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Cost-Volume-Profit Analysis

Cost Behavior.Cost behavior is the manner in which a cost changes as a related activity changes.

Cost-Volume-Profit Relationships. is the examination of the relationships among selling prices, sales and production volume, costs, expenses, and profits.

Special Relationships and Analyses

Cost-Volume-Profit Analysis.

Cost-volume-profit analysis can be presented graphically as well as in equation form.

Variable Costs

Fixed Costs

Mixed Costs

Operating Leverage

Margin of Safety

Sales Mix

Contribution Margin

Break-Even Point

Profit-Volume Chart

Unit Contribution Margin

Contribution Margin Rati

Assumptions

Are costs that vary in proportion to changes in the activity base.

Cost per unit remains the same regardless of changes in the activity base.

Total cost changes in proportion to changes in the activity base.

Fixed costs are costs that remain the same in total dollar amount as the activity base changes.

Cost per unit decreases as the activity level increases and increases as the activity level decreases.

Total cost remains the same regardless of changes in the activity base.

Mixed costs are costs that have characteristics of both a variable and a fixed cost. Mixed costs are sometimes called semivariable or semifixed costs.

Contribution margin is the excess of sales over variable costs, computed as follows: Contribution Margin = Sales – Variable Costs

The contribution margin ratio, sometimes called the profit-volume ratio, indicates the percentage of each sales dollar available to cover fixed costs and to provide income from operations.

Contribution Margin Ratio =

Contribution Margin /Sales

The unit contribution margin is also useful for analyzing the profit potential of proposed deci-sions. The unit contribution margin is computed as follows: Unit Contribution Margin = Sales Price per Unit – Variable Cost per Unit

graphically shows sales, costs, and the related profit or loss for various levels of units sold. It assists in understanding the relationship among sales, costs, and operating profit or loss.

Plots only the difference between total sales and total costs (or profits). In this way, the profit-volume chart allows managers to determine the operating profit (or loss) for various levels of units sold

-Total sales and total costs can be represented by straight lines.

▪ Within the relevant range of operating activity, the efficiency of operations does not change.

▪ Costs can be divided into fixed and variable components.

▪ The sales mix is constant.

▪ There is no change in the inventory quantities during the per-

The sales mix is the relative distribution of sales among the products sold by a company.

The relationship between a company’s contribution margin and income from operations is measured by operating leverage. A company’s operating leverage is computed as follows: Operating Leverage =

Contribution Margin/ Income from Operations

The margin of safety indicates the possible decrease in sales that may occur before an oper-ating loss results. Thus, if the margin of safety is low, even a small decline in sales revenue may result in an operating loss.