Portfolio Activity Unit 3

This week has focused on using several cost analysis tools to determine how well products
contribute to a company’s profitability. However, all of these tools are internally used and not
required to be published outside of an organization. Instead, external stakeholders rely on the
three key financial statements reviewed in Unit 1:

 Income Statement
 Balance Sheet
 Statement of Cash Flows)

If a company’s CVP analyses showed it was not operating at break-even, where on the
financial statements might one be able to see this impact (i.e., specific line items on the
statements)?
As portfolio activities are to be self-reflective, please make sure to connect the portfolio
assignment to:

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 Your personal experiences

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 Course readings and any external readings.

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 Discussion forum posts or other course objectives that tie into your reflection.

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 Walther and Skousen (2009) stated, “Cost Volume Profit (CVP) analysis is used to build an

understanding of the relationship between costs, business volume, and profitability” (p. 50).

CVP analysis focuses on the interplay of pricing, volume, variable and fixed costs, and

product mix. It drives decisions about what products to offer, how to price them, and how to

manage an organization’s cost structure. CVP is at the heart of techniques that are useful for

calculating the break-even point, the volume levels necessary to achieve targeted income

levels, and similar computations. (Walther and Skousen, 2009).

In a previous paper, an extensive review was undertaken to show the relationship between

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the three (3) financial statements that external stakeholders rely on to gain insight into a

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company’s profitability. These financial statements are income statement or profit and loss

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account, balance sheet which shows the relationship between the asset and liability, and the
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cash flow statement which details the inflow and outflow of cash.

This paper shall review internal techniques management utilize to monitor the performance of
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products and services offered to customers as it relates to costing.

Cost Volume Profit – CVP

to grow or scale a business operation is called cost-volume-profit analysis (Walther &

Skousen, 2009). The analysis of CVP is used to build an understanding of the relationship
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between costs, business volume, and profitability (Walther & Skousen, 2009).
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According to Heisinger & Hoyle (n.d.) the key techniques used in computing cost-volume-

profits are break-even point, contribution margin, and volume levels necessary to achieve

targeted income levels. We shall review each below;

 Break-even point - According to Heisinger & Hoyle (n.d.) the break-even point in

units is the number of units that must be sold to achieve zero profit. Break-even

results when:

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 Sales = Total variable costs + Total fixed cost

 Contribution Margin (CM) - is the amount available to a company from each sale,

after deducting all variable costs associated with the number of goods sold (Walther &

Skousen, 2009). To compute the contribution margin:

CM per unit = Selling Price – Variable cost per unit sold

 Contribution Margin Ratio - often called contribution margin percent is the

contribution margin as a percentage of sales. It measures the amount each sales

dollar contributes to (1) covering fixed costs and (2) increasing profit (Heisinger &

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Hoyle, n.d.). To compute the contribution margin ratio;

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CM ratio = CM per unit divided by the selling price per unit

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 Target Income in Units - simply means that a company would like to know how many
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units of product must be sold to achieve a certain profit (Heisinger & Hoyle, n.d.).

Target Income results when:

Sales = Total Variable Costs + Total Fixed Costs + Target Income

CVP in Financial Statement

on the internal income statement of a company showing the effects of changes in costs and
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volume on the profit of a business. Invariably, same information can be obtained in a

financial statement compiled in line with the Generally Accepted Accounting Principles
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(GAAP) or the more recent International Financial Reporting Standards (IFRS).

During my employment at the National Commercial Bank, I recall that we had to develop a

strategy to reduce the cost to income ratio of the bank in FY 2008. Several initiatives were

implemented including cost savings and centralization of diesel purchase. I was on a team of

persons responsible for drafting and implementing the centralization of gasoline procurement

which resulted in the reduction of gasoline cost by about 15% and the elimination of losses

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 due to pilferages and under-delivery of gasoline to about five (5) branch outlets in the first

phase. Incidentally, this and other initiatives resulted in a profit in FY 2008 of about a 58%

increase in profit compared to the previous year. The aforementioned is a classic example of

implementing high operating leverage because of the drive to reduce variable cost whilst

generating revenue with a high gross margin (Kenton, 2019).

Even though I only worked in a financial institution for a year, I usually gloss over financial

statements due to my inability to comprehend them. However, in 3 weeks of studying this

course, my knowledge of financial statements has significantly improved. I am able to better

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understand the use and relationship between the balance sheet, income statement, and

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statement of cash flow. As well as the the in-depth analysis of CVP, contribution margin,

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contribution margin ratio and break-even calculations.
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In conclusion, to see the performance of company’s CVP in their financial report the
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following items has to be reviewed closely on the income statement;

 The difference between the Revenue and Gross Profit will show the impact of variable
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cost.
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 The key ratios such as Gross margin, EBITDA margin and Operating margin hodl
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valuable insights.
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References:

Michael Brown (n.d.) Double Entry Bookkeeping. Retrieved from https://www.double-entry-

bookkeeping.com/costing/cvp-income-statement/

Kenton, W. (2019, June 25). Operating leverage definition. Investopedia. Retrieved from

https://www.investopedia.com/terms/o/operatingleverage.asp

Walther, L. M. & Skousen, C.J. (2009). Managerial and Cost Accounting. Bookboon.com

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 Chapter 8

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