cost volume profit

• Cost-Volume-Profit (CVP) Relationships


  Analysis of the impact on income of changes in: Selling prices, Volume of sales, Unit variable cost, Total fixed costs, Mix of products sold
• Level of Fixed vs. Variable Cost
• Contribution Margin (CM)


  The amount remaining from sales revenue after variable expenses have been deducted
• After covering fixed costs, any remaining CM contributes to income
• Contribution Margin Ratio


  The ratio of total contribution margin to total sales
• Contribution Margin (CM) Ratio


  The ratio of unit contribution margin to unit selling price
• The CM Ratio for Coffee Klatch is 0.758
• Equation method


  Calculating the break-even point using the equation: Sales = Variable expenses + Fixed expenses + Profits
• Contribution margin method


  Calculating the break-even point using the formula: Fixed expenses / Unit contribution margin = Break-even point in units sold, or Fixed expenses / CM ratio = Break-even point in total sales dollars
• The break-even sales in dollars for Coffee Klatch is $1,715
• Break-even sales in units

  1. Fixed expenses

  2. Unit contribution margin

  3. Break-even = $1,300 / $1.13 per cup = 1,150 cups
• Break-even sales in dollars

  1. Fixed expenses

  2. CM Ratio

  3. Break-even sales = $1,300 / 0.758 = $1,715
• Target profit analysis


  1. Sales = Variable expenses + Fixed expenses + Profits

  2. $500Q = $300Q + $80,000 + $100,000

  3. Q = 900 bikes
• Margin of safety


  Excess of budgeted (or actual) sales over the break-even volume of sales. The amount by which sales can drop before losses begin to be incurred.
• Margin of safety = Total sales - Break-even sales = 950 cups
• Margin of safety percentage = 950 cups / 2,100 cups = 45%
• Operating leverage


  A measure of how sensitive net operating income is to percentage changes in sales. With high leverage, a small percentage increase in sales can produce a much larger percentage increase in net operating income.
• Operating leverage for Coffee Klatch

  Contribution margin / Net operating income = $2,373 / $1,073 = 2.21
• If sales increase by 20%


  Net operating income should increase by 44.2%
• Sales mix


  The relative proportions in which a company's products are sold. Different products have different selling prices, cost structures, and contribution margins.