1. CVP Analysis
1. CVP Analysis
1. CVP Analysis
PROFIT ANALYSIS
Edited by
Nazim Uddin
Lecturer, National Institute of Textile
Engineering & Research
Study Objectives
1. Distinguish between
variable and fixed costs.
2. Explain the significance of
the relevant range.
3. Explain the concept of
mixed costs.
4. List the five components of
cost-volume-profit analysis.
5. Indicate what contribution
margin is and how it can be
expressed.
Study Objectives
Examples include:
1. Depreciation on buildings and equipment,
2. Property taxes
3. Insurance, and
4. Rent.
Sometimes called
semivariable cost.
Change in total
but not
proportionately
with changes in
activity level.
Maintenance costs:
$8,000 per month plus $1.10 per mile.
a. Sales mix.
b. Unit selling prices.
c. Fixed costs per unit.
d. Volume or level of activity.
Thus, for every DVD player sold, Vargo Video has $200 to
cover fixed costs and contribute to net income.
For every DVD player that Vargo sells above 1,000 units, net
income increases by the amount of the contribution margin,
$200.
Vargo’s CVP income statement, assuming 1001 units sold is:
Contribution margin:
a. $100,000.
b. $160,000.
c. $200,000.
d. $300,000.
Mathematical Equation
Using the basic formula for the break-even point,
simply include the desired net income as a factor.
The computation for Vargo Video is as follows:
SO 8: Define margin of safety, and give the formulas for computing it.
Break-Even Analysis: Margin of Safety
SO 8: Define margin of safety, and give the formulas for computing it.
Let’s Review
a. 25%.
b. 30%.
c. 33 1/3%.
$600 - $420 = $180
d. 45%. $180 ÷ $600 = 30%
A Hybrid Dilemma
Hybrid vehicles typically cost
$3,000 to $5,000 more than
conventional vehicles.
The most fuel efficient
hybrids can save about $660
per year in fuel costs.
Each gallon of gas not burned
reduces carbon dioxide
emissions by 19 pounds.
All About You
A Hybrid Dilemma
What do you think?
Do you think that making the
investment in a hybrid car will
slow the cash outflow from
your wallet due to high gas
prices and save your feet?
Because of the premium
charged for hybrid cars,
would you ever break-even on
your investment?
Chapter Review - Brief Exercise 5-4
Markowis Company accumulates the following data concerning a
mixed cost, using miles as the activity level.
Miles Total Miles Total
Driven Cost Driven Cost
January 8,000 $14,150 March 8,500 $15,000
February 7,500 $13,600 April 8,200 $14,490
Compute the variable and fixed cost elements using the high-
low method.
High Level of Activity: March $15,000 8,500 miles
Low Level of Activity: February 13,600 7,500 miles
Difference $ 1,400 1,000 miles
Step 1:
Variable Cost per Unit = $1,400 ÷ 1,000 miles
= $1.40 variable cost per mile
Chapter Review - Brief Exercise 5-4
Step 1:
Variable Cost per Unit = $1,400 ÷ 1,000 miles
= $1.40 variable cost per mile
Step 2: High Low
Total Cost: $15,000 $13,600
Variable Cost:
8,500 × $1.40 11,900
7,500 × $1.40 10,500
Total Fixed Costs $ 3,100 $ 3,100
Questions
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