Topic Four by Dr. Ong Tze San [email protected]
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Cost-Volume-Profit Relationships. Topic Four by Dr. Ong Tze San [email protected]. 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 - PowerPoint PPT Presentation
Transcript of Topic Four by Dr. Ong Tze San [email protected]
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
CVP GraphD
olla
rs
Units
Break-even pointBreak-even point(400 units or $200,000 in sales)(400 units or $200,000 in sales)
Break-even pointBreak-even point(400 units or $200,000 in sales)(400 units or $200,000 in sales)
Profit Area
Loss Area
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Contribution Margin Ratio
• Contribution margin = sales –variable costs
• CM ratio = Total CM / Total sales
• Or, in terms of units, the contribution margin ratio is = unit CM/ unit selling pricesales
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Break-Even Analysis
Break-even analysis can be approached in two ways:
1. Equation method
2. Contribution margin method
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Equation Method
Profits = (Sales – Variable expenses) – Fixed expenses
Sales = Variable expenses + Fixed expenses + Profits
OR
At the break-even point At the break-even point profits equal zeroprofits equal zero
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Contribution Margin Method
The contribution margin method has two key equations.
Fixed expensesUnit contribution margin
=Break-even point
in units sold
Fixed expenses CM ratio
=Break-even point intotal sales dollars
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Key Assumptions of CVP Analysis
Selling price is constant.Costs are linear.In manufacturing companies,
inventories do not change (units produced = units sold).
