# CVP (Cost Volume Profit I)

nguyp035's version from 2016-05-17 18:03

## Section 1

CVP analysis assumes of certainty i.e. variable and fixed cost can be known.
it is a tool for short term planning and is concerned with tactical decision making ("best use or alternative uses for existing capacity")
Main assumptions are...VC/unit remains unchanged throughout analysis - FC totally unchanged - Possible to separately identify VC and FC - Product mix doesn't change - Results of analysis are only as good as the stability of these underlying assumptions...
Changes in level of revenue and cost arise only because of changes in number of products produced/sold
The analysis covers a single product or assumes that the sales mix when multiple products are sold will remain constant as the level of total units sold changes
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## Section 2

Operating income = Total revenues from operating - Cost of goods sold and operating costs (excluding tax)
Net Income =Operating income - Income taxes

## Section 3

Contribution MarginA reporting format where costs are reported by cost behavior and a contribution margin is calculated
Total contribution margin(Sales revenue - variable costs) - the amount availiable to cover fixed costs and then contribute to profits
Unit contribution margin(Sales price per unit - variable cost per unit)
Contribution margin ratio(Unit contribution margin / unit sales price) - the proportion of each sales dollar available to cover fixed cost and earn a profit - once all fixed cost have been covered any revenue (cm) remaining is profit
Contribution margin percentage(Unit contribution margin ratio x 100) - the percentage of each sales dollar available to cover fixed cost and earn a profit
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## Section 4

Breakeven in Units Fixed cost / Unit contributuion margin
Breakeven in sales revenue(FC/UCM) * Price (OR FC/(UCM/P)
Alternative: Breakeven in sales =FC/(UCM/PRICE) = FC/CM Ratio
Desired profit (target net profit) example (1)Finding how many units to achieved desired profit of 15000
Q = (FC+ Target Profit) / UCM = units sold to earn target profit
NOTE CAN ALSO USE FORMULA APPROACH SR-VC-FC and rearrange it and using self made formulae.g. 500X - 300X - FC = DESIRED PROFIT
SO.. 200X = FC+DESIRED PROFIT
X = (FC/DES PROFIT)/200 -> X = UNITS TO MAKE DES PROFIT
Sales less variable expense = contribution margin
contribution margin less fixed expense = net income
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## Section 5

Safety margin is te...budgeted sales revenue/actual - break even sales revenue
It is the amount sales can drop before losses begin to be incurred
BE = 200000 ACTUAL SALES 250000 > Safety margin = 50,000

## Section 6

Assumptions and sensitivity analysisAssumptions of CVP analysis asks what if.. e.g. what would happen to profits... if fixed cost increased?
If fixed cost changes, BE will change - higher FC means more units need to be sold
There may be more than one break even point
Changes in Fixed cost question.An owner believes that an increase in 10,000 monthly ad budget would increase bike sales to 540 units.. should it be authorised?
We would work out the NET INCOME of current sales and the NET INCOME for the proposed sales (VC and fixed cost changes, hence CM and NET INCOME changes)
Remember structure Sales - VC =CM > CM-FC = NET INCOME
How to evaluate... sales increase/decrease... but Net income increase/decrease?
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