1

Cost – Volume - Profit

Business
Decisions Using
Cost Behavior
Opening a Restaurant
Fixed Costs Variable Costs

• Don’t fluctuate each • Vary according to

month output
• Easy to budget for • Will vary each month
them
Examples
FIXED
• Depreciation of plant
machinery
• Depreciation of office furniture
• Rent
• Insurance
• Salary of plant manager
• Advertising (normally)
• Salary of accountant
• Sales rep salaries
VARIABLE
• Raw materials for product
• Labor to assemble product
• Sales commissions
• Shipping costs to deliver
product
• Packing materials to ship
product
• Electricity to run
manufacturing plant (has
some fixed aspects)
Fixed vs. Variable
• In Class Activity
 5

Cost Behavior
• Over a range of production and/or sales:

• Fixed costs remain constant as production/sales

increase/decrease (except for general price level
increases)

• Variable costs fluctuate in-line with changes in

production/sales
▫ If sales volume goes up by 10% then variable costs will
also increase by 10%
Cost Behavior in Total
•• Total
Totalvariable
variablecosts
costschange
changewhen
whenactivity
activitychanges.
changes.
There
Thereisisaadirect
directrelation
relationbetween
betweenthem.
them.
•• Total
Totalfixed
fixedcosts
costsremain
remainunchanged
unchangedwhen
whenactivity
activity
changes.
changes.No Norelation
relationbetween
betweenfixed
fixedcosts
costsand
andlevel
level
ofofactivity.
activity.

$ $

X X
Total Variable Costs Total Fixed Costs
Cost Behavior per Unit
•• Variable
Variablecost
costper
perunit
unitremains
remainsunchanged
unchangedwhenwhen
activity
activitychanges.
changes.
•• Fixed
Fixedcost
costper
perunit
unit decreases
decreaseswhenwhenactivity
activity
increases.
increases.Remember
Rememberthis thisisisaacalculation
calculationonly.
only.The
The
fixed
fixedcosts
costsare
arenot
notrelated
relatedto tothe
theactivity
activitylevel.
level.

$ $

X X
Variable Cost per unit Fixed Cost per unit
 8

Contribution Margin
Contribution
ContributionMargin
Margin==Sales
SalesRevenue–Variable
Revenue–VariableExpenses
Expenses
Contribution
ContributionMargin
Marginper
perUnit
Unit==Sales
SalesPrice
Priceper
perunit
unit––
Variable
VariableCost
Costper
perunit
unit

Contribution
Contributionmargin
margin“contributes”
“contributes”to
tocovering
coveringfixed
fixedcosts
costs

• To be profitable, a company needs to generate a

large enough contribution margin to cover all of
its fixed expenses.
Example
Voltar Company manufactures and sells a specialized
wireless telephone for high electromagnetic radiation
environments. In 2023 it sold 20,000 phones for total
Sales Revenue of $1,200,000. Its variable costs are
900,000 and fixed costs are $240,000. Calculate the
following:

• Contribution Margin
• Contribution Margin per Unit (CMU)
 10

Break-Even Analysis
• The break-even point is the sales volume that results in neither a
profit nor a loss. It is the point at which the total contribution
margin will equal the total fixed expenses at the break-even point.

Break-even in units = Total Fixed Costs

CMU

• How many phones does Voltar Company need to sell to break even?
 11

Break-even in Units
• For Voltar:
$240,000
$15 = 16,000 Phones to Break Even