Documentos de Académico
Documentos de Profesional
Documentos de Cultura
COST-VOLUME-PROFIT RELATIONSHIPS
LEARNING OBJECTIVES
INTRODUCTION
The objective of CVP analysis is to establish what will happen to the financial results if a
specified level of activity fluctuates.
The study of CVP is often called break-even analysis. The break-even point is the point when
total revenue and total costs are equal. In other words, at this point there is no net income or loss.
Both the variable and fixed costs are covered by sales revenue at the break-even point. The break-
even point represents a target of minimum sales volume that the manager must achieve because it
does indicate the level of sales necessary to avoid a loss.
Below is a very simple example to show various analytical techniques used in CVP analysis.
BIB Bhd. owned by Adura plans to rent an MBSA store. She is analyzing an average selling price
of RM 50 and average cost price of RM 30 per unit of book item. She targeted to sell 2000 units
of book items at the following costs:
Rent RM10,000
Wages of helpers RM 8,000
Other fixed costs RM 2,000
Total RM 20,000
1
There are THREE approaches to determine break-even point:
1. Contribution Margin Approach
2. Equation Approach
3. Graphical Method
By using this approach, each book item sells for RM 50, but RM 30 of this is used to
cover variable costs. This leaves RM 20 (RM 50 – RM 30) per unit of book item to
contribute to covering the fixed costs of RM 20,000. When enough book items have been
sold in one month, RM 20 contributions per food item add up to RM 20,000 then, Puan
Adura will break even.
= RM 20,000
RM 20
= 1,000 units
Puan Adura must sell 1,000 units of book items per month in order to break even.
The calculation of break-even also can be computed in sales dollar instead of units. The
contribution to sales ratio is expressed as a percentage. Interpretation of the higher ratio
means the contribution grows more quickly as sales level increase.
From the above illustration, C/S ratio can be used to calculate break-even point as
follows:
2
2. Equation Approach
This approach is based on the profit equation. Profit can be calculated as follows:
To find break-even for a month for Puan Adura, it is assumed that profit is zero.
COST-VOLUME-PROFIT RELATIONSHIP
Alternatively, profit figure can be computed as follows which is known as Marginal Cost
Statement
(a) Contribution is the amount remaining from sales revenue after variable expenses have
been deducted.
Sales XXX
Less: Variable Cost XXX
Profit/Loss 3 XXX
Formula in CVP Analysis:
(OR)
(OR)
There are basically three types of graphs that can be used, namely :
Total
Fixed
Sales Sales Total V.C Total Costs Profit /
Costs
(Loss)
(Units) (RM) (RM) (RM) (RM) (RM)
500 2500 1500 2000 3500 (1000)
1000 5000 3000 2000 5000 0
1500 7500 4500 2000 6500 1000
2000 10000 6000 2000 8000 2000
4
a) Traditional break – even graph
5
ASSUMPTIONS/LIMITATIONS OF CVP ANALYSIS
1. The unit sales prices remain constant throughout the period being considered.
2. All costs can be easily identified as being either variable or fixed with a reasonable amount of
accuracy.
3. Variable costs will change in total amount proportionately with volume.
4. Total fixed costs will remain constant over the entire range of activity being considered.
5. Single or constant sales mix
6. Total costs and total revenue are linear functions of output. Total cost and total revenue
change proportionately to changes in volume.
7. Risk and uncertainty are ignored and perfect knowledge of cost and revenue functions is
assumed.
8. It is assumed that the firm is a price taker, i.e. a perfect market is deemed to exist.
9. The efficiency and productivity of the production and workers remain constant.
CONCLUSIONS
a. A fixed cost is fixed only within a given time span and over a given range of activity.
However, it may change from budget year to budget year when the activity level changes too
greatly.
b. Variable costs per unit is assumed to be constant. However, variable costs may fall as
volume increases and trade discounts or economies of large scale are achieved, and will then
rise when the demand for resources exceed supply.
c. Selling price may be reduced to achieve greater volume of sales.
d. In practice it is not always feasible to resolve all costs into their fixed and variable
elements.
e. Efficiency and productivity to change, thus affecting costs.
f. Volume, though important, it not the only factor affecting costs. Factors such as
efficiency, productivity, war, government legislation also affects costs.
The above assumptions act as major limitations of the CVP analysis, but nevertheless it is a
powerful tool for decision making in the short run.
6
Self Review Questions
4. What information other than break-even point can be obtained by managers from a
CVP graph?