* Original variable cost per unit is $45 * New variable cost per unit after equipment purchase is $45 - $5 = $40 * Original fixed costs are $43,750 * New fixed costs after equipment purchase are $48,700 * Selling price remains $80 per unit * Contribution per unit is selling price - variable cost = $80 - $40 = $40 * Break-even point in units = Fixed costs / Contribution per unit = $48,700 / $40 = 1,218 units Therefore, the break-even point in units if Splurge Electronics purchases the new equipment is 1,218 units.

1. CVP Analysis

2. Contribution Margin Statement
Sales per unit
- Variable Cost per unit
Contribution per unit
X No. of units
Total Contribution
- Total Fixed Costs
Profit

3. CVP Analysis
Cost-volume-profit (CVP) analysis is the study
of the effects of output volume on revenue
(sales), expenses (costs), and net income (net
profit).

4. 1. The behavior of costs and revenues have been reliably determined and
is linear over the relevant range
2. All costs may be divided into fixed and variable elements.
3. Fixed cost remain constant over the relevant volume range.
4. Variable costs are proportional to volume.
5. Selling prices to be unchanged.
6. Prices of cost factors are to be unchanged.
7. Efficiency and productivity remain unchanged.
8. The analysis either covers a single product or it assumes that a given
sales-mix will be maintained as total volume changes.
9. Revenue and costs are being compared on a common activity base.
10. Changes in beginning and ending inventory levels are insignificant in
amount.
CVP Assumptions

5. Example
Per Unit
Selling price $3.00
Variable cost of each item 2.10
Contribution $ .90
Monthly fixed expenses:
Rent $10,000
Depreciation 20,000
Other fixed expenses 15,000
Total fixed expenses per month $ 45,000

6. Contribution Margin Ratio or Profit
Volume Ratio
• CMR or PV Ratio represents the percentage of
sale available to recover the fixed cost.
• CMR or PV Ratio = Contribution per unit
Selling Price per Unit
,OR,
Total Contribution
Total Sales

7. Example
Per Unit
Selling price $3.00
Variable cost of each item 2.10
Contribution $ .90
Monthly fixed expenses:
Rent $10,000
Depreciation 20,000
Other fixed expenses 15,000
Total fixed expenses per month $ 45,000
Compute the Contribution Margin Ratio.

8. Break Even
The break-even is the level of sales at which
revenue equals expenses and net income is zero.
Sales
- Variable expenses
- Fixed expenses
Zero net income (break-even point)

9. Break Even
Break
Even
Break
Even Point
Break
even Sales

10. Break Even Point (BEP)
• Break Even Point is the ‘no. of units to be
sold to achieve no profit no loss’.
BEP = Total Fixed Costs / Contribution per unit

11. Break Even Sales (BES)
• Break Even Sales is the ‘amount of sales in
rupees required to achieve the no profit no
loss’
Break Even Sales = Total Fixed Cost / CMR

12. Example
Per Unit
Selling price $3.00
Variable cost of each item 2.10
Contribution $ .90
Monthly fixed expenses:
Rent $10,000
Depreciation 20,000
Other fixed expenses 15,000
Total fixed expenses per month $ 45,000
Compute the BEP and BES.

13. Margin of Safety
• The excess of actual sales revenue over the
break even sales revenue.
• It represents the ‘how much sales the
company can lose before it incurs a loss’.
• It is the cushion available.
Margin of safety (in Rs.)= Actual Sales – BES

14. Example
Per Unit
Selling price $3.00
Variable cost of each item 2.10
Contribution $ .90
Monthly fixed expenses:
Rent $10,000
Depreciation 20,000
Other fixed expenses 15,000
Total fixed expenses per month $ 45,000
Compute the margin of safety if the actual sales is $200,000.

15. Example
A company had incurred fixed expenses of Rs.4,50,000 with sales of
Rs.15,00,000 and earned a profit of Rs.3,00,000 during the first half
of the year. In the Second half, it suffered a loss of Rs.1,50,000.
Compute:
i. The profit volume ratio, break even sales and margin of safety
for the first half.
ii. Sales of second half assuming that the selling price per
unit, variable cost per unit and fixed expenses remained unchanged.
iii. The margin of safety and breakeven point for the whole year.

16. Diva Products produces scarves. The estimated fixed costs
for the year are $164,500, and the estimated variable costs
per unit are $9. The company expects to produce and sell
40,000 scarves at a unit selling price of $16 per unit. How
much is the break-even point in units?
Ans: 23,500 units

17. At Bahama Foods, the break-even point is 1,600 units. If
fixed costs total $44,000 and variable costs are $12 per
unit, what is the selling price per unit?
Ans: $39.50

18. Widgely Sales Company’s break-even point is 12,200 units.
Each unit incurs variable costs of $2.20 and is sold for $4.90.
How much are total fixed costs?
Ans: $32,940

19. Target Net Profit
• CVP Analysis can be used to determine the total
sales or total units to be sold to achieve a ‘Target
Profit’.
No. of units to be sold = Total Fixed Costs +
Target Net Profit
Contribution per unit
Sales required in rupees = Total Fixed Costs +
Target Net Profit
CMR

20. Example
Per Unit
Selling price $3.00
Variable cost of each item 2.10
Contribution $ .90
Monthly fixed expenses:
Rent $10,000
Depreciation 20,000
Other fixed expenses 15,000
Total fixed expenses per month $ 45,000
Compute the number of units to be sold and amount of sales (in dollars)
required to earn a monthly profit of $9,000

21. Operating Leverage
• Operating leverage: a firm’s ratio of fixed costs to
variable costs.
• Highly leveraged firms have high fixed costs and
low variable costs.
– A small change in sales volume = a large change in net
income.
• Low leveraged firms have lower fixed costs and
higher variable costs.
– Changes in sales volume will have a smaller effect on
net income.

22. Degree of Operating Leverage
• DOL = % change in Operating Profits
% change in Sales
= Contribution/ Operating Profit

23. Example
Two competing companies HERO Ltd. and ZERO Ltd. sell same type of product in the same
market. Their forecasted Profit and Loss A/c for the year ending Mar 2018 are as follows:
HERO ZERO
Sales 500,000 500,000
Less: Variable Costs 400,000 300,000
Fixed costs 50,000 150,000
Forecasted net profit 50,000 50,000
You are required to state which company is likely greater profits in the conditions of:
a. Low demand
b. High Demand.

24. Total Annual
Costs (Rs.)
Percent of total annual
cost which is variable
Material 210,000 100%
Labour 150,000 80%
Factory overheads 92,000 60%
Administration expenses 40,000 35%
A Japanese soft drink is planning to establish a subsidiary company
in India to produce mineral water. Based on the estimated annual
sales of 40,000 bottles of mineral water, cost studies produced the
following estimates for Indian Subsidiary:
The Indian production will be sold by the manufacturer's representatives
who will receive a commission of 8% of the sale price.
1.What should be the selling price per bottle to earn a net profit of 10%
on sales.
2.What will be the break even point in units and in Rupee sales at the
above computed selling price.

25. Splurge Electronics sells homework machines for $80 each. Variable
costs per unit are $45 and total fixed costs are $43,750. Splurge is
considering the purchase of new equipment that would increase
fixed costs to $48,700, but decrease the variable costs per unit by
$5. At that level, Splurge Electronics expects it can sell 1,500 units
next year. What is the company’s break-even point in units if it
purchases the new equipment, assuming the selling price remains
constant?
Ans: 1,218 units