Cost-Volume-Profit Analysis

Mountain Biking, Inc.

Sells four different models
Best selling model is the MB 80
Selling Price per unit
$500
Variable Cost per unit
$300
Contribution margin per unit$200
Fixed Costs for the MB 80
$80,000 per year

Relationships among Unit Sales,

Contribution Margin and Net Income
Unit Sales
0
Contribution
Margin
Net Income

400

401

Breakeven Analysis: Terms

P is the selling price per unit

N is the number of units sold
V is the variable cost per unit
FC is the total fixed costs for the period (year)
NI is the net income

CM Income Statement as an Equation

The basic sales equation is equivalent to looking at
the contribution margin income statement:
Sales Revenue
=>
Less: Variable Costs =>
Contribution Margin =>
Less: Fixed Costs =>
Net Income
=>
Which N produces enough contribution margin to cover
FC and contribute to NI?

CM Income Statement as an Equation

Basic Net Income Equation:

Sales - Variable Costs - Fixed Costs = Net Income
Algebraically:

Starting Your Own Consulting Firm

Question: What price should you charge per hour?
How many billable hours can you expect?
Monthly Expense Projection -- all Fixed Costs
Salaries
$900
Rent
550
Telephone & Utilities
80
Supplies
10
Depreciation-Furniture
30
Depreciation-Equip
10
Insurance
20
Total
$1,600

Projected Monthly Net Incomes

Use the equation to help determine NI:
(P x N) - (V x N) - FC =
NI
(P x N) - $1600 =
NI (since V = 0)
at the following prices: $20, $40 and $80 per hour
(N) Billed
hrs/month
20
40
60
80
100
120
160

If P = $20

If P = $40

If P = $80

Questions:
Where do you lose $,
make $ or B-E?
Should you start the
business?
at what price?
at what likely N?

Breakeven Analysis
(P x N) - (V x N) - FC = 0
(P - V) x N - FC
= 0
(P - V) x N
= FC
BE-N = FC
= FC
(P-V)
Unit CM
Multiply both sides of the above equation by P to get the
breakeven revenue:
BE$ = BE-N x P =
FC x 1 = FC = FC
(P-V)
1
(P-V) CM Ratio
P
P

Getting to Breakeven
We know FC = $1,600
Let P = $60.00 and V = $10.00
then the breakeven quantity (in hours) is:
BE-N =
and
BE-$ =

Comparing Firms with Different

Cost Structures
Price/Unit
Variable Costs/Unit
CM/Unit
Fixed Costs
Cost Structure:

Breakeven:

Firm A

Firm B

50
10
40
340,000

50
35
15
90,000

CVP Graph -- Firm A

$

Revenue

Cost
340,000

B-E Output

Volume

CVP Graph -- Firm B

$

Revenue
Cost

90,000
B - E Output

Volume

CVP Graph -- Both Firms

$

Revenue
Cost - B
Cost - A

340,000

90,000

Volume

Margin of Safety

Margin of safety in dollars:

Actual sales ($) - Breakeven sales ($)
Budgeted sales ($) - Breakeven sales ($)
Margin of safety in percentage:
Margin of safety ($) / Sales ($)

Incremental Analysis

MetalWorks, Inc. which sells lockers to schools

has the following cost structure:
Sales per unit
Variable cost per unit
Contribution margin per unit
Total Fixed Costs

$450
333
$117

$1,250,000

How Does Breakeven Change?

1. Fixed Costs increase to $2,340,000

2. Revenue per unit falls to $433

3. Variable Costs per unit rise to $340

Sales Mix
Sales mix relative combination in which a
companys products are sold
Managers try to maximize overall profit based
on the optimal sales mix
Challenge not all products are equally
profitable
One measure of effectiveness of sales force or
sales strategy is sales mix and its profitability

Sales Mix and Break Even ($)

Razor Phone
Amount
Sales
Less: VC
CM
Less: FC
NOI

$80,000

Percent
100

Smart Phone
Amount
$20,000

60,000

10,000

$ 20,000

$10,000

Percent
100

Total
Amount
$100,000

27,000
$______

Percent
100

Sales Mix and Break Even ($)

Razor Phone
Amount
Sales

Percent
100

Smart Phone
Amount

Percent

Total
Amount

100

100

Less: VC
CM
Less: FC
NOI

Percent

27,000
$______

Sales Mix and Break Even ($)

Razor Phone
Amount
Sales

$20,000

Percent
100

Smart Phone
Amount
$80,000

Percent
100

Total
Amount
$100,000

Less: VC
CM
Less: FC
NOI

27,000
$_______

Percent
100

Sales Mix and Break Even ($)

Razor Phone
Amount
Sales

Percent
100

Smart Phone
Amount

Percent

Total
Amount

100

100

Less: VC
CM
Less: FC
NOI

Percent

27,000
$______

Sales Mix and Break Even (units)

Assume that the original data was based on
800 units sold of the Razor phone and 200
units sold of the Smart phone.
Determine the weighted average contribution
margin for the firm to obtain the break even
number of units.

Sales Mix and Break Even (units)

Razor Phone
Per
Unit

No.
Units

Amount

Smart Phone
Per
Unit

Sales

No.
Units

Amount

Total
Per
Unit

No.
Units

Amount

$100,000
$100

$100

75

50

$25

$50

Less: VC
CM
Less: FC
NOI

27,000

Sales Mix and Break Even (units)

Razor Phone
Per
Unit

No.
Units

Amount

Smart Phone
Per
Unit

No.
Units

Amount

Total
No.
Units

Per
Unit

Amount

Sales
$100

$100

75

50

$25

$50

Less: VC
CM
Less: FC
NOI

$27,000