $800 = 0,6 $ 700
(4) Operating income = ($200 - $120)-(15%x$200)) (60) - $800 =
0,4 $2,200
(5) Operating income = ($200 - $120)-(25% x $200)) (30) = 0,6 $ 900
(6) Operating income = ($200 - $120)-(25%x$200)) (60) =
0,4 $1,800

Pay $2,000 fixed fee E(a1) = (0,6 x $400) + (0,4 x 2,800) = $1,360
Pay $800 fixed fee, plus 15% of revenues E(a2) = (0,6 x $700) + (0,4 x 2,200) = $1,300
Pay 25% of revenues, with no fixed fee E(a3) = (0,6 x $900) + (0,4 x 1,800) = $1,260
Expected Value
Pay $2,000 fixed fee E(a1) = (0,6 x $400) + (0,4 x 2,800) = $1,360
Pay $800 fixed fee, plus 15% of revenues E(a2) = (0,6 x $700) + (0,4 x 2,200) = $1,300
Pay 25% of revenues, with no fixed fee E(a3) = (0,6 x $900) + (0,4 x 1,800) = $1,260

To maximize expected operating income, Emma should select action a1 :

Pay the Chicago fair organizers a $2,000 fixed fee.
The interpretation of selecting that action:
• If Emma attends 10 fairs,
• She will expect to earn $400 operating income 60% of the time (at 6 fairs)
and $2,800 operating income 40% of time (at 4 fairs),
• for a total operating income of $13,600 (= $40x60% + $2,800x4%).
• The expected value of $1,360 is the operating income per fair that Emma will
earn when averaged across all fairs (= $13,600 : 10).
 Effort is what
makes you smart
or talented.”
Carol Dweck

Steps to Success
1. Effort
2. More Effect
3. Extra Dose of
Effort
Oleh: Dr. Judith Felicia Pattiwael Irawan 4. Success!