Professional Documents
Culture Documents
Chapter 8 CVP Analysis
Chapter 8 CVP Analysis
Chapter 8 CVP Analysis
Analysis
LEARNING OUTCOME
AT THE END OF THIS TOPIC, STUDENTS SHOULD BE ABLE TO:
EXPLAIN THE CONCEPT OF CVP.
CALCULATE BREAK EVEN POINT (BEP) AND ITS INTERPRETATIONS.
COMPUTE MARGIN OF SAFETY (MOS).
MAKE TARGET PROFIT ANALYSIS.
COST BEHAVIOURS
FIXED COST VARIABLE COST MIXED COST
Total Cost
Total Cost
Total Cost
Total Units Produced Total Units Produced Total Units Produced
Total fixed costs do not Total variable costs Mixed costs include both fixed and
change as volume change in proportion to variable cost components.
changes. volume changes. Mixed costs is greater than zero
Unit fixed costs Unit variable costs stay when volume is zero (fixed
decreases as volume the same as volume component) and increases steadily
increases. changes. in proportion to increases in
volume (variable component.
FIXED COST & RELEVANT
RANGE
The relevant range of activity pertains 90
to fixed cost as well as variable costs.
Dollars
feet. activity for a fixed cost
is the range of activity
Fixed costs would increase in a step 30 over which the graph of
fashion at a rate of $30,000 for each the cost is flat.
additional 1,000 square feet. 0
0 1,000 2,000 3,000
Rented Area (Square Feet)
COST-VOLUME-PROFIT
ANALYSIS
Cost-volume-profit analysis is the systematic examination of the relationships among selling
prices, sales and production volume, costs, expenses, and profits.
Contribution margin ratio is the percent of each sales dollar that remains after deducting the unit
variable cost
CONTRIBUTION MARGIN EXAMPLE
Formula Contribution
Margin Income Cost-Volume-
Method Profit Chart
Statement
BREAK-EVEN POINT: FORMULA METHOD
Syarikat Bakar fixed costs are estimated to be RM90,000. The unit contribution margin is calculated as
follows:
Unit selling price RM25
Unit variable cost 15
Unit contribution margin RM10
Fixed Costs
Break-Even Sales (units) = Unit Contribution Margin
RM90,000
Break-Even Sales (units) =
RM10
Fixed costs are estimated at RM200,000, and the desired profit is RM100,000. Unit contribution
margin is RM30.
RM200,000 + RM100,000
Unit selling price RM75 Sales (units) =
Unit variable cost 45 RM30
Unit contribution margin RM30
Sales (units) = 10,000 units
QUICK TEST
Syarikat Fika sells a product for RM140 per unit. The variable cost is RM60 per unit, and fixed costs
are RM240,000. Determine the:
(a) break-even point in sales units, and
(b) break-even point in sales units if the company desires a target profit of RM50,000.
BREAK-EVEN POINT: COST-VOLUME-PROFIT
CHART
MARGIN OF SAFETY
Margin of safety is the amount that sales can decline before the company incurs a loss. Margin of
safety is expressed in dollars, a percent of expected sales or units.
Margin of safety is the difference between the current sales revenue and the sales revenue at the
break-even point.
Sales – Sales at Break-Even Point
Margin of Safety =
Sales
If sales are RM250,000, the unit selling price is RM25, and the sales at the break-even point are
RM200,000, the margin of safety is 20%, computed as follows:
RM250,000 – RM200,000
Margin of Safety = The margin of safety of 20% is equivalent to
RM250,000
RM50,000 in sales (RM250,000 x 20%). In units,
Margin of Safety = 20% the margin of safety is 2,000 units
(RM50,000/RM25)
QUICK TEST
Syarikat Rariq has sales of RM400,000, and the break-even point in sales RM is RM300,000.
Determine the company’s margin of safety.
DEGREE OF OPERATING
LEVERAGE
The degree of operating leverage is a measure of the effects of change in the level of sales on
income.
The degree of operating leverage formula:
Contribution Margin
Operating Leverage =
Income from Operations
DEGREE OF OPERATING
LEVERAGE
Syarikat Salam Syarikat
Sinar
Sales RM400,000 RM400,000
Variable costs 300,000 300,000
Contribution margin RM100,000 RM100,000
Fixed costs 80,000 50,000
Income from operations RM 20,000 RM 50,000
Operating leverage ? ?
Both companies have the same contribution
margin.
RM100,000 RM100,000
Syarikat Salam = Syarikat Sinar =
RM20,000 RM50,000
=5 =2
QUICK TEST
Syarikat Tariq reports the following data.
Sales RM750,000
Variable costs RM500,000
Fixed costs RM187,500