CHAPTER 16

Cost-volume-profit (CVP)
analysis

CVP analysis is a decision – making tool that assists management to

determine effects that changes in costs, price, quantity and mix will have
on future profits
OUTCOMES
At the end of this chapter students should be able to:
• describe cost-volume-profit analysis
• calculate breakeven point
• use cost-volume-profit analysis to estimate profits
• calculate and evaluate the effect of changes in selling prices, volume
and costs.
CHAPTER OUTLINE
16.1 Introduction
16.2 Assumptions of CVP analysis
16.3 CVP according to the contribution margin approach
16.4 Using CVP analysis in decision making
16.5 Summary of formulae needed for CVP analysis
16.1 INTRODUCTION
Fixed costs
• Are costs that do not change in total with different production
levels

Variable costs
• Are costs that change in total with different production levels

Marginal costing layout

• Sales – variable costs = contribution – fixed costs =

profit
16.2 ASSUMPTIONS OF CVP
ANALYSIS
 CVP IS BASED ON:

 SELLING PRICE REMAINS CONSTANT

 ALL COSTS BE DIVIDED INTO FIXED

AND VARIABLE COMPONENTS

 FIXED COSTS REMAIN UNCHANGED

16.3 CVP ACCORDING TO
THE CONTRIBUTION
MARGIN APPROACH
Contribution margin per unit = Selling price – Variable cost per
unit

Contribution margin ratio = (Sales – Variable costs) ÷ Sales × 100

 CVP ACCORDING TO THE CONTRIBUTION MARGIN APPROACH

Calculation of breakeven point

Figure 16.1 - Illustration of breakeven point using a breakeven graph

 CVP ACCORDING TO THE CONTRIBUTION MARGIN APPROACH
Calculation of breakeven point

Breakeven quantity

Breakeven quantity = Fixed costs ÷ Contribution margin

per unit

Breakeven value

Breakeven value = Breakeven quantity × Selling price

OR
Breakeven value = Fixed costs ÷ Contribution margin ratio
 CVP ACCORDING TO THE CONTRIBUTION MARGIN APPROACH

Calculation of margin of safety

Margin of safety expressed as a value

= Total sales – Breakeven sales

or
= Profit ÷ Contribution margin ratio
 CVP ACCORDING TO THE CONTRIBUTION MARGIN APPROACH
Calculation of margin of safety

Margin of safety expressed in units

= Total sales (units) – Breakeven sales (units)

Margin of safety ratio (expressed as a percentage)

or
 CVP ACCORDING TO THE CONTRIBUTION MARGIN APPROACH

Sales required to achieve expected (target) profit or return

See ILLUSTRATIVE EXAMPLE page 295

16.4 USING CVP ANALYSIS IN
DECISION MAKING

Change in the selling price

See ILLUSTRATIVE EXAMPLE page 296

 USING CVP ANALYSIS IN DECISION MAKIN

Change in the variable cost

See ILLUSTRATIVE EXAMPLE page 297

 USING CVP ANALYSIS IN DECISION MAKIN

Change in the fixed cost

See ILLUSTRATIVE EXAMPLE page 298

16.5 SUMMARY OF
FORMULAE NEEDED
FOR CVP ANALYSIS

Breakeven point in units

or
Breakeven units = Breakeven rands ÷ Selling price
 SUMMARY OF FORMULAE NEEDED FOR CVP ANALYS

Breakeven point in rands

Contribution margin ratio

Breakeven point in rands

or

Breakeven rands = Breakeven units × Selling price

 SUMMARY OF FORMULAE NEEDED FOR CVP ANALYS

Sales necessary to make a desired profit

 SUMMARY OF FORMULAE NEEDED FOR CVP ANALYS

Margin of safety
Margin of safety as a percentage

Margin of safety in rands

= Budgeted sales – Breakeven sales

or
= Profit ÷ Contribution margin ratio
Margin of safety in units

= Budgeted sales in units – Breakeven sales in units