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CVP Analysis
Contribution Margin Ratio
Target Profit Analysis
Break Even Point
Margin of Safety
Cost-Volume- Profit (CVP) Analysis
● Helps managers understand the
relationships among costs, volume, and
profit
● Looks at how profits are affected by selling
prices, sales volume, unit variable costs,
total fixed costs, and mix of products sold
3 Types of costs
Variable: Vary directly proportional with changes in activity
Ex. Direct Labor, Direct Materials
Fixed: Remain the same regardless of the level of activity
Ex. Rent, Property Tax
Mixed: Have a variable & a fixed element (Change in total but not proportionally
Ex. Utility bill
Contribution Margin
CM = Sales - Variable cost
CM ratio = Contribution Margin/ Sales
CM ratio Example
Total
Per Unit
Percent of Sales
Sales (200 toasters)
$80,000
$400
100%
Variable expenses
$35,00
$175
????
Contribution margin
Fixed expenses
Net operating income
????
$20,000
CM ratio Example
Total
Per Unit
Percent of Sales
Sales (200 toasters)
$80,000
$400
100%
Variable expenses
$35,00
$175
43%
Contribution margin
$45,000
$225
57%
Fixed expenses
$20,000
Net operating income
$25,000
Target Profit Analysis
● Is used to estimate what sales volume is
needed to achieve a specific target profit
● For example: Gary’s Guitars wants to know
how many guitars they have to sell in order
to have a profit of $20,000 per month.
Target Profit
Dollar amount:
Target profit = Fixed cost + Target profit / CM%
Total Units:
Target profit = Fixed cost + Target profit / CM per unit
Target Profit Example
Gary’s Guitars wants to know how many guitars
they have to sell in order to have a profit of
$20,000 per month.Fixed expenses are
$10,000 and has a unit contribution margin of
$200. What's the target profit in units?
Target Profit Example
Unit sales to attain the target profit = Target
profit+Fixed expenses/ Unit CM
Unit sales to attain the target profit = $20,000
+$10,000/ 200
Unit sales to attain the target profit = 150
Target Profit Example
Same example and the Contribution ratio is
35%. What’s the Target Profit in dollars?
Target Profit Example
Dollar sales to attain a target profit= Target
profit+Fixed expenses/CM ratio
Dollar sales to attain a target profit= $20,000
+$10,000/35%
Dollar sales to attain a target profit= $85,714.28
Break Even Point
● The level of sales at which the company’s
profit is zero
● Since to target profit except the target profit
is zero
● You can find the break even point in units or
in dollars
Break Even Point in Units
Unit sales to break even = Fixed expenses/ Unit CM
Break Even Example
Gary’s Guitars wants to know how many guitars
they have to sell in order to break even. Fixed
expenses are $10,000 and has a unit
contribution margin of $200. What is the break
even point in units?
Break Even Example
Unit sales to break even = Fixed expenses/ Unit CM
Unit sales to break even = $10,000/ $200
Unit sales to break even = 50
Break Even Point in Dollars
Dollar sales to break even =Fixed expenses/ CM ratio
Break Even Example
Gary’s Guitars wants to know how many guitars
they have to sell in order to break even. Fixed
expenses are $10,000 and has a contribution
margin ratio of 35%.What is the break even
point in dollars?
Break Even Example
Dollar sales to break even =Fixed expenses/ CM ratio
Dollar sales to break even =$10,000/ .35
Dollar sales to break even =$28,571.43
Margin of Safety
● Is the excess of budgeted or actual sales
dollars over the break-even volume of sales
dollars
Margin of Safety
Margin of safety in dollars= Total budgeted (or
actual) sales - break-even sales
Margin of safety percentage= Margin of safety
in dollars/ Total budgeted (or actual) sales in
dollars
Margin of Safety
Sales (at the current
volume of 75 guitars) (X)
???
Break-even sales (50
guitars)
$28,571.43
Margin of safety in dollars
(Y)
???
Margin of Safety, (Y)/(X)
???
Margin of Safety
Sales (at the current
volume of 75 guitars) (X)
$42,857.14
Break-even sales (50
guitars)
$28,571.43
Margin of safety in dollars
(Y)
$14,285.72
Margin of Safety, (Y)/(X)
33.33%
Overview
Catie’s Couches Examples
Catie’s Couches makes and sells expensive couches. Below is the company’s
contribution format income statement for the most recent year.
Total
Per Unit
Percent of Sales
Sales (50,000 units)
$35,000,000
$700
100%
Variable expenses
15,000,000
300
?
Contribution Margin
20,000,000
400
?
Fixed expenses
15,000,000
Net operating
income
5,000,000
Catie’s Couches Example
● Compute the company’s CM ratio
● Compute the break-even point in units and
dollars
● Compute the target profit of $7 million in
units and dollars
● Compute the margin of safety in dollars and
units
Compute the company’s CM ratio
Total
Per Unit
Percent of Sales
Sales (50,000 units)
$35,000,000
$700
100%
Variable expenses
15,000,000
300
?
Contribution Margin
20,000,000
400
?
Fixed expenses
15,000,000
Net operating
income
5,000,000
Compute the company’s CM ratio
Total
Per Unit
Percent of Sales
Sales (50,000 units)
$35,000,000
$700
100%
Variable expenses
15,000,000
300
?
Contribution Margin
20,000,000
400
?
Fixed expenses
15,000,000
Net operating
income
5,000,000
CM ratio = 400/700 = 57%
Variable expenses ratio = Variable expense/Sales = 300/700= 43%
Compute the break-even point in units and
dollars
Unit sales to break even = Fixed expenses/ Unit CM
Dollar sales to break even =Fixed expenses/ CM ratio
Compute the break-even point in units and
dollars
Unit sales to break even = $15,000,000/ $400
=37,500 units
Dollar sales to break even =$15,000,000/ .57
=$26,315,789.47
Compute the target profit of $7 million in units
and dollars
Unit sales to attain the target profit = Target
profit+Fixed expenses/ Unit CM
Dollar sales to attain a target profit= Target
profit+Fixed expenses/CM ratio
Compute the target profit of $7 million in units
and dollars
Unit sales to attain the target profit =
$7,000,000+$15,000,000/ 400
=55,000 units
Dollar sales to attain a target profit= $7,000,000
+$15,000,000/ .57
=$38,596,491.22
Compute the margin of safety in dollars and
units
Sales (at the current
volume of 50,000 units)
(X)
$
Break-even sales (37,500
units)
$
Margin of safety in dollars
(Y)
$
Margin of Safety, (Y)/(X)
%
Compute the margin of safety in dollars and
units
Sales (at the current
volume of 50,000 units)
(X)
$35,000,000
Break-even sales (37,500
units)
$26,315,789.47
Margin of safety in dollars
(Y)
$8,684,210.53
Margin of Safety, (Y)/(X)
25%