Cost Volume Profit Module 1 A Cost Volume Profit CVP Analysis a Allows managers to understand relationships among cost volume and profit by focusing on interactions between i Prices of Products ii Volume or level of activity iii Per unit variable costs iv Total fixed costs b Allows them to make decisions like i Products services to offer ii Pricing policy iii Marketing strategy iv Cost structure c Basic Elements of CVP analysis i Break even calculations 1 Gives managers min target revenue especially for offering a new product 2 In UNITS represents number of units that have to be sold to break even 3 In SALES DOLLARS Represents sales revenue to generate to break even a Variable Cost Ratio b Variable Costs Sales Revenue c Variable Cost Unit Selling price Unit B Contribution Margin Amount of revenue sales that is available ii Target profit analysis iii Margin of safety iv Operating leverage to i Pay cover fixed costs ii Contribute toward a profit b Can be expressed in 3 different ways i Total Contribution Margin Sales Revenue Variable Costs ii Contribution margin per unit Selling price per unit Variable costs per unit iii As percentage of sales Called the contribution margin ratio Contribution margin total sales revenue OR CM per unit Selling price per unit C Target Profit Units Analysis a Like break even but instead of 0 we will a certain D Margin Of Safety Measure of firm riskiness amount sales can fall amount before losses occur i Actual sales revenue break even sales revenue b The higher the margin of safety the lower the risk of reporting losses and operating further from the break even point E Operating Leverage How sensitive net income is to percentage a Degree of operating leverage Contribution margin net change in sales income i is a measure at a given level of sales of how a percentage change in sales volume will impact net income b Sales increase by 10 results in 10 increase in variable costs and the fixed costs will remain the same Thus net income will increase by more than 10 when sales increase by 10 F Company has more than one product a Sales Mix relative combo of products sold by company i ABC sold 70 of A and 30 of B 1 Sales mix 7 3 ii Reduce to smallest possible whole numbers iii Once you find sales mix calculate package contribution margin per unit 1 For each product take the product s contribution margin per unit and multiply that by its sales mix number then add them together 2 F iv D v
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