Cost Volume Profit and Balanced Scorecard
CHAPTER 4 : COST-VOLUME-PROFIT ANALYSIS : A MANAGERIAL PLANNING TOOL
SUMMARY
Cost-Volume-Profit analysis estimates how changes in costs (both variable and fixed), sales volume, and price affect a company’s profit. CVP is a powerful tool for planning and decision making. Operating Income = Total revenue – Total Expense
Contribution margin is the difference between sales and variable expense. It is the amount of sales revenue left over after all the variable expenses are covered that can be used to contribute to fixed expense and operating income. Contribution Margin = Price – Variable cost per unit Contribution Margin Ratio =
Break-even point in number of units and in total sales dollars:
At breakeven, total cost (variable and fixed) equal total sales revenue.
Break-even units =
Break-even revenue =
Units and sales dollars needed to achieve a target income:
To earn a target (desired) profit, total costs (variable and fixed) plus the amount of target profit must equal total sales revenue.
Number of units to earn target income =
Sales dollars to earn target income =
Graphs of Cost-Volume-Profit Relationships:
CVP assumes linear revenue and cost functions, no finished goods ending inventories, constant sales mix, and selling prices and fixed and variable costs that are known with certainty.
Profit-volume graphs plot the relationship between profit (operating income) and units sold.Break-even units are shown where the profit-line crosses the horizontal axis.
CVP graphs plot a line for total costs and a line for total sales revenue. The intersection of these two lines is the break-even point in units.
Cost-Volume-Profit Analysis in a multiple product setting:
Multiple-product analysis requires the expected sales mix.
Break-even units for each product will change as the sales mix changes.
Increased sales of high contribution margin products decrease the break-even point.
Increased sales of low contribution margin products increase the
SUMMARY
Cost-Volume-Profit analysis estimates how changes in costs (both variable and fixed), sales volume, and price affect a company’s profit. CVP is a powerful tool for planning and decision making. Operating Income = Total revenue – Total Expense
Contribution margin is the difference between sales and variable expense. It is the amount of sales revenue left over after all the variable expenses are covered that can be used to contribute to fixed expense and operating income. Contribution Margin = Price – Variable cost per unit Contribution Margin Ratio =
Break-even point in number of units and in total sales dollars:
At breakeven, total cost (variable and fixed) equal total sales revenue.
Break-even units =
Break-even revenue =
Units and sales dollars needed to achieve a target income:
To earn a target (desired) profit, total costs (variable and fixed) plus the amount of target profit must equal total sales revenue.
Number of units to earn target income =
Sales dollars to earn target income =
Graphs of Cost-Volume-Profit Relationships:
CVP assumes linear revenue and cost functions, no finished goods ending inventories, constant sales mix, and selling prices and fixed and variable costs that are known with certainty.
Profit-volume graphs plot the relationship between profit (operating income) and units sold.Break-even units are shown where the profit-line crosses the horizontal axis.
CVP graphs plot a line for total costs and a line for total sales revenue. The intersection of these two lines is the break-even point in units.
Cost-Volume-Profit Analysis in a multiple product setting:
Multiple-product analysis requires the expected sales mix.
Break-even units for each product will change as the sales mix changes.
Increased sales of high contribution margin products decrease the break-even point.
Increased sales of low contribution margin products increase the