Cost Volume Profit Analysis

Cost Volume Profit Analysis

• A tool used by managers to analyze the profitability of products or services.
• One of many analysis tools available to cost accountants.

Pros and Cons

• Pros:
  • Allows analysis of the product to see how adjustments to productivity (units produced) affect profits.
• Cons:
  • Can be time-consuming if there are many costs to accumulate and allocate.
• Many analysis exist; firms are not limited to a single method.

Profit Equation

• Profit = Total Revenue - Total Costs
• Total Revenue = Price per unit x Number of units produced
• Total Costs = (Variable Costs per unit x number of units) + Fixed Costs
• Profit = (Price per unit x Number of units) - (Variable Costs per unit x Number of units) - Fixed Costs
• Profit = (Price per unit - Variable Cost per unit) x Number of Units - Fixed Costs
• Using algebra to find the number of units (x):
  • $Profit = (P - V) * x - FixedCost$
  • Isolate x: $(P - V) * x = Profit + FixedCost$
  • $x = \frac{FixedCost}{P - V}$, where P is the Price per unit and V is Variable cost per unit.

Finding Dollar Value

• Use the contribution margin ratio.
• Contribution Margin = Sales Price - Variable Cost per unit.
• Contribution Margin Ratio = (Sales Price - Variable Cost per unit) / Sales Price
• Dollar amount of breakeven level = Fixed Costs / Contribution Margin Ratio

Example

• Price per unit: 100
• Cost per unit: 40
• Gross Profit: 60 (Contribution Margin)
• Contribution Margin Ratio: 60 / $100 = 60$

Breakeven Analysis

• Breakeven point per unit
• Breakeven point in dollars

Target Volume

• Calculate how many units must be created to achieve a specific profit target (e.g., $$50,000 profit).