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3 - Cost Volume Profit Analysis

This chapter discusses cost-volume-profit (CVP) analysis, which examines the relationship between revenues, costs, and volume and how they impact profit. The key relationship is the profit equation, which shows that total contribution margin from units sold covers fixed costs and provides operating profit. Contribution margin ratio is contribution margin as a percentage of sales revenue. Other concepts covered include profit-volume analysis using a single profit line, cost structure, operating leverage, margin of safety, break-even analysis, and calculating target volume.

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223 views1 page

3 - Cost Volume Profit Analysis

This chapter discusses cost-volume-profit (CVP) analysis, which examines the relationship between revenues, costs, and volume and how they impact profit. The key relationship is the profit equation, which shows that total contribution margin from units sold covers fixed costs and provides operating profit. Contribution margin ratio is contribution margin as a percentage of sales revenue. Other concepts covered include profit-volume analysis using a single profit line, cost structure, operating leverage, margin of safety, break-even analysis, and calculating target volume.

Uploaded by

Pattranite
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER THREE: COST-VOLUME-PROFIT ANALYSIS

 Cost-volume-profit analysis studies the relations among revenues, cost, and volume and their effect on profit.
 The key relation for CVP analysis is the profit equation.
 Total contribution margin is the amount that units sold contribute toward (1) covering fixed costs and (2) providing
operating profits.
 Contribution margin ratio is the contribution margin as a percentage of sales revenue.
 Profit-volume analysis is version of CVP analysis which uses a single profit line.
 Cost structure is the proportion of fixed and variable costs to the total costs of an organization.
 Operating leverage is the extent to which an organization’s cost structure is made up of fixed costs.
 The margin of safety is the excess of projected (actual) sales over the break-even sales level.

Operating profit= Total revenues – Total costs

Total revenue= Price * Units of output produced and sold

Total costs= (Variable costs per unit * units of output) + Fixed costs

Or… Profit= (Price- Variable costs) * Units of output – Fixed costs

Contribution margin = Selling price – Variable costs

¿ costs
Breakeven volume ( ¿ units )=
Unit contribution margin

Unit contributionmargin
Contribution margin ratio=
Sales revenue

¿ costs
Breakeven volume ( ¿ sales dollars )=
Contribution margin ratio

¿ costs+Target profit
Target volume ( ¿ units )=
Contribution margin per unit

¿ costs+Target profit
Target volume ( ¿ units )=
Contribution marginratio

Contribution margin
Operating leverage=
Operating profit

Margin of safety=Sales volume−Break even sales volume

After-tax profit= [(P-V)X – F] * (1- t)

target profit
¿ costs+[ ]
(1−t )
Target volume ( ¿ units )=
Contribution marginratio

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