Cost-Volume-Profit Analysis
Self-Test Questions
1. The difference between the sales price and the total variable costs is the contribution margin. (D) 2. The breakeven volume in units (perfume sticks) for 2005 is
TR-VC-FC=PBTMR=900000/1800 = 500
TR-VC-FC=0VC/Q = 495000/1800 = 275
Q*MR - Q(VC/Q) = FC
Q = _____FC_____
MR-VC/Q
Q = 247500/(500 275)
Q=1100Therefore (B)
3. If sales volume is expected to be 2100 units with prices/costs same, after-tax net income is expected to be
TR-VC-FC=PBT
Q*MR-Q(VC/Q)-FC=PBT
2100(500) 2100(275) 247500 = PBT = 225000
After income taxes of 32%:
225000 (225000)(.32) = 153000Therefore (A)
4. Sell 1500 at 450, reject some business from regular customers.
TR-VC-FC=PBT
Q*MR-Q(VC/Q)-FC=PBT
1500(450)+1500(500) 3000(275) 247500 = 352500
After income taxes
352500 352500(.32) = 239700Therefore (C)
5. Prices decline by 10%, variable costs increase $40/unit, no change in FC. Q needed to earn after-tax net income of 107100.
After tax income of 107100 requires PBT = X, where
X (0.32)X = 107100VC/Q = 315
X = 157500MR = 450
TR-VC-FC=157500
Q(450) Q(315) 247500 = 157500
Q(135) = 405000
Q = 3000
Sales volume required is 3000(450)=1,350,000Therefore (D) 6. Degree of operating leverage = contribution margin ÷ profit before tax
OLo = 650000÷440000 = 1.48 Therefore (C)
7. CM%=CM/TRExpected Level of production/sales 10000
VC/Q = 5+10+3.5=18.5TR = Q*MR
(MR-18.5)/(MR) = .30
0.3MR = MR 18.5
18.5 = 0.7MRMR = 26.43Therefore (B)

8. MR=28, what must Q be to generate income of 10000.
Q*MR Q*(VC/Q) FC = 10000
CM = 9.5
Q*CM = Total Fixed Costs + Desired Income
Q*CM = (0.65*10*10000) + 10000
9.5*Q = 75000
Q = 7895Therefore (C)
9. Variable costing is direct costing that treats includes only variable production costs (DM, DL, VOH) as product of inventoriable costs and FOH is a period cost. 300K + 100K + 50K = 450000 Therefore (B)

...Cost, Volume, and ProfitCost-Volume-Profit (CVP) analysis is a managerial accounting tool that expresses the simplified relationship between cost, volume, and profit (or loss). CVP analysis is based on several factors and assumptions and uses a formula to express the relationship by equation or graphically and can be used with great effect by managers who understand the limitations of the analysis.
Cost-Volume-Profit (CVP) analysis is a managerial accounting tool that expresses the simplified relationship between cost, volume, and profit (or loss). CVP analysis focuses on how profits are affected by the following five factors: selling prices, sales volume, unit variable costs, total fixed costs, and mix of products sold. (Brewer, 2010, p. 258) Additionally, CVP analysis is based on several assumptions including, (a) selling price is constant and a change in sales volume is the only factor that affects costs, (b) costs and revenues are linear throughout relevant range, (c) costs can be divided into fixed and variable components throughout relevant range, (d) sales mix doesn’t change, and (e) inventory levels don’t change (units sold equals units...

...How to Do CostVolumeProfit Analysis?
1. Do Price forecasting
Costvolumeprofit analysis is a branch of cost accounting which is often used in managerial accounting. During price forecasting, emphasis is laid on a number of points like the level of sales essential in order to cover all expenses, the exact number of valves which need to be sold so as to earn a plannedprofit, the impact on profit on changing the selling price and impact of changes in variable or fixed costs on the planned profits. Managers also take into account the valve types which the organization needs to produce and sell more in order to gain maximum amount of profit.
2. Determination of fixed costs
Fixed costs will remain more or less the same, regardless of the financial performance of the organization. The type of fixed costs may vary from business to business, but some typical fixed costs include interest on debt, rent, insurance, business license, plant as well as equipment costs, licenses for operating business as well as salaries of full time workers.
3. Determination of variable costs
Variable costs change with the increase or decrease in the level of sales in units sold. Depending on the specific type of...

...fully understanding the total costs involved and the prices they can charge. As a result, they discover they can't sell enough of the product or service to make a profit. One of the most important tools you can use to make better business decisions is the break-even analysis; it enables you to determine with great accuracy whether or not your idea is a profitable one. Best of all, you can use this tool to evaluate every product or service you offer. The break- even point is the starting point for CVP analysis because before a company can earn profits; it must first cover all of its variable and fixed costs.
What is CVP?
Cost-volume-profit analysis is a tool that can be utilized by business managers to make better business decisions. Among the tools in a business manager's decision-making arsenal, CVP analysis provides one of the more detailed and objective ways by which a manager can assess and even predict the course of business for the company and its employees. Another major benefit of CVP analysis is that it provides a detailed snapshot of company activity. This includes everything from the costs needed to produce a product to the amount of the product produced. This helps managers determine, very specifically, what the future will hold if variables are altered. For instance, transportation expenses and costs for materials can change. These...

...sales a company needs in order to make a profit. They care if the sales mix is accurate because if the sales mix is different, it because a completely different calculation.
B. The first financial model was not useful because it did not separate fixed and variable cost. That means a CVP analysis cannot be done. It separated costs into manufacturing and cost of goods sold which is not as useful as knowing which costs are fixed or variable.
C. If I were going to invest in RBC, I would make sure the sales mix is accurate. It is important because the variable cost of beer is only 15% of the beer sales while food and other is 33% and 35% respectively. If food sales are much higher the CM goes down and it results in the Break Even Point being much higher.
D. It is difficult to find out how much it costs for a pint of beer because it lists total beer sales without saying how many were sold. It is given as a total percentage of sales which means price or units cannot be figured out.
E. The Contribution Margin for the company is 822,212/1,953,000=.420999 Break even then would be Sales Dollars=Fixed Cost/CMR 520000/.420999=$1,235,156
Margin of Safety is Actual Sales-Breakeven Sales=MOS is 1,953,000-1,235,156=$717,844
The percentage is 717,844/1,953,000= 36.8%
RBC cannot find the breakeven point in units because there is no number of units given in...

...COST-VOLUMEPROFIT (CVP) ANALYSIS
This is a technique used for planning short-term run profits by finding the relationship between profits and factors that influence profits. The following factors are taken to be influencing profits:-
• Selling price
• Variable cost of production
• Fixed costs
• Activity level (production and sales units)Profit planning is based on break-even analysis and can be worked out using either;
a) Algebraic method
b) Contribution method
c) Break-even chart.
Accountants Model: Assumptions of Break-even Analysis:
a) The selling price will remain constant at all levels of sales units (using marginal costing)
b) The fixed costs will not change at whatever level of activity
c) The variable costs of production will remain constant for each unit.
d) Costs and revenues will follow a linear trend.
e) Organizations produce only one type of product or various products at a constant mix.
f) The only factor that affects costs and revenue is the production-volume.
g) Technology and efficiency methods do not change.
h) Production level is equal to sales level i.e. all that is produced is sold hence no changes in stock levels.
Single product is assumed to be produced.
Limitations of...

...Cost, Volume, and Profit Formulas
Heather Jauregui
University of Phoenix of Axia College
“The Cost-volume-profit (CVP) analysis is the study of the effects of changes in costs and volume on a company’s profits.” (Kimmel, P., Weygandt, J., & Kieso, D. 2003) The analysis is used to maximize efficiency in a business. In order to be effective the CVP analysis has to make several assumptions. These assumptions are that the costs can be fitted into either fixed or variable categories. The next assumption is that changes that a business makes in its activities are the only thing that will affect costs. The business must assume that all units of a good or service are sold. The last two assumptions are that “behavior of both costs and revenues is linear throughout the relevant range of the activity index.” (Kimmel, P., Weygandt, J., & Kieso, D. 2003) Finally, if the company produces more than one type of product the mix or percentage of each product type will remain the same.
Volume or the level of activity; unit selling price or how much each unit of the product or service is sold for; variable cost per unit such as labor; total fixed cost like rent and utilities, and sales mix are the components that make up the CVP analysis. Contribution margin is...

...COST-VOLUME-PROFIT ANALYSIS(CVP)
Definition of Cost Accounting
A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs such as depreciation of capital equipment.
Definition of Cost-VolumeProfit Analysis
A method of cost accounting used in managerial economics. Cost-volumeprofit analysis is based upon determining the breakeven point of cost and volume of goods. It can be useful for managers making short-term economic decisions, and also for general educational purposes.
AND Cost-volumeprofit analysis makes several assumptions in order to be relevant. It often assumes that the sales price, fixed costs and variable cost per unit are constant. Running this analysis involves using several equations using price, cost and other variables and plotting them out on an economic graph.
The assumptions underlying CVP analysis are:
The behavior of both costs and revenues is linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.)
...

...COST – volume –profit analysis
LEARNING OBJECTIVES
Students should be able to:
1. Explain the nature of CVP Analysis and name and illustrate planning and
Decision-making situations in which it may be used,
2. Separate semi-variable (mixed) costs into their fixed and variable components.
3. Construct profit/volume charts given selling price, costs andvolume data.
4. Construct a cost/volume/profit (CVP) model representing the data in a marginal costing profit and loss account
5. Define and calculate the breakeven point using various techniques
6. Apply the CVP model in multi-product situations.
7. Calculate budgeted sales volume required for a given target net income.
8. Calculate and explain the margin of safety.
9. Identify and explain the limitations of C-V-P analysis
KEY TOPICS
The following major topics are covered in this chapter (related learning objectives are listed for each topic).
1. Break-even point in units
2. Break-even point in sales dollars
3. Multiple-product analysis
4. Graphical representation of CVP relationships
5. Changes in the CVP variables
1. BREAK-EVEN POINT...