Cost-Volume-Profit (CVP) analysis:
- 5 factors
helps managers understand the relationships among cost, revenue, and profit on one hand and sales and volume on the other using these 5 key factors:
- selling profits
- sales volumes
- unit variable costs
- total fixed costs
- mixed product costs
Break Even Point
The level of sales at which Profit = 0
neither profit nor loss
*CM is enough to cover fixed expenses with no money left over = 0 profit
incremental analysis
focuses on the costs and revenues that change as a result of a decision i.e. a new program that is implemented)
Target analysis
estimates what sales volume is needed to achieve a specific target profit
decrease break even point
decrease fixed expenses or increase unit CM
increase unit CM
increase selling price or decrease variable cost per unit
- operating leverage
- degree of operating leverage
- a measure of how sensitive net operating income is to a given % change in dollar sales
- measure at a given level of sales, of how percentage change in sales volume will affect profits
- higher fixed costs result in higher operating leverage
- operating lev is highest when sales are near the break even point
sales mix
the relative proportions in which a company’s products are sold. the goal is to achieve the combo or mix that will yield the greatest amount of profits. sales are greater when high-margin items make up a large portion of total sales
CM equation
*cover for fixed expenses, left overs is profit
Sales - Variable Costs
CMR
*Shows how CM will be affected by total sales
Higher % = good
CM / Sales or unit CM / unit Selling Price
Break-even in sales
*profit = 0
Fixed Expenses / CMR = Total Sales $$
Break-even in units sold
*profit = 0
Fixed Expenses / CM per unit
Sales to reach a targeted profit
Profit = CMR * Sales - Fixed
Fixed Exp + Profit / CMR
NOI (Profit)
Sales - VC = CM - Fixed Cost
# of units to reach a targeted profit (Profit = unit CM * Q - Fixed)
Fixed + Profit / CM per unit
Variable Exp Ratio
variable exp / total sales
- Margin of Safety (the amount sales can drop before losses are incurred)
- Margin %
- total sales - break even sales
- Margin safety $$ / total sales $$
operating leverage (how a % change in sales volume will affect profits)
CM / NOI
Assumptions for CVP (4)
selling price per unit constant
costs are linear, total costs can be separated into FC & VC
Sales mix is constant
No change in inventories (production = sales)
