Cost-Volume-Profit
Analysis
Topic V
McGraw-Hill/Irwin
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Cost-Volume-Profit (CVP) Analysis for Curl, Inc., Lecture notes of Business Management and Analysis
An in-depth analysis of Curl, Inc.'s sales, costs, and profits using both the Equation Approach and Contribution-Margin Approach. The accountant calculates the break-even point, contribution margin ratio, and profit-volume graph to help the company understand its cost structure and operating leverage.
What you will learn
- What is the impact of an increase in fixed expenses on net income?
- How does the unit contribution margin vary between surfboards and sailboards?
- How does the contribution margin ratio change as the number of surfboards sold increases?
- What is the operating leverage factor for Curl, Inc.?
- What is the break-even point for Curl, Inc. in sales dollars?
Typology: Lecture notes
2019/2020
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Cost-Volume-Profit
Analysis
Topic V
McGraw-Hill/Irwin
The Break-Even Point
The break-even point is the point in the volume of activity where the
organization’s revenues and expenses are equal.
Sales $250, Less: variable expenses 150, Contribution margin 100, Less: fixed expenses 100, Net income $ -
Contribution-Margin Approach
For each additional surf board sold, Curl generates $200 in contribution margin.
Total Per Unit Percent Sales (500 surf boards) $250,000 $ 500 100% Less: variable expenses 150,000 300 60% Contribution margin $100,000 $ 200 40% Less: fixed expenses 80, Net income $ 20,
Consider the following information
developed by the accountant at Curl, Inc.:
Contribution-Margin Approach
Fixed expenses
Unit contribution margin
Break-even point
(in units)
Total Per Unit Percent Sales (500 surf boards) $250,000 $ 500 100% Less: variable expenses 150,000 300 60% Contribution margin $100,000 $ 200 40% Less: fixed expenses 80, Net income $ 20,
= 400 surf boards
Contribution Margin Ratio
Calculate the break-even point in sales dollars rather than units
by using the contribution margin ratio.
Contribution margin
Sales
= CM Ratio
Fixed expense
CM Ratio
Break-even point
(in sales dollars)
Total Per Unit Percent Sales (400 surf boards) $200,000 $ 500 100% Less: variable expenses 120,000 300 60% Contribution margin $ 80,000 $ 200 40% Less: fixed expenses 80, Net income $ -
Contribution Margin Ratio
= $200,000 sales
Cost-Volume-Profit Graph
Dollars
600 700 800 Units
200 300 400 500
450,
100
200, 150, 100, 50,
400, 350, 300, 250,
Fixed expenses
Cost-Volume-Profit Graph
Dollars
600 700 800 Units
200 300 400 500
450,
100
200, 150, 100, 50,
400, 350, 300, 250,
Fixed expenses
Cost-Volume-Profit Graph
Dollars
600 700 800 Units
200 300 400 500
450,
100
200, 150, 100, 50,
400, 350, 300, 250,
Fixed expenses
Cost-Volume-Profit Graph
Dollars
600 700 800 Units
200 300 400 500
450,
100
200, 150, 100, 50,
400, 350, 300, 250,
Fixed expenses
Break-even point
Target Net Profit
We can determine the number of surfboards that Curl must
sell to earn a profit of $100,000 using the contribution
margin approach.
Fixed expenses + Target profit
Unit contribution margin
Units sold to earn
the target profit
= 900 surf boards
Equation Approach
Sales revenue – Variable expenses – Fixed expenses = Profit
($500 × X) – ($300 × X) – $80,000 = $100,
($200X) = $180,
X = 900 surf boards
Safety Margin
Curl, Inc. has a break-even point of $200,
in sales. If actual sales are $250,000, the safety margin is
$50,000, or 100 surf boards.
Break-even sales 400 units
Actual sales 500 units Sales $ 200,000 $ 250, Less: variable expenses 120,000 150, Contribution margin 80,000 100, Less: fixed expenses 80,000 80, Net income $ - $ 20,