Chapter 3 Cost-volume-profit Analysis

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Chapter 3Cost-volume-profit Analysis

• Key topics
• Short term decision making
• Cost-volume-profit analysis
• Single product
• Multiple products
• Assumptions underlying CVP analysis
• Uses for CVP analysis
• Margin of safety and operating leverage

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Cost-volume-profit

• Keep in mind the CVP formulas are simple
  algebraic manipulations of the income statement
• TR TVC F Profit
• Or
• PQ VCQ F Profit
• Also keep in mind Profit 0 at the breakeven
  point
• When the problem gives information about units
• CM per unit P - VC
• Units at target profit
• (F profit)/CM per unit

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CVP With Units Given
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CVP Assumptions

• Refer to the Oysters Away problem
• Suppose the managers rely on the preceding CVP
  analysis to decide whether to operate the
  business. What assumptions are they making?
• How reasonable are these assumptions?

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CVP with Revenues

• First calculate contribution margin ratio (CMR)
  using information from current operations as
  follows
• CMR contribution margin
• total revenue
• To solve for target revenue
• Revenue (F Profit)/CMR
• Turn after tax profit target into pre-tax target
  profit as follows
• Pre-tax profit After tax profit/(1-tax rate)

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CVP with Revenues

• Required
• Calculate the breakeven point.

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CVP with Revenues, cont.
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Breakeven Analysis with Multiple Products
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Breakeven Analysis with Multiple Products, cont.
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CVP AssumptionAbout Sales Mix

• Refer to the Keener problem
• What assumption is made about sales mix when
  using CVP analysis for multiple products?
• How reasonable is this assumption?

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Management Decision Making Using CVP

• What are specific uses for CVP analysis? List
  ideas

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Margin of Safety

• Margin of Safety in Units
• Actual or Estimated Units of Activity Units
  at Breakeven Point
• Margin of Safety in Revenues
• Actual or Estimated Revenue Revenue at
  Breakeven Point
• Margin of Safety Percentage

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Operating Leverage

• The degree of operating leverage is the extent to
  which the cost function is made up of fixed costs
• Contribution margin/ profit or

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Using Operating Leverage for Decision Making
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Using Operating Leverage for Decision Making,
cont.