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CVP Analysis
Understand how cost behavior and cost-volume-profit analysis are used by managers.
Cost-Profit-Volume Analysis
What is cost-volume-profit analysis?
It is the study of the effects of output volume on revenue (sales), expenses (costs), and net income (net profit).
Variable Costs
Fixed Costs
Mixed Costs
Scattergraph
High-Low Method
Example: Let total costs at 500 units of output be $150,000 and at 3,000 units of output be $400,000. Calculate variable and fixed costs, respectively.
High-Low Method
Solution: High Low Change Costs: $400,000 $150,000 $250,000 Units: 3,000 500 2,500 Calculate Variable Cost Per Unit: $250,000/2,500 = $100 Calculate Total Fixed Costs: $400,000 (3,000 x 100) = $100,000
High-Low Method
Regression Analysis
Relevant Range
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Cost-Volume-Profit Analysis
1. 2. 3. 4. 5. 6. The Profit Equation Breakeven Point Margin of Safety Contribution Margin Contribution Margin Ratio What-if Analysis
X = Quantity of units produced and sold SP = Selling price per unit VC = Variable cost per unit TFC = Total fixed cost
Break-Even Point
The break-even point is the level of sales at which revenue equals expenses and net income is zero.
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Break-Even Point
Break-Even Point
TFC/CM(per unit) = Break-Even (units)
X = Quantity of units produced and sold SP = Selling price per unit VC = Variable cost per unit CM = Contribution margin TFC = Total fixed cost
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Contribution Margin
SP(u) VC(u) = CM (u)
SP = Selling price per unit VC = Variable cost per unit CM = Contribution margin u = per unit
SP = Selling Price per unit VC = Variable Cost per unit CM = Contribution Margin
CVP Scenario
Selling price Variable cost Difference Per Unit $5 4 $1 Percentage 100 80 20
Total monthly fixed expenses = $8,000 Rent $2,000 Labor $5,500 Other $ 500
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Equation Technique
Let N = number of units to be sold to break even $5N $4N $8,000 = 0 $1N = $8,000 N = $8,000 $1 N = 8,000 Units
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Equation Technique
Let S = sales in dollars needed to break even S 0.80S $8,000 = 0 .20S = $8,000 S = $8,000 .20 S = $40,000
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Margin of Safety
The margin of safety shows how far sales can fall below the planned level before losses occur.
Margin of safety
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