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Chapter 4

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COMM 112
Teri Shearer

CVP ANALYSISCostvolume Profit CVP analysisestimates how change sin costs sales volume and price affect a companys profitRECALL income statement is divided by manufacturing selling and administrative fuctionsBUT for CVP analysis you split it up by variable and fixed costs o Variable costs include direct materials direct labour variable overhead and variable selling oradministrative costs o Fixed costs include fixed overhead fixed selling and administrative costs o This income statement is called a contribution margin income statement SALES LESS VARIABLE COSTSCONTRIBUTION MARGIN LESS FIXED COSTSINCOME FROM OPERATIONSCONTRIBUTION MARGINsalesvariable costsUNIT CONTRIBUTION MARGINsales price per unitvariable cost per unitCONTRIBUTION MARGIN RATIOcontribution marginsalesCHANGE IN INCOME FROM OPERATIONSchange in sales dollars X contribution margin ratioCHANGE IN INCOME FROM OPERATIONSchange in sales units X unit contribution margin VARIABLE COSTS100contribution margin ratioOPERATING INCOMEsalesvariable expensestotal fixed expenses price Xof units soldvariable cost per unit Xunits soldtotal fixed cost BREAK EVEN POINT IN UNITStotal fixed costpricevariable cost per unitOperating income is 0 at breakeven BREAK EVEN POINT IN SALES DOLLARStotal fixed expensescontribution margin ratioJust take the breakeven units and multiply it by priceTotal variable costs are defined as a percentage of sales rather than as an amount per unit sold o Variable cost ratiothe proportion of variable cost from the revenueIncome statement can be expanded to add percent of sales or per unit values When fixed costcontribution margin then the operating income is 0 AKA breakeven TARGET INCOMEHow many units must be sold and how much sales revenue is needed to earn a particular target income 1 You can use operating income equation AKA make operating incometarget income you want o This will tell you how many units need to be sold
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