16 -1

Cost-Volume
CostVolume--Profit
Analysis (BEP)

16 -2

Objectives
1. Determine the
number
of units
After
studying
this that must be
sold to breakchapter,
even oryou
earnshould
a target profit.
2. Calculate the amount
of to:
revenue required to
be able
break even or to earn a targeted profit.
3. Apply cost-volume-profit analysis in a
multiple-product setting.
4. Prepare a profit-volume graph and a costvolume-profit graph, and explain the meaning
of each.

16 -3

Using Operating Income in CVP Analysis

Narrative Equation

Sales revenue
Variable expenses
Fixed expenses
= Operating income

16 -4

Using Operating Income in CVP Analysis

Sales (1,000 units @ $400)
Less: Variable expenses
Contribution margin
Less: Fixed expenses
Operating income

$400,000
325,000
$ 75,000
45,000
$ 30,000

16 -5

Using Operating Income in CVP Analysis

Break Even in Units
0 = ($400 x Units) ($325 x Units) $45,000

$400,000
1,000

$325,000
1,000

16 -6

Using Operating Income in CVP Analysis

Break Even in Units
0 = ($400 x Units) ($325 x Units) $45,000
0 = ($75 x Units) $45,000
$75 x Units = $45,000
Units = 600

Proof
Sales (600 units)
Less: Variable exp.
Contribution margin
Less: Fixed expenses
Operating income

$240,000
195,000
$ 45,000
45,000
$
0

16 -7

BEP

Unit

VC/Unit
Price
FC
FC

50
100
150
200
250
300
350
400
450
500
550
600
650
700
750
800
850
900

325
400
45000
VC

45,000
45,000
45,000
45,000
45,000
45,000
45,000
45,000
45,000
45,000
45,000
45,000
45,000
45,000
45,000
45,000
45,000
45,000

TC
16,250
32,500
48,750
65,000
81,250
97,500
113,750
130,000
146,250
162,500
178,750
195,000
211,250
227,500
243,750
260,000
276,250
292,500

61,250
77,500
93,750
110,000
126,250
142,500
158,750
175,000
191,250
207,500
223,750
240,000
256,250
272,500
288,750
305,000
321,250
337,500

Sales
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
220,000
240,000
260,000
280,000
300,000
320,000
340,000
360,000

Profit
(Loss)
(41,250)
(37,500)
(33,750)
(30,000)
(26,250)
(22,500)
(18,750)
(15,000)
(11,250)
(7,500)
(3,750)
3,750
7,500
11,250
15,000
18,750
22,500

16 -8

Achieving a Targeted Profit

Desired Operating Income of $60,000
$60,000 = ($400 x Units) ($325 x Units) $45,000
$105,000 = $75 x Units
Units = 1,400
Proof
Sales (1,400 units)
Less: Variable exp.
Contribution margin
Less: Fixed expenses
Operating income

$560,000
455,000
$105,000
45,000
$ 60,000

16 -9

Targeted Income as a Percent of Sales Revenue

Desired Operating Income of
15% of Sales Revenue
0.15($400)(Units) = ($400 x Units) ($325 x Units) $45,000

$60 x Units = ($400 x Units) $325 x Units) $45,000

$60 x Units = ($75 x Units) $45,000
$15 x Units = $45,000
Units = 3,000

16 -10

Break--Even Point in Sales Dollars

Break
First, the contribution margin
ratio must be calculated.
Sales
Less: Variable
expenses
Contribution
margin
Less: Fixed exp.
Operating income

$400,000 100.00%
325,000

81.25%

$ 75,000 18.75%
45,000
$ 30,000

16 -11

Break--Even Point in Sales Dollars

Break
Given a contribution margin ratio of 18.75%, how
much sales revenue is required to break even?
Operating income = Sales Variable costs Fixed costs
$0 = Sales (Variable costs ratio x Sales)
$45,000
$0 = Sales (1 0.8125) $45,000
Sales (0.1875) = $45,000
Sales = $240,000

16 -12

Profit Targets and Sales Revenue

How much sales revenue must a firm generate to
earn a before-tax profit of $60,000. Recall that
fixed costs total $45,000 and the contribution
margin ratio is .1875.
Sales = ($45,000 + $60,000)/0.1875
= $105,000/0.1875
= $560,000

16 -13

Multiple--Product Analysis
Multiple
Sales
Less: Variable expenses
Contribution margin
Less: Direct fixed expenses
Product margin
Less: Common fixed expenses
Operating income

Mulching
Mower
$480,000
390,000
$ 90,000
30,000
$ 60,000

Riding
Mower
Total
$640,000 $1,120,000
480,000
870,000
$160,000 $ 250,000
40,000
70,000
$120,000 $ 180,000
26,250
$ 153,750

16 -14

Income Statement: B/E Solution

Mulching
Mower
Sales
Less: Variable expenses
Contribution margin
Less: Direct fixed expenses
Segment margin
Less: Common fixed expenses
Operating income

$184,800
150,150
$ 34,650
30,000
$ 4,650

Riding
Mower
$246,400
184,800
$ 61,600
40,000
$ 21,600

Total
$431,200
334,950
$ 96,250
70,000
$ 26,250
26,250
$
0

16 -15

The profit-volume graph portrays

the relationship between profits
and sales volume.

16 -16

Example
The Tyson Company produces a single product
with the following cost and price data:
Total fixed costs
Variable costs per unit
Selling price per unit

$100
5
10

Profit-Volume Graph
(40, $100)

Profit $100
or Loss
80

I = $5X - $100

60
40
20

Break-Even Point
(20, $0)

0 |
|
|
|
|
|
| |
|
|
5 10 15 20 25 30 35 40 45 50
- 20
Units Sold
- 40 Loss
-60
-80
-100 (0, -$100)

16 -17

16 -18

The cost-volume-profit graph

depicts the relationship among
costs, volume, and profits.

16 -19

Cost-Volume-Profit Graph
Revenue
$500 -450 -400 -350 -300 -250 -200 -150 -100 -Loss
50 -|
0 -- |
5 10

Total Revenue

Total Cost

Variable Expenses
($5 per unit)

Break-Even Point
(20, $200)

Fixed Expenses ($100)

|

15

20

25

30

35 40

45 50 55
Units Sold

60

16 -20

Assumptions of CC-V-P Analysis

1. The analysis assumes a linear revenue function and a
linear cost function.
2. The analysis assumes that price, total fixed costs, and
unit variable costs can be accurately identified and
remain constant over the relevant range.
3. The analysis assumes that what is produced is sold.
4. For multiple-product analysis, the sales mix is assumed
to be known.
5. The selling price and costs are assumed to be known
with certainty.

16 -21

Relevant Range
$

Total Revenue

Total Cost

Units
Relevant Range

Alternative 1: If advertising expenditures increase by 16 -22

$8,000, sales will increase from 1,600 units to 1,725 units.

Units sold
Unit contribution margin
Total contribution margin
Less: Fixed expenses
Profit

BEFORE THE
INCREASED
ADVERTISING

WITH THE
INCREASED
ADVERTISING

1,600
x
$75
$120,000
45,000
$ 75,000

1,725
x
$75
$129,375
53,000
$ 76,375

DIFFERENCE IN PROFIT

Change in sales volume

Unit contribution margin
Change in contribution margin
Less: Change in fixed expenses
Increase in profits

125
x $75
$9,375
8,000
$1,375

Alternative 2: A price decrease from $400 to $375 per 16 -23

lawn mower will increase sales from 1,600 units to 1,900
units.

Units sold
Unit contribution margin
Total contribution margin
Less: Fixed expenses
Profit

BEFORE THE
PROPOSED
CHANGES

WITH THE
PROPOSED
CHANGES

1,600
x
$75
$120,000
45,000
$ 75,000

1,900
x $50
$95,000
45,000
$50,000

DIFFERENCE IN PROFIT

Change in contribution margin

Less: Change in fixed expenses
Decrease in profits

$ -25,000
-------$ -25,000

Alternative 3: Decreasing price to $375and increasing 16 -24

advertising expenditures by $8,000 will increase sales from
1,600 units to 2,600 units.

Units sold
Unit contribution margin
Total contribution margin
Less: Fixed expenses
Profit

BEFORE THE
PROPOSED
CHANGES

WITH THE
PROPOSED
CHANGES

1,600
x
$75
$120,000
45,000
$ 75,000

2,600
x
$50
$130,000
53,000
$ 77,000

DIFFERENCE IN PROFIT

Change in contribution margin

Less: Change in fixed expenses
Increase in profit

$10,000
8,000
$ 2,000

16 -25

Margin of Safety
Assume that a company has the following projected
income statement:
Sales
Less: Variable expenses
Contribution margin
Less: Fixed expenses
Income before taxes
Break-even point in dollars (R):

$100,000
60,000
$ 40,000
30,000
$ 10,000

R = $30,000 .4 = $75,000
Safety margin = $100,000 - $75,000 = $25,000

16 -26

The End