5/3/22

Welcome to ACC10007
Financial Information for Decision Making

Session 10 – Video 1
Cost-Volume-Profit (CVP) Analysis

Presented by:
Dr John Webster and Alan J Serry

Acknowledgement of Country
We respectfully acknowledge the Wurundjeri People of the Kulin Nation, who
are the Traditional Owners of the land on which Swinburne’s Australian
campuses are located in Melbourne’s east and outer-east, and pay our
respect to their Elders past, present and emerging.

We are honoured to recognise our connection to Wurundjeri Country,

history, culture, and spirituality through these locations, and strive to ensure
that we operate in a manner that respects and honours the Elders and
Ancestors of these lands.

We also respectfully acknowledge Swinburne’s Aboriginal and Torres Strait

Islander staff, students, alumni, partners and visitors.

We also acknowledge and respect the Traditional Owners of lands across

Australia, their Elders, Ancestors, cultures, and heritage, and recognise the
continuing sovereignties of all Aboriginal and Torres Strait Islander Nations.

1
 5/3/22

Learning Objectives
Video 1
1. Introduction to Cost-Volume-Profit analysis

2. Define fixed, variable and mixed costs

3. Understand Contribution Margin

Video 2
4. Prepare a break-even analysis

5. Prepare a target profit analysis

Video 3
6. Assess relevant information for decision making
7. Analyse an outsourcing decision

8. Analyse a special order decision.

1. Introduction to cost–volume–profit analysis

• Examining cost behaviour enables us to consider:

– the way in which costs change

– the main factors that influence those changes.

• An understanding of these is important for basic cost–

volume–profit analysis:

– investigate the change in profits in response to

changes in sales volumes, costs and prices.

2
 5/3/22

1. Introduction to cost–volume–profit analysis

• Cost–volume–profit (CVP) analysis is concerned with the

change in profits in response to changes in sales volumes,
costs and prices.

• Helps answer the following questions:

• How many units need to be sold, or services performed,
to break even (for example, earn zero profit)?
• How many units need to be sold, or services performed,
to achieve a particular level of profit?
• What is the impact on profit of a change in costs?
• What is the impact on profit of a change in the mix
between fixed and variable costs?
5

2. Define Fixed, Variable and Mixed Costs

• Costs can be classified as fixed, variable or mixed.

• An understanding of these is important for basic cost–
volume–profit analysis
Fixed costs
A cost that remains constant despite changes in the volume of activity

Variable costs
A cost that varies in proportion to changes in the volume of activity

Mixed costs
A cost that has both fixed and variable elements

3
 5/3/22

2. Define Fixed, Variable and Mixed Costs

Fixed costs
A cost that remains constant despite changes in the volume of activity

• Fixed costs remain the same in total irrespective of

the level of activity
• When we produce more units:
• Total $ of fixed costs does not change
• Fixed Costs per unit decreases

2. Define Fixed, Variable and Mixed Costs

Fixed costs
A cost that remains constant despite changes in the volume of activity

Relevant range:
• The range of activity over which a company expects to
operate during a year
• Will be different for every company based on its own
circumstances

Fixed costs are fixed only within the relevant range

If the activity level goes outside the relevant range, then the
expected behaviour of costs changes can no longer be
assumed to be fixed.

4
 5/3/22

2. Define Fixed, Variable and Mixed Costs

Variable costs
A cost that varies in proportion to changes in the volume of activity

• Variable costs change in total as the level of activity

changes
• When we produce more units:
• Total $ of variable costs increases
• Variable Costs per unit does not change

2. Define Fixed, Variable and Mixed Costs

Mixed costs
A cost that has both fixed and variable elements

Variable
Component

Fixed
Component

Total mixed costs

10

5
 5/3/22

2. Define Fixed, Variable and Mixed Costs

Serry, Webster and Co. wants to estimate the cost for each guitar that it
makes.

Required: Classify each of the following costs as either fixed or variable with
respect to a guitar.

Fixed Variable
Wood

Factory Rental

Electricity

Supervisor’s Salary

11

3. Understand Contribution Margin

Contribution Margin (CM):

is the contribution made by the sale of a product/service

towards:
– Covering fixed costs (FC), and
– Making a profit

Calculated as the difference between selling price (SP)

and variable costs (VC)

12

6
 5/3/22

3. Understand Contribution Margin

Contribution Margin (CM) is calculated as the difference

between selling price (SP) and variable costs (VC)

SP
- VC
= CM

This can be done on a per unit basis or in total

13

Financial versus Management Accounting

Financial Accounting Management Accounting

Sales Revenue $300,000 Sales Revenue $300,000

Less Less
Cost of Goods Sold $180,000 Variable Costs $110,000
= Gross Profit $120,000 = Contribution Margin $190,000

Less Less
Other Expenses $100,000 Fixed Costs $170,000
= Net Profit $20,000 = Net Profit $20,000

All the costs that contribute to COGS and to the other expenses category
in the Financial Accounting approach will need to be reclassified
as either fixed or variable under the Management Accounting approach.

14

7
 5/3/22

Learning Objectives
Video 1
1. Introduction to Cost-Volume-Profit analysis

2. Define fixed, variable and mixed costs

3. Understand Contribution Margin

Video 2
4. Prepare a break-even analysis

5. Prepare a target profit analysis

Video 3
6. Assess relevant information for decision making
7. Analyse an outsourcing decision

8. Analyse a special order decision.

15

Thank You

16

8
 5/3/22

Welcome to ACC10007
Financial Information for Decision Making

Session 10 – Video 2
Cost-Volume-Profit (CVP) Analysis

Presented by:
Dr John Webster and Alan J Serry

17

Learning Objectives
Video 1
1. Introduction to Cost-Volume-Profit analysis

2. Define fixed, variable and mixed costs

3. Understand Contribution Margin

Video 2
4. Prepare a break-even analysis

5. Prepare a target profit analysis

18

9
 5/3/22

4. Break-even Analysis

Break-even analysis relates to the calculation of the necessary levels of

activity required in order to break even in a given period.

Break-even occurs when total revenue and total costs are equal resulting
in zero profit:

Revenue = VC + FC

19

4. Break-even Analysis

Break-even analysis involves the contribution margin concept.

Contribution margin is calculated by deducting total variable costs from
total sales revenue.
Contribution margin per unit can be calculated by deducting variable
cost per unit from selling price per unit

CM/unit = SP/unit – VC/unit

𝐅𝐢𝐱𝐞𝐝 𝐜𝐨𝐬𝐭𝐬 ($)
= break-even (in units)
𝐂𝐨𝐧𝐭𝐫𝐢𝐛𝐮𝐭𝐢𝐨𝐧 𝐦𝐚𝐫𝐠𝐢𝐧 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭 ($)

break-even (in $’s) = break-even (in units) X selling price per unit

20

10
 5/3/22

4. Break-even Analysis Example

Break-even analysis for Alan’s Tennis Competition (ATC):
ie. The number of players that will make the competition break even.
Information Provided: $ sales for break-even

BE in units X SP/unit
30 players X $150/player
=$4,500

𝐅𝐢𝐱𝐞𝐝 𝐜𝐨𝐬𝐭𝐬 ($)

= break-even (in units)
𝐂𝐨𝐧𝐭𝐫𝐢𝐛𝐮𝐭𝐢𝐨𝐧 𝐦𝐚𝐫𝐠𝐢𝐧 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭 ($)

21

5. Target Profit Analysis

To earn a target or desired profit:

(𝐅𝐢𝐱𝐞𝐝 𝐜𝐨𝐬𝐭𝐬 $ + 𝐓𝐚𝐫𝐠𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭 $ )

= Number of units to earn target profit
𝐂𝐨𝐧𝐭𝐫𝐢𝐛𝐮𝐭𝐢𝐨𝐧 𝐦𝐚𝐫𝐠𝐢𝐧 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭 ($)

22

11
 5/3/22

5. Target Profit Analysis Example

Target analysis for Alan’s Tennis Competition (ATC):
ie. The number of players that will make the desired profit of $600 $ sales for desired profit
.
No. of units to earn target
Information Provided: profit X SP/unit

40 players X $150/player
=$6,000

(𝐅𝐢𝐱𝐞𝐝 𝐜𝐨𝐬𝐭𝐬 $ + 𝐓𝐚𝐫𝐠𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭 ($)

= Number of units to earn target profit
𝐂𝐨𝐧𝐭𝐫𝐢𝐛𝐮𝐭𝐢𝐨𝐧 𝐦𝐚𝐫𝐠𝐢𝐧 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭 ($)

23

Contribution Margin Ratio

If there is insufficient data to calculate the number of units of

product to calculate break-even,

Then as an alternative, you can use the Contribution Margin Ratio.

It represents the percentage of sales revenue that contributes to
meeting fixed costs and making a profit

𝐅𝐢𝐱𝐞𝐝 𝐜𝐨𝐬𝐭𝐬 ($)

= break-even (in $’s)
𝐂𝐨𝐧𝐭𝐫𝐢𝐛𝐮𝐭𝐢𝐨𝐧 𝐦𝐚𝐫𝐠𝐢𝐧 𝐫𝐚𝐭𝐢𝐨

24

12
 5/3/22

Contribution Margin Ratio

Using the ATC example.

$𝟏𝟓𝟎 − $𝟗𝟎
CM ratio = = 0.40 or 40%
$𝟏𝟓𝟎

𝐅𝐢𝐱𝐞𝐝 𝐜𝐨𝐬𝐭𝐬 ($)

= break-even (in $’s)
𝐂𝐨𝐧𝐭𝐫𝐢𝐛𝐮𝐭𝐢𝐨𝐧 𝐦𝐚𝐫𝐠𝐢𝐧 𝐫𝐚𝐭𝐢𝐨

$𝟏𝟖𝟎𝟎 = $4500 in sales

𝟎. 𝟒𝟎

25

Assumptions of CVP

• The behaviour of costs can be neatly classified as fixed

or variable.

• Cost behaviour is linear.

• Fixed costs remain ‘fixed’ over the time period and/or

a given range of activity.

• Unit price and cost data remain constant over the

time period and relevant range.

26

13
 5/3/22

Learning Objectives
Video 1
1. Introduction to Cost-Volume-Profit analysis

2. Define fixed, variable and mixed costs

3. Understand Contribution Margin

Video 2
4. Prepare a break-even analysis

5. Prepare a target profit analysis

Video 3
6. Assess relevant information for decision making
7. Analyse an outsourcing decision

8. Analyse a special order decision.

27

Thank You

28

14
 5/3/22

Welcome to ACC10007
Financial Information for Decision Making

Session 10 – Video 3
Cost-Volume-Profit (CVP) Analysis

Presented by:
Dr John Webster and Alan J Serry

29

Learning Objectives
Video 1
1. Introduction to Cost-Volume-Profit analysis

2. Define fixed, variable and mixed costs

3. Understand Contribution Margin

Video 2
4. Prepare a break-even analysis

5. Prepare a target profit analysis

Video 3
6. Assess relevant information for decision making
7. Analyse an outsourcing decision

8. Analyse a special order decision.

30

15
 5/3/22

6. Assess relevant information for decision making

Business decisions usually involve the selection of one alternative over another.

To make sure decisions are based on the right information, the following must be
identified:

Relevant income and relevant costs:

relevant meaning those that differ among alternative courses of action.

31

6. Assess relevant information for decision making

To make sure decisions are based on the right information, the following relevant
information must be identified:

Incremental costs and incremental income:

ie. the additional income/costs resulting from an alternative course of action.

Opportunity cost:
The cost of forgoing benefits that would be available if the resources had been used in
the next best alternative.

Avoidable costs and unavoidable costs:

Avoidable costs are no longer incurred if the decision is taken.
Unavoidable costs will be incurred regardless of the decision.

32

16
 5/3/22

7. Analyse an Outsourcing Decision (make or buy)

Requires an entity to choose whether to:

• Continue producing a product component, or
• Purchase it from an external entity.

Examples:
Car companies outsourcing the manufacture of many component parts such as seat
belts, windscreens and airbags

Other services commonly outsourced include building maintenance, office cleaning

and security

The decision to outsource can be motivated by many factors such as:

• The need to reduce costs
• Free up capacity to pursue other ventures
• Focus on core activities

33

7. Analyse an Outsourcing Decision

Source: Peter Robinson, The Sydney Morning Herald, 29 June 2019

https://www.smh.com.au/business/companies/boeing-s-737-max-software-outsourced-to-12-80-an-hour-engineers-
20190629-p522h4.html

Source: David Booth, Driving, 10 July 2015

https://driving.ca/honda/auto-news/news/takata-air-bag-debacle-shows-the-dark-side-of-more-for-less

34

17
 5/3/22

7. Analyse an Outsourcing Decision

What else should be considered?

Qualitative factors include:

• Quality of outsourced component

• Reliability of supplier

• The financial stability of the company we have used to outsource

• Business practices of the company we have used to outsource

• i.e., ethical operations

35

Outsourcing (Make or Buy)

The management of Miller Ltd has asked for your assistance in deciding whether to continue manufacturing a
part or to buy it from an outside supplier. The part, called Beta B, is a component of Miller Ltd’s finished product.
Analysis of the accounting records and the production data revealed the following information for the year
ending June 2021:
• The production department produced 70 000 units of Beta B.

• The cost of materials per Beta B unit is $4.

• Six employees are assigned to the production department and each work full-time (1920 hours each per year)
producing Beta B. Each employee is paid $20 per hour.

• Additional manufacturing costs applicable to the production of Beta B are:

• All of the above costs will be eliminated if Beta B is purchased.

• The lowest price for Beta B from an outside supplier is $8 per unit. Delivery costs will be $0.80 per unit, and a
part-time dispatch employee at $17 000 per year will be required.

• Currently, Miller Ltd rents alternative storage space for 9 000 units of its finished product at
approximately $1.60 per unit. If Beta B is purchased, the rental of the alternative space will not be
required.
36

18
 5/3/22

Outsourcing (Make or Buy)

Required:
Should Miller Ltd make or buy the part? Show all calculations.
• The production department produced 70 000 units of Beta B. The cost of materials per Beta B unit
is $4.
70 000 units × $4 = $280 000

Costs Make Buy

Direct Materials $280 000

37

Outsourcing (Make or Buy)

Required:
Should Miller Ltd make or buy the part? Show all calculations.
• Six employees are assigned to the production department and each work full-time (1920
hours each per year) producing Beta B. Each employee is paid $20 per hour.
1920 hrs x $20 per hour x 6 employees = $230 400

Costs Make Buy

Direct Materials $280 000

Direct Labour $230 400

38

19
 5/3/22

Outsourcing (Make or Buy)

Required:
Should Miller Ltd make or buy the part? Show all calculations.
• Additional manufacturing costs applicable to the production of Beta B are:
All of the above costs will be
= $23 600 eliminated if Beta B is purchased

Costs Make Buy

Direct Materials $280 000

Direct Labour $230 400

Avoidable Manufacturing Costs $23 600

39

Outsourcing (Make or Buy)

Required:
Should Miller Ltd make or buy the part? Show all calculations.

• The lowest price for Beta B from an outside supplier is $8 per unit.

70 000 × $8 = $560,000

Costs Make Buy

Direct Materials $280 000

Direct Labour $230 400

Avoidable Manufacturing Costs $23 600

Purchase costs $560 000

40

20
 5/3/22

Outsourcing (Make or Buy)

Required:
Should Miller Ltd make or buy the part? Show all calculations.

• Delivery costs will be $0.80 per unit

70 000 × $0.80 = $56 000

Costs Make Buy

Direct Materials $280 000

Direct Labour $230 400

Avoidable Manufacturing Costs $23 600

Purchase costs $560 000

Delivery costs $56 000

41

Outsourcing (Make or Buy)

Required:
Should Miller Ltd make or buy the part? Show all calculations.

• A part-time dispatch employee at $17 000 per year will be required

Costs Make Buy

Direct Materials $280 000

Direct Labour $230 400

Avoidable Manufacturing Costs $23 600

Purchase costs $560 000

Delivery costs $56 000

Part-time dispatch employee $17 000

42

21
 5/3/22

Outsourcing (Make or Buy)

Required:
Should Miller Ltd make or buy the part? Show all calculations.
• Currently, Miller Ltd rents alternative storage space for 9 000 units of its finished
product at approximately $1.60 per unit. If Beta B is purchased, the rental of the
alternative space will not be required.
9 000 units × $1.60 = $14 400
Costs Make Buy

Direct Materials $280 000

Direct Labour $230 400

Avoidable Manufacturing Costs $23 600

Purchase costs $560 000

Delivery costs $56 000

Part-time dispatch employee $17 000

Savings in storage space ($14 400)

43

Outsourcing (Make or Buy)

Required:
Should Miller Ltd make or buy the part? Show all calculations.

Costs Make Buy

Direct Materials $280 000

Direct Labour $230 400

Avoidable Manufacturing Costs $23 600

Purchase costs $560 000

Delivery costs $56 000

Part-time dispatch employee $17 000

Savings in storage space ($14 400)

Costs $534 000 $618 600

44

22
 5/3/22

Outsourcing (Make or Buy)

Required:
Should Miller Ltd make or buy the part? Show all calculations.

Costs Make Buy

Direct Materials $280 000

Direct Labour $230 400

Avoidable Manufacturing Costs $23 600

Purchase costs $560 000

Delivery costs $56 000

Part-time dispatch employee $17 000

Savings in storage space ($14 400)

Costs $534 000 $618 600

Additional costs to outsource $84 600

Decision?
Continue to make

45

8. Analyse a Special Order Decision

Requires an entity to consider whether it would be willing to supply

goods or services at a reduced price or with special features, or a
combination of both.

Therefore, special orders differ to the ‘normal’ customer orders.

It’s important to identify the entity’s available capacity (idle capacity).

Available capacity (idle capacity) indicates the amount of capacity an

entity has available to increase output.

Example:
An entity can produce a maximum of 100,000 units
Currently producing 90,000 units
Therefore, available capacity = 10,000 units

46

23
 5/3/22

Gotrack Company produces compasses for cross-country skiing.

The production capacity is 45 000 compasses and the company is currently operating at 85 per cent capacity.

Variable manufacturing costs are $10 per unit.

Fixed manufacturing costs are $425 000.

The compasses are normally sold directly to Outdoor Adventures at $25 each.

Gotrack Company has an offer from On Top Company (a foreign wholesaler) to purchase an additional 5000
compasses at $13 per unit.

Required

a. Calculate the available production capacity.

b. Calculate the contribution margin per unit for both the current production of compasses and the special order
compasses.

c. Should the special order be accepted? Show calculations.

d. What is the opportunity cost if On Top Company required 10 000 compasses?

e. Would you recommend the special order if On Top Company required 10 000 compasses?

47

Gotrack Company produces compasses for cross-country skiing.

The production capacity is 45 000 compasses and the company is currently operating at 85 per cent
capacity.

Variable manufacturing costs are $10 per unit.

Fixed manufacturing costs are $425 000.

The compasses are normally sold directly to Outdoor Adventures at $25 each.

Gotrack Company has an offer from On Top Company (a foreign wholesaler) to purchase an additional
5000 compasses at $13 per unit.

Required
a. Calculate the available production capacity.

The company is currently operating at 85 per cent capacity.

15% capacity left

15% of 45 000 compasses = 6,750 compasses

48

24
 5/3/22

Gotrack Company produces compasses for cross-country skiing.

The production capacity is 45 000 compasses and the company is currently operating at 85 per cent capacity.

Variable manufacturing costs are $10 per unit.

Available production capacity
Fixed manufacturing costs are $425 000. 6,750 compasses

The compasses are normally sold directly to Outdoor Adventures at $25 each.

Gotrack Company has an offer from On Top Company (a foreign wholesaler) to purchase an additional 5000
compasses at $13 per unit.

Required

b. Calculate the contribution margin per unit for both the current production of compasses and the special order
compasses.

Contribution Margin Normal Special

Selling Price $25 $13

Less Variable Costs $10 $10

$15 $3

49

Gotrack Company produces compasses for cross-country skiing.

The production capacity is 45 000 compasses and the company is currently operating at 85 per cent capacity.

Variable manufacturing costs are $10 per unit.

Available production capacity
Fixed manufacturing costs are $425 000. 6,750 compasses

The compasses are normally sold directly to Outdoor Adventures at $25 each.

Gotrack Company has an offer from On Top Company (a foreign wholesaler) to purchase an additional 5000
compasses at $13 per unit.

Required
Contribution Margin is positive $3
c. Should the special order be accepted? Show calculations.
As we have available capacity
(do not have to give anything up)
Contribution Margin Normal Special
Therefore worth accepting the special order
Selling Price $25 $13
However we should consider, there is an
Less Variable Costs $10 $10 associated risk of
alienating existing customers
$15 $3 by selling at a lower than normal price

50

25
 5/3/22

Gotrack Company produces compasses for cross-country skiing.

The production capacity is 45 000 compasses and the company is currently operating at 85 per cent capacity.

Variable manufacturing costs are $10 per unit. Available production capacity
6,750 compasses
Fixed manufacturing costs are $425 000.
Normal production
The compasses are normally sold directly to Outdoor Adventures at $25 each. 45,000 – 6,750 = 38,250

Gotrack Company has an offer from On Top Company (a foreign wholesaler) to purchase an additional 5000
compasses at $13 per unit.

Required
The benefits given up when
d. What is the opportunity cost if On Top Company required 10 000 compasses? another alternative is chosen

Contribution Margin
If we were to make 10,000 compasses Normal Special
Given available production capacity is 6,750 compasses,
we would have to reduce normal production by 10,000 - 6,750 = 3,250 compasses $15 $3

Opportunity Cost of Special Order = Lost Ordinary Sales = 3,250 compasses x $15 CM/unit = $48,750

51

Gotrack Company produces compasses for cross-country skiing.

The production capacity is 45 000 compasses and the company is currently operating at 85 per cent capacity.

Variable manufacturing costs are $10 per unit. Available production capacity
6,750 compasses
Fixed manufacturing costs are $425 000.
Normal production
The compasses are normally sold directly to Outdoor Adventures at $25 each. 45,000 – 6,750 = 38,250

Gotrack Company has an offer from On Top Company (a foreign wholesaler) to purchase an additional 5000
compasses at $13 per unit.

Required Contribution Margin

Normal Special
e. Would you recommend the special order if On Top Company required 10 000 compasses? $15 $3

From d. we are giving up

Opportunity Cost of Special Order = Lost Ordinary Sales = 3,250 compasses x $15 CM/unit = $48,750

But Gaining Special Sales = 10,000 compasses x $3 CM/unit = $30,000

Note: = $18,750
Management may believe order has strategic benefit Decrease in
By gaining a new long term customer for future profits Therefore NO Profit

52

26
 5/3/22

Learning Objectives
Video 1
1. Introduction to Cost-Volume-Profit analysis

2. Define fixed, variable and mixed costs

3. Understand Contribution Margin

Video 2
4. Prepare a break-even analysis

5. Prepare a target profit analysis

Video 3
6. Assess relevant information for decision making
7. Analyse an outsourcing decision

8. Analyse a special order decision.

53

Thank You

54

27