Chapter 18 Cost volume profit analysis Copyright ª 2006 McGraw­Hill Australia Pty Ltd 18­1 Cost volume profit (CVP) analysis • A technique used to determine the effects of changes in an organisation’s sales volume on its costs, revenue and profit • Can be used in profit-seeking organisations and not-for-profit organisations • Not confined to profit-seeking enterprises • Commonly used in many not-for-profit situations Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 18-2 The break-even point • The volume of sales where the total revenues and expenses are equal, and the operation breaks even • At this level of sales, there is no profit or loss • Can be calculated for an entire organisation or individual projects Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 18-3 Formulas Break-evenpoint(inunits)=Unitcontributionmargin Break-evenpoint(insalesdollar)=Unitcontributionmarginratio Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 18-4 Terminology • Contribution margin (or variable costing) statement – A profit report where costs are reported by cost behaviour and a contribution margin is calculated – Fixed and variable costs are separated • Total contribution margin – The difference between the total sales revenue and the total variable costs – The amount available to cover fixed costs and then contribute to profits continued Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 18-5 Terminology • Unit contribution margin – The difference between the sales price per unit and the variable cost per unit • Contribution margin ratio – The unit contribution margin divided by the unit sales price – The proportion of each sales dollar available to cover fixed costs and earn a profit • Contribution margin percentage – The contribution margin ratio multiplied by 100 – The percentage of each sales dollar available to cover fixed costs and earn a profit Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 18-6 Graphing cost volume profit relationships • Shows how costs, revenue and profits change as sales volume changes • Five steps 1. Draw the axes of the graph 2. Draw the fixed expense line 3. Draw the total expense line 4. Draw the total revenue line 5. Break-even point—where the total revenue and total expense lines intersect Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 18-7 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 18-8 Profit volume (PV) graph • Shows the total amount of profit or loss at different sales volumes • The graph intercepts the vertical axis at the amount equal to the fixed costs • The break-even point is the point at which the line crosses the horizontal axis Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 18-9 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 18-10 Target net profit