ACCT20001 Lecture Notes - Lecture 3: Contribution Margin, Variable Cost, Sensitivity Analysis
16 May 2018
School
Department
Course
Professor
Cost-volume-profit analysis, revenue and pricing
Revenue and revenue models
•How are we going to earn our revenue?
-Who are the customers/consumers?
-What are we offering? Sell a good/service directly to customers to on-sell, or consumers?
-Sell regularly or one-off? Price per transaction or subscription?
-Physical products/services/expertise?
-Pricing?
•Revenue generation
-Dropbox - subscription
-Digital news service (WSJ) - subscription
-Facebook - advertising (“clicks”)
-Ford - sales of vehicles
Cost-volume-profit analysis
•Calculate the units or revenues required in order to achieve breakeven
•Calculate the units or revenues required in order to achieve a target profit
•Calculate margin of safety = excess of budgeted revenues over breakeven revenues
•Conduct sensitivity analysis: answer “what-if” type questions on the impact of changes to key
variables on profits and/or breakeven calculations
-selling price
-variable costs
-fixed costs (e.g. acquisition of new assets, new advertising campaign, leasing new offices)
CVP Model Assumptions
1. Total costs can be split into fixed component and a variable component
2. Total costs and total revenues are linear with respect to output volume
3. The unit selling price, unit variable costs and total fixed costs are known and constant
4. The proportion of units of different products sold will remain constant as the total units sold
changes
5. Zero time value of money
6. Costs and revenues have a single common driver: output volume
Contribution Margin
Contribution Margin (CM) = Revenue - Variable Cost
•Can be expressed as:
•Total CM = total revenue - total variable cost
•CM per unit = selling price - variable cost per unit
•CM ratio = (SP - VC per unit) / SP!
1
Fixed cost behaviour
Variable Cost behaviour
The Essential Question in CVP
•Given our Costs (and selling price), at what output Volume (measured in units) do we make a
(given) Profit?
•To determine the break-even number of units, set “profit” equal to zero
•Breakeven revenues = breakeven units x selling price
2
Document Summary
Xed costs (e. g. acquisition of new assets, new advertising campaign, leasing new of ces) Example - melbourne theatre company: selling price per ticket= , total variable cost per ticket = , total xed cost = ,800. Breakeven volume = 124,800 / (20 - 7) = 9,600 tickets. Units to sell to achieve pro t of 50,000 = (124,800+50,000) / (20 - 7) = 13,447 tickets. Robot tattoo artist: french artists pierre emm and johan da silveira developed a prototype of a tattoo robot, not yet commercially available, tattoo artists are generally self-employed and only paid commission by the studio, perhaps 50% Decrease in variable costs, increase in contribution margin per unit, increase in total xed costs. All else being equal, operating leverage would increase. Xed costs are said to have higher operating leverage. Greater upside = once breakeven point is reached, pro ts will increase.
