The Basics of Cost-Volume-Profit (CVP) Analysis Contribution margin (CM) is the difference between...
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Total P er U nit S ales (500 bikes) 250,000 $ 500 $ Less:variable expenses 150,000 300 C ontribution m argin 100,000 200 $ W IN D B IC YC LE C O . C ontribution Incom e S tatem ent For the M onth ofJune The Basics of Cost- Volume-Profit (CVP) Analysis Contribution margin (CM) is the difference between sales revenue and variable expenses. Next Page Clic k Here CM can be expressed in total or per unit. The CM ratio is computed by dividing the per unit contribution margin by the per unit selling price. $200 ÷ $500 = 40%
Transcript of The Basics of Cost-Volume-Profit (CVP) Analysis Contribution margin (CM) is the difference between...
Total Per UnitSales (500 bikes) 250,000$ 500$ Less: variable expenses 150,000 300 Contribution margin 100,000 200$
WIND BICYCLE CO.Contribution Income Statement
For the Month of June
The Basics of Cost-Volume-Profit (CVP) Analysis
Contribution margin (CM) is the difference between
sales revenue and variable expenses.
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CM can be expressed in total or per unit.
The CM ratio is computed by dividing the per unit contribution margin by the per unit selling price.
$200 ÷ $500 = 40%
Total Per UnitSales (500 bikes) 250,000$ 500$ Less: variable expenses 150,000 300 Contribution margin 100,000 200$
Less: fixed expenses 80,000 Net income 20,000$
WIND BICYCLE CO.Contribution Income Statement
For the Month of June
The Basics of Cost-Volume-Profit (CVP) Analysis
After fixed expenses are covered, any additional contribution margin
results in net income.
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Break-Even PointWind has $80,000 of fixed expenses.
If Wind sells 400 units in a month, Wind will generate $80,000 in total CM
($200 CM per unit x 400 units).
Wind will be operating at its break-even point.
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Total Per UnitSales (401 bikes) 200,500$ 500$ Less: variable expenses 120,300 300 Contribution margin 80,200 200$
Less: fixed expenses 80,000 Net income 200$
WIND BICYCLE CO.Contribution Income Statement
For the Month of June
Additional Unit Sales If Wind sells one additional unit
(that is, 401 bikes), net income will be $200.
Net income will increase by $200 (the CM per unit) as each additional unit is sold.
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The Contribution Approach
The point where total contribution margin equals total fixed expenses.
The point where total sales revenue equals total expenses (variable and fixed).
The break-even point can be defined as:
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Break-even analysis can be approached in two ways - contribution margin method
or equation method. Covered here
Break-Even AnalysisFixed expenses (costs) total $80,000. Bikes sell for
$500 per unit; variable expenses are $300 per unit.
CM = $500 - $300 = $200 per unit
CM Ratio = $200 ÷ $500 = 40%
Fixed costs Unit contribution margin
=Break-even point
in units sold
Fixed costs CM ratio
=Break-even point intotal sales dollars
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$80,000 $200
=Break-even point
in units sold
$80,000 40%
=Break-even point intotal sales dollars
= 400 units
= $200,000
CVP Relationships in Graphic Form
Viewing CVP relationships in a graph gives managers a perspective that can be obtained in no other way.
Consider the following information for Wind Company:
Income 300 units
Income 400 units
Income 500 units
Sales 150,000$ 200,000$ 250,000$ Less: variable expenses 90,000 120,000 150,000 Contribution margin 60,000$ 80,000$ 100,000$ Less: fixed expenses 80,000 80,000 80,000 Net income (loss) (20,000)$ -$ 20,000$
Income 300 units
Income 400 units
Income 500 units
Sales 150,000$ 200,000$ 250,000$ Less: variable expenses 90,000 120,000 150,000 Contribution margin 60,000$ 80,000$ 100,000$ Less: fixed expenses 80,000 80,000 80,000 Net income (loss) (20,000)$ -$ 20,000$
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-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
- 100
200
300
400
500
600
700
800
Units
Do
llar
sCVP Graph
Break-even point
Profit Area
Loss Area
Total Expenses
Total Sales
Fixed Expenses
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Target Income AnalysisFixed costs total $80,000. Bikes sell for
$500 per unit; variable expenses are $300 per unit.
Target after-tax income is $45,000; tax rate is 25%.
CM = $500 - $300 = $200 per unit
CM Ratio = $200 ÷ $500 = 40%
Before tax income = $45,000 ÷ (1 - .25) = $60,000,
so tax expense = $60,000 - $45,000 = $15,000
TargetFixed After-Tax Income costs Income Taxes CM per unit
=Unit sales at target after-tax income
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=
+ +
$80,000 + 45,000 + $15,000
$200
$140,000 $200
= 700 units
Target Income AnalysisFixed costs total $80,000. Bikes sell for
$500 per unit; variable expenses are $300 per unit.
Target after-tax income is $45,000; tax rate is 25%.
CM = $500 - $300 = $200 per unit
CM Ratio = $200 ÷ $500 = 40%
Before tax income = $45,000 ÷ (1 - .25) = $60,000,
so tax expense = $60,000 - $45,000 = $15,000
TargetFixed After-Tax Income costs Income Taxes CM Ratio
=Dollar sales at target after-tax income
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=
+ +
$80,000 + 45,000 + $15,000
40%
$140,000 40%
= $350,000
