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CVP Relationship

Variable costs change proportionally with changes in activity, while fixed costs do not change with activity. The relevant range is the level of activity where the cost relationships remain valid. Cost-volume-profit (CVP) analysis examines how costs and profits are affected by changes in activity or sales volume. The break-even point is where total sales revenue equals total costs, resulting in zero profit. Managers use CVP analysis to determine the sales volumes needed to meet target profit levels.

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Sarith Sagar
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72 views14 pages

CVP Relationship

Variable costs change proportionally with changes in activity, while fixed costs do not change with activity. The relevant range is the level of activity where the cost relationships remain valid. Cost-volume-profit (CVP) analysis examines how costs and profits are affected by changes in activity or sales volume. The break-even point is where total sales revenue equals total costs, resulting in zero profit. Managers use CVP analysis to determine the sales volumes needed to meet target profit levels.

Uploaded by

Sarith Sagar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Variable and Fixed Cost Behavior

A variable cost
changes in direct
proportion to changes
in the cost-driver level.
A fixed cost is
not immediately
affected by changes
in the cost-driver.
Think of variable
costs on a per-unit basis.
The per-unit variable
cost remains unchanged
regardless of changes in
the cost-driver.
Think of fixed costs
on a total-cost basis.
Total fixed costs remain
unchanged regardless of
changes in the cost-driver.
Relevant Range
The relevant range is the limit
of cost-driver activity level within which a
specific relationship between costs
and the cost driver is valid.
Even within the relevant range, a fixed
cost remains fixed only over a given
period of time Usually the budget period.
Fixed Costs and Relevant Range
20 40 60 80 100
$115,000
100,000
60,000
Total Cost-Driver Activity in Thousands
of Cases per Month
T
o
t
a
l

M
o
n
t
h
l
y

F
i
x
e
d

C
o
s
t
s

Relevant range
$115,000
100,000
60,000
20 40 60 80 100
CVP Scenario
Per Unit Percentage of Sales
Selling price $1.50 100%
Variable cost of each item 1.20 80
Selling price less variable cost $ .30 20%

Monthly fixed expenses:
Rent $3,000
Wages for replenishing and
servicing 13,500
Other fixed expenses 1,500
Total fixed expenses per month $ 18,000

Cost-volume-profit (CVP) analysis is the study of the effects of output
volume on revenue (sales), expenses (costs), and net income (net profit).
Break-Even Point
The break-even point is the level of sales at which
revenue equals expenses and net income is zero.
Sales
- Variable expenses
- Fixed expenses
Zero net income (break-even point)

Contribution Margin Method
$18,000 fixed costs $.30
= 60,000 units (break even)
Contribution margin
Per Unit
Selling price $1.50
Variable costs 1.20
Contribution margin $ .30
Contribution margin ratio
Per Unit %
Selling price 100
Variable costs .80
Contribution margin .20
Contribution Margin Method
$18,000 fixed costs
20% (contribution-margin percentage)
= $90,000 of sales to break even
60,000 units $1.50 = $90,000
in sales to break even
Equation Method
Sales variable expenses fixed expenses = net income
$1.50N $1.20N $18,000 = 0
$.30N = $18,000
N = $18,000 $.30
N = 60,000 Units
Let N = number of units
to be sold to break even.
Equation Method
S .80S $18,000 = 0
.20S = $18,000
S = $18,000 .20
S = $90,000
Let S = sales in dollars
needed to break even.
Shortcut formulas:
Break-even volume in units = fixed expenses
unit contribution margin

Break-even volume in sales = fixed expenses
contribution margin ratio
Cost-Volume-Profit Graph
18,000
30,000
90,000
120,000
138,000
$150,000
0
10 20 30 40 50 60 70 80 90 100
Units (thousands)
D
o
l
l
a
r
s

60,000
Total
Expenses
Sales
Net Income Area
Break-Even Point
60,000 units
or $90,000
Net Loss
Area
A
C
D
B
Fixed Expenses
Variable
Expenses
Net Income
Target Net Profit
Managers use CVP analysis
to determine the total sales,
in units and dollars, needed
To reach a target net profit.
Target sales
variable expenses
fixed expenses
target net income
$1,440 per month
is the minimum
acceptable net income.
Target sales volume in units =
(Fixed expenses + Target net income)
Contribution margin per unit
($18,000 + $1,440) $.30 = 64,800 units
Target Net Profit
Selling price $1.50
Variable costs 1.20
Contribution margin per unit $ .30
Target sales dollars = sales price X sales volume in units
Target sales dollars = $1.50 X 64,800 units = $97,200.
Sales volume in dollars = 18,000 + $1,440 = $97,200
.20
Target Net Profit
Target sales volume in dollars = Fixed expenses + target net income
contribution margin ratio
Contribution margin ratio
Per Unit %
Selling price 100
Variable costs .80
Contribution margin .20

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