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Topic Four by Dr. Ong Tze San tzesan@econ.upm.my

Cost-Volume-Profit Relationships. Topic Four by Dr. Ong Tze San tzesan@econ.upm.edu.my. Break-even point (400 units or $200,000 in sales). CVP Graph. Profit Area. Dollars. Loss Area. Units. Contribution Margin Ratio. Contribution margin = sales –variable costs

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Topic Four by Dr. Ong Tze San tzesan@econ.upm.my

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  1. Cost-Volume-Profit Relationships Topic Fourby Dr. Ong Tze Santzesan@econ.upm.edu.my

  2. Break-even point(400 units or $200,000 in sales) CVP Graph Profit Area Dollars Loss Area Units

  3. Contribution Margin Ratio • Contribution margin = sales –variable costs • CM ratio = Total CM / Total sales • Or, in terms of units, the contribution margin ratiois = unit CM/ unit selling pricesales

  4. Break-Even Analysis Break-even analysis can be approached in two ways: • Equation method • Contribution margin method

  5. At the break-even point profits equal zero Equation Method Profits = (Sales – Variable expenses) – Fixed expenses OR Sales = Variable expenses + Fixed expenses + Profits

  6. Break-even point in units sold Fixed expenses Unit contribution margin = Break-even point in total sales dollars Fixed expenses CM ratio = Contribution Margin Method The contribution margin method has two key equations.

  7. Key Assumptions of CVP Analysis • Selling price is constant. • Costs are linear. • In manufacturing companies, inventories do not change (units produced = units sold).

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