Scribd
Upload
11 views3 pages

Chapter 10: Decision-Making - Cost-Volume-Profit (CVP) Analysis 1 Introduction To CVP Analysis

Chapter 10 discusses Cost-Volume-Profit (CVP) analysis, a tool that helps managers understand how changes in costs, sales volume, and prices impact profits. It outlines key components, assumptions, and the format of a CVP income statement, which separates fixed and variable costs to determine contribution margin and operating income. The chapter also includes formulas for calculating contribution margin per unit and contribution margin ratio, emphasizing their importance in decision-making and profitability assessment.

Uploaded by

Asmit Shrestha
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
11 views3 pages

Chapter 10: Decision-Making - Cost-Volume-Profit (CVP) Analysis 1 Introduction To CVP Analysis

Chapter 10 discusses Cost-Volume-Profit (CVP) analysis, a tool that helps managers understand how changes in costs, sales volume, and prices impact profits. It outlines key components, assumptions, and the format of a CVP income statement, which separates fixed and variable costs to determine contribution margin and operating income. The chapter also includes formulas for calculating contribution margin per unit and contribution margin ratio, emphasizing their importance in decision-making and profitability assessment.

Uploaded by

Asmit Shrestha
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

Chapter 10: Decision-Making - Cost-Volume-Profit (CVP) Analysis

1 Introduction to CVP Analysis


Definition: CVP analysis examines how changes in costs (fixed and variable), sales vol-
ume, and price affect a company’s profits. It’s a vital tool for profit planning and strategic
decision-making.
Components:
• Volume (quantity sold)

• Unit selling price

• Unit variable costs

• Total fixed costs

• Sales mix (proportion of different products sold)


Purpose: Helps managers make decisions like setting prices, choosing product mixes, or
evaluating cost changes.
Example: A coffee shop uses CVP to determine how many cups of coffee to sell to cover
rent and labor costs while earning a target profit.

2 Assumptions of CVP Analysis


• Costs and revenues are linear within the relevant range (e.g., no discounts or economies
of scale).

• Costs are classified as fixed (e.g., rent) or variable (e.g., coffee beans).

• Only activity level (sales volume) affects costs.

• All units produced are sold (no inventory buildup).

• Sales mix remains constant for multiple products.

3 CVP Income Statement


Purpose: An internal report separating fixed and variable costs to calculate contribution
margin and operating income.
Contribution Margin (CM): Sales revenue minus variable costs, showing funds available
to cover fixed costs and generate profit.
Format:

1
• Sales

• Less: Variable costs (product and selling)

• = Contribution Margin

• Less: Fixed costs (product and selling)

• = Operating Income
Example (Vargo Electronics):
• Selling price: $500/smartphone

• Variable costs: $300/unit (direct materials $185, labor $75, commissions $15, admin $25)

• Fixed costs: $200,000/month (manufacturing $40,000, sales salaries $10,000, CEO salary
$150,000)

• Units sold: 1,600


CVP Income Statement:

Description Amount
Sales $800,000
Variable costs $480,000
Contribution Margin $320,000
Fixed costs $200,000
Operating Income $120,000

• CM per Unit: $500 - $300 = $200

• CM Ratio: $200 ÷ $500 = 40% (40% of each sales dollar covers fixed costs/profit).

3.1 Formula Enhancements


3.1.1 Contribution Margin per Unit

• Formula: Selling Price per Unit - Variable Cost per Unit

• Meaning: Represents the profit per unit after covering variable costs, contributing to
fixed costs and profit.

• When Used: To assess per-unit profitability or calculate break-even in units.

• Improvement: Include semi-variable costs (e.g., utilities with a fixed base plus variable
usage) by estimating their variable portion. Use historical data to refine variable cost
estimates.

2
• Example: If a bakery sells cakes for $20 each with $12 variable costs (ingredients, pack-
aging), CM per unit = $20 - $12 = $8. If flour prices rise, update variable costs for accuracy.

3.1.2 Contribution Margin Ratio

• Formula: CM per Unit ÷ Selling Price per Unit OR Total CM ÷ Total Sales

• Meaning: Indicates the percentage of each sales dollar that contributes to covering fixed
costs and generating profit.

• When Used: To evaluate the impact of sales changes on profitability or calculate break-
even in dollars.

• Improvement: Adjust for product-specific CM ratios in multi-product firms to account


for sales mix variations. Use forecasting tools to predict changes in selling prices or costs.

• Example: For Vargo Electronics, CM ratio = $200 ÷ $500 = 40%. If selling multiple products
(e.g., smartphones and tablets), calculate weighted CM ratio based on sales mix.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy