Chapter 03-Cost-Volume-Profit Relationship
Chapter 03-Cost-Volume-Profit Relationship
Chapter 03-Cost-Volume-Profit Relationship
Production - Example
Marketing - Example
Distribution - Example
16,000 –
12,000 –
Relevant Range
8,000 –
4,000
–
–
–
0 500 1,000 1,500 2,000 2,500
Volume in Units
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Cost-Volume-Profit
Analysis (CVP)
Break-even in units:
Break-even in dollars:
Revenue (sales)
– Variable cost (VC)
S – 60%S – $15,000 = 0
40%S = $15,000
S = $15,000 ÷ 40%
S = $37,500
BEP at
7,500 units
2,500 units is the extra
volume needed to
reach the target profit
BEP at
$37,500
$22,500 is the extra
volume needed to
reach the target profit
Change in EBIT
= EBIT
Change in sales
Sales
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Degree of Operating Leverage
from Sales Level
If we have the data, we can use this
formula:
DOLs = Q (P – VC)
Q (P – VC) – FC
Where,
Q: Quantity; P: Price; VC: Variable cost per unit; FC: Fixed cost
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Degree of Operating Leverage
from Sales Level
In briefly:
Contribution margin
DOL =
EBIT
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What does this tell us?
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An example for DOL
Saigon’s Coffee Shop
Data:
Price $5
Variable cost per unit $3
Fixed cost $15,000
Income statement Planned New Change
Quantity (unit) 10,000 11,000 10%
Sales 50,000 55,000
Variable costs 30,000 33,000
Contribution margin 20,000 22,000
Fixed costs 15,000 15,000
EBIT 5,000 7,000 40%
DOL [$20,000/$5,000] 4
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Gross Margin and Contribution Margin
Financial Management
accounting accounting
Sales Sales
(-) Cost of good sold (-) Variable cost
(=) Gross margin (=) Contribution margin
(-) Operating costs (-) Fixed cost
(=) EBIT (=) EBIT
Income
Company A Company B
statement
Amount % Amount %
Sales 70,000 100% 70,000 100%
Variable cost 28,000 40% 56,000 80%
Contribution 42,000 60% 14,000 20%
Fixed costs 50,000 10,000
Profits (8,000) 4,000