Variable Cost and Contribution Margin Ratio
C V P Analysis
1
CVP Analysis
Understand how cost behavior and cost-volume-profit analysis are used by managers.
2
Questions Addressed by CVP
Analysis
How much must I sell to earn my desired income?
How will income be affected if I reduce selling prices to increase sales volume? What will happen to profitability if I expand capacity?
3
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).
4
Variable Costs
Fixed Costs
Mixed Costs
Cost Estimation Methods
Cost Estimation Methods are frequently required to separate the fixed and variable components of a total cost pool. Methods include: 1.
2.
3.
4.
5.
Account Analysis
Scattergraph
High-Low Method
Regression
Relevant Range
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
How Is Cost Behavior
Used By Managers ?
Understanding cost behavior is vital to the manager’s decision-making role, because one of the main goals of management accounting is controlling costs.
15
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
The Profit Equation
Profit = SP(x) –VC(x) – TFC
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.
18
Break-Even Point
Break-Even Point
1
CVP Analysis
Understand how cost behavior and cost-volume-profit analysis are used by managers.
2
Questions Addressed by CVP
Analysis
How much must I sell to earn my desired income?
How will income be affected if I reduce selling prices to increase sales volume? What will happen to profitability if I expand capacity?
3
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).
4
Variable Costs
Fixed Costs
Mixed Costs
Cost Estimation Methods
Cost Estimation Methods are frequently required to separate the fixed and variable components of a total cost pool. Methods include: 1.
2.
3.
4.
5.
Account Analysis
Scattergraph
High-Low Method
Regression
Relevant Range
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
How Is Cost Behavior
Used By Managers ?
Understanding cost behavior is vital to the manager’s decision-making role, because one of the main goals of management accounting is controlling costs.
15
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
The Profit Equation
Profit = SP(x) –VC(x) – TFC
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.
18
Break-Even Point
Break-Even Point