Managerial Accounting

Chapter – 6
Cost-Volume-Profit Relationships
Garisson 10th edition
CVP : Cost-Volume-Profit Analysis
 Important to make decisions
 Focuses on five elements:
1. Prices of products
2. Volume or level of activity
3. Per unit variable cost
4. Total fixed cost
5. Mix of products sold
Contribution Margin (CM)
 The amount remaining from sales revenue
after deducting variable cost
 It is the amount to cover fixed cost and
to provide profit
 If CM is not sufficient to cover fixed cost,
then a loss occurs
 Example for CM

Total Per Unit

Sales (1speaker)………………………….$ 250 $250
Less variable expense…………………….150 150
Contribution margin……………………......100 100
Less fixed expenses ………………………35,000
Net operating loss………………………….34900
…continued

Total Per Unit

Sales (2 speakers)………………………….$500 $250
Less variable expense……………………..300 150
Contribution margin……………………......200 100
Less fixed expenses ………………………35,000
Net operating loss………………………….34800
…continued

Total Per Unit

Sales (350 speaker)…………………… ..$ 87,500 $250
Less variable expense…………………….52,500 150
Contribution margin……………………......35,000 100
Less fixed expenses ……………………….35,000
Net operating income..……………………………0
…continued

Increased number of speakers to be sold………………25

Contribution margin per speaker………………………$100
Increase in net operating income………………………$2500
Contribution Margin Ratio (CM Ratio)

Total Per Unit Percent

of Sales
Sales (400 speaker)………………...$ 100,000 $250 100%
Less variable expense………………..60,000 150 60%
Contribution margin…………………..40,000 100 40%
Less fixed expenses ………………….35,000
Net operating income……………………5,000

CM Ratio = Contribution margin/Sales

CM Ratio = $40,000/$100,000 = 40%
CM Ratio = Unit Contribution margin/ Unit Selling Price
=$100/$250 = 40%
Change in fixed cost and sales
volume

Currently Sales
Increase in Should they
selling increase
advertising make this
400 $30,000
$10,000 decision
speakers 520
…continued

Current Sales with Difference Percent

Sales additional of sales
advertising
budget
Sales (400 speaker)….$ 100,000 130,000 30,000 100%
Less variable expense….60,000 78,000 18,000 60%
Contribution margin…….40,000 52,000 12,000 40%
Less fixed expenses ……35,000 45,000 10,000
Net operating income……5,000 7,000 2,000

See: Alternative Solutions

Break – Even Computations
 It is the point where profit is zero
 The equation Method:

Profits = (Sales-Variable Expense) – Fixed Expense

Sales = Variable Expense + Fixed Expense + Profit
$250Q = $150Q + $35,000 + $0
$100Q = $35,000
Q = 350 speakers
…continued
 The contribution margin method

Break-even point in units sold = Fixed expenses/Unit contribution

margin
Fixed expenses/Unit contribution margin = 35,000/$100 per speaker
=350 speakers
Break-even point in dollar = Fixed expense/ CM ratio = $35,000/0.4
= $87,500
Target Profit Analysis

Sales = Variable Expense + Fixed Expense + Profit

$250Q = $150Q + $35,000 + $40,000
$100Q = $75,000
Q = 750 speakers