BU1002 Lecture 11: Cost Volume Profit Analysis
14 Jun 2018
School
Department
Course
Professor
Introduction to the concept of CVP
-CVP Analysis concerned with the change in profits in response to changes in sales volume, costs and
prices
-Helps the answer the following questions
• How many units need to be sold, or services performance, to break even (for example, earn
zero profit)?
• How many units need to be sold, or serviced performed, to achieve a particular level of
profit?
• What is the impact on profit of a change in the mix between fixed and variable costs?
• What is the impact on profit of a 15% increase in costs?
Cost behaviour
-examining cost behaviour enables us to consider
• The way in which costs change, and
• The main factors that influence those changes
• Costs can be classified as fixed, variable or mixed
• The nature of fixed and variable costs relates to whether such costs are likely to alter in total
with changes in activity
Fixed, variable and mixed costs
-Fixed costs are those costs which remain the same in total (within a given range of activity and
timeframe) irrespective of the level of activity
• E.g lease cost, depreciation charges
When we consider levels of activity in terms of units and output
• Total fixed costs remain the same, but
• Fixed costs per unit will decrease as the number of units produced increases
-Variable costs change in total as the level of activity changes
E.g cost of bricks to build a house aviation fuel for qantas
-Variable costs can be considered on either a total or uni basis
-the relevant is the range of activity over which the cost behaviour is assumed to be valid
-if the activity level geos outside the relevant range, the expected behaviour of cost changes can no
longer be assumed to be fixed
-mixed costs occur some costs have both fixed and variable components
Break-even analysis
-break even analysis related to the calculation of the necesssary levels of activity required in order to
break even in a given period
-break even occurs when total revenue and total costs are equal resulting in zero profit
• REVENUE = FC + VC
-involves the contribution margin concept
-contribution margin is calculated by deducting total variable costs from total revenue
-contribution margin per unit can be calculated by deducting variable cost per unit from revenue per
unit
• Contribution Margin = revenue - VC
find more resources at oneclass.com
find more resources at oneclass.com
find more resources at oneclass.com
find more resources at oneclass.com
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Cvp analysis concerned with the change in profits in response to changes in sales volume, costs and prices. Costs can be classified as fixed, variable or mixed. The nature of fixed and variable costs relates to whether such costs are likely to alter in total with changes in activity. Fixed costs are those costs which remain the same in total (within a given range of activity and timeframe) irrespective of the level of activity. When we consider levels of activity in terms of units and output. Fixed costs per unit will decrease as the number of units produced increases. Variable costs change in total as the level of activity changes. E. g cost of bricks to build a house aviation fuel for qantas. Variable costs can be considered on either a total or uni basis. The relevant is the range of activity over which the cost behaviour is assumed to be valid.
