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Volume Profit Analysis

The document discusses cost-volume-profit analysis theories including contribution margin, break-even point, and margin of safety. It provides examples of calculating these metrics for different sales volumes and cost structures. The document also examines how changes in variables such as selling price, costs, sales levels, and fixed expenses impact contribution margin, break-even point, and net operating income.

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Jean Malti
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46 views24 pages

Volume Profit Analysis

The document discusses cost-volume-profit analysis theories including contribution margin, break-even point, and margin of safety. It provides examples of calculating these metrics for different sales volumes and cost structures. The document also examines how changes in variables such as selling price, costs, sales levels, and fixed expenses impact contribution margin, break-even point, and net operating income.

Uploaded by

Jean Malti
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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COST VOLUME PROFIT ANALYSIS

MICHELLE VALERIE UY 21 SEPT 2019


THEORIES

• Contribution Margin - the amount remaining from sales revenue after variable expenses
have been deducted. It is the amount used to cover fixed expenses to arrive at income
• Contribution Margin Ratio - contribution margin as a percentage of sales.
• Variable Expense Ratio - the ratio of variable expenses to sales.
• CVP Analysis/ Target Profit Analysis - estimates what sales volume is needed to achieve a
specific target profit
• Break-Even Point – level of sales at which profit is zero.
• Margin of Safety - the amount by which sales can drop before losses are incurred
How To Get Contribution Margin
PER UNIT TOTAL
SALES PRICE (Speakers) $250 $250
VARIABLE EXPENSES $150 $150
CONTRIBUTION MARGIN $100 $100
Per Unit Vs. Total
PER UNIT TOTAL
SALES (400 units) $250 $100,000
VARIABLE EXPENSES 150 60,000
CONTRIBUTION $100 40,000
MARGIN
FIXED EXPENSES 35,000
NET OPERATING $5,000
INCOME
Showing Net Loss
PER UNIT TOTAL
SALES (1 Speaker) $250 $250
VARIABLE EXPENSES 150 150
CONTRIBUTION MARGIN $100 100

FIXED EXPENSES 35,000


NET OPERATING LOSS $(34,900)
Break-Even
PER UNIT TOTAL
350 UNITS $250 $87,500
VARIABLE 150 52,500
EXPENSES
CONTRIBUTION $100 35,000
MARGIN
FIXED EXPENSES 35,000
NET OPERATING 0
INCOME
One Unit More Than Break-Even
PER UNIT TOTAL
SALES (351 Speakers) $250 $87,750
VARIABLE EXPENSES 150 52,650
CONTRIBUTION $100 35,100
MARGIN
FIXED EXPENSES 35,000
NET OPERATING $100
INCOME
25 Units More Than Break-Even
PER UNIT 400 UNITS 425 UNITS DIFFERENCE (25)
SALES PRICE $250 $100,000 $106,250 $6,250
VARIABLE 150 60,000 63,750 3,750
EXPENSES
CONTRIBUTION $100 40,000 42,500 2,500
MARGIN
FIXED EXPENSES 35,000 35,000 0
NET OPERATING $5,000 $7,500 $2,500
INCOME

INCREASED SALES 25 UNITS


CONTRIBUTION MARGIN x 100
NET OPERATING INCOME $2,500
Contribution Margin Ratio
PER UNIT TOTAL % OF SALES
A. SALES (400) $250 $100,000 100 A/A
B. VARIABLE EXPENSES 150 60,000 60 B/A
C. CONTRIBUTION $100 40,000 40 C/A
MARGIN
D. FIXED EXPENSES 35,000
E. NET OPERATING $5,000
INCOME

CM RATIO: UNIT CM / UNIT SALES PRICE = 100/250 = 40%


Increase In Fixed Cost
TOTAL MONTHLY SALES IS 100,000 ( 400 UNITS * 250)
INCREASE ADVERTISING BUDGET BY $10,000 WILL INCREASE SALES TO 520 UNITS/ MONTH

CURRENT INCREASE DIFFERENCE % OF


SALES ADVERTISING SALES

SALES $100,000 $130,000 $30,000 100


VARIABLE EXPENSES 60,000 78,000 * 18,000 60
CONTRIBUTION MARGIN 40,000 52,000 12,000 40
FIXED EXPENSES 35,000 45,000** 10,000
NET OPERATING INCOME $5,000 $7,000 $2,000

*520 x 150 = 78,000


** 35,000 + 10,000 (advertising expense) = 45,000
Increase in Variable Cost and Sales Volume
SALES IS 400 UNITS PER MONTH.
IMPROVED QUALITY WILL LOWER CM BY $10, NEW CM = $90.
SALES IS EXPECTED TO INCREASE TO 480 UNITS PER MONTH

CONTRIBUTION MARGIN TOTAL SALES

480 SPEAKERS $90 $43,200

400 SPEAKERS $100 40,000

INCREASE CM $3,200*

* FIXED COST DOES NOT CHANGE, INCREASED CM = INCREASED NET OPERATING INCOME
Change in Selling Price, Variable, and Fixed
Cost due to Sales Commission
FIXED EXPENSE WILL DECREASE BY $6,000 FROM $35,000 TO $29,000
VARIABLE EXPENSE PER UNIT WILL INCREASE BY $15 FROM $150 TO $165
CONTRIBUTION MARGIN WILL DECREASE FROM $100 TO $85

COMMISSIONS $39,100 (CM DECREASED 100 – 15)


460 UNITS * $85
CURRENT $40,000
400 UNITS* $100
DECREASE CM (900)
ADD CHANGE IN FIXED 6,000 FIXED EXPENSE DECREASED 35,000 T0 29,000
EXPENSE DUE TO SALARIES AVOIDED
NET OPERATING INCOME $5,100
How to Increase Monthly Profit for Bulk Sales
MONTHLY SALES 400 SPEAKERS / MONTH
BULK SALE 150 UNITS TO WHOLESALER
INCREASE PROFITS BY $3,000

VARIABLE COST PER UNIT $150

DESIRERED PROFIT PER UNIT $20


$3,000/ 150

PRICE TO WHOLESALER $170

FIXED EXPENSES ARE NOT AFFECTED BY BULK SALE


Target Profit Analysis
FIXED EXPENSES $35,000 / MONTH
ATTAIN TARGET PROFIT OF 40,000 PER MONTH

EQUATION METHOD: FORMULA METHOD:

PROFIT = UNIT CM * Q – FIXED EXPENSE UNIT SALES TO ATTAIN TARGET PROFIT =

$40,000 = $100* Q – $35,000 TARGET PROFIT + FIXED EXPENSE / UNIT CM

$100* Q = $40,000 + $35,000 / $100 $40,000 + $35,000 / $100

Q = 750 UNITS = 750 UNITS


Break-Even Equation in Units
FIXED EXPENSE $35,000 / MONTH
SET TARGET PROFIT TO ZERO

UNIT SALES TO BREAK EVEN = (0 + FIXED EXPENSE) / UNIT CM

UNIT SALES TO BREAK EVEN = FIXED EXPENSE /UNIT CM

= $35,000/ $100

= 350 UNITS
Break-Even in Sales (DOLLARS)
FIXED EXPENSE $35,000/ MONTH
CM RATIO: UNIT CM / UNIT SALES PRICE
= $100/$250 = 40%

DOLLAR SALES TO BREAK EVEN= FIXED EXPENSE / CM RATIO

= $35,000 / .40

= $87,500
CVP Graph/ Break-Even Chart
CVP Graph / Break Even Chart
1. DRAW A LINE PARALLEL TO THE VOLUME AXIS FOR FIXED
EXPENSES: $35,000

2. PLOT TOTAL EXPENSES ( FIXED AND VARIABLE)


= $35,000 + (600 UNITS * $150) = $90,000
= TOTAL EXPENSE = 125,000

3. PLOT TOTAL SALES DOLLARS (VOLUME * SALES PRICE)


= 600 UNITS * $250 = $150,000
Margin of Safety
MARGIN OF SAFETY IN DOLLARS = TOTAL SALES (BUDGETED OR ACTUAL) – BREAK EVEN SALES

MARGIN OF SAFETY PERCENTAGE = MARGIN OF SAFETY IN DOLLARS / TOTAL SALES


(BUDGETED OR ACTUAL)

SALES (400 UNITS) (A) $100,000


BREAK EVEN SALES (350 UNITS) 87,500

MARGIN OF SAFETY DOLLARS (B) $12,500


MARGIN OF SAFETY PERCENTAGE (B/A) 12.5%
Degree of Operating Leverage
OPERATING LEVERAGE: MEASURES SENSITIVITY OF NET INCOME TO CHANGE IN SALES.
SMALL PERCENTAGE IN SALES CAN PRODUCE A HIGH PERCENTAGE IN NET OPERATING
INCOME.

DEGREE OF OPERATING LEVERAGE = CM/ NET OPERATING INCOME

SAMPLE 1 SAMPLE 2
SAMPLE 1:
AMOUNT % AMOUNT % = 40,000 / 10,000
SALES $100,000 100 $100,000 100 =4
VARIABLE EXPENSES 60,000 60 30,000 30
SAMPLE 2:
CONTRIBUTION MARGIN 40,000 40 70,000 70 = 70,000/10,000
FIXED EXPENSES 30,000 60,000 =7
NET OPERATING MARGIN $10,000 $10,000
THANK YOU!
ACTIVITIES
TOTAL PER UNIT % OF SALES

Sales (20,000 UNITS) $1,200,000 $60 100

Less variable expenses 900,000 45 ?

CM 300,000 $15 ?

Less Fixed Expense 240,000

Net Income $60,000

1. Compute the company’s CM Ratio and variable expense ratio


2. Compute the company’s margin of safety in dollars and %.

3. Compute the company’s degree of operating leverage at the present level of sales.
4. Assume sales increased by 8%. What % do you expect net income to increase? (use
operasting leverage)
ANSWER SHEET

1. CM Ratio: CM $15/ Selling Price $60 = 25%


Variable Expense Ratio: Variable Expense $45/Selling Price 60 = 75%

2. Total Sales – Break Even Sales = Margin of Safety in Dollars


$1,200,000 - $960,000 = $240,000
Margin of Safety in dollars $240,000/Total Sales $1,200,000 = 20%

3. CM $300,000/Net Income $60,000 = 5 (Degree of Operating Leverage)


4. Expected Increase in Sales……………8%
Degree of Operating Leverage……………..X 5
Expected Increase in Net Income………….40%

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