Summary FBS222: Chapter 4

Determine the break-even point in number of units and in total sales dollars.

Cost-Volume-Profit (CVP) Analysis estimates how changes in costs (both variable and fixed),
sales volume, and price affect a company’s profit.
CVP is a powerful tool for planning and decision making and is one of the most versatile and widely
applicable tools used by managerial accountants to help managers make better decisions and
pinpoint problems and find solutions.
Break-Even Point is the point where total revenue equals total cost or the point of zero profit. The
break-even point tells managers exactly how many units must be sold to cover all costs. Any units
sold above breakeven will yield a profit.

CVP analysis can address the following issues:
The number of units that must be sold to break even
The impact of a given reduction in fixed costs on the break-even point
p The impact of an increase in price on profit

Contribution Margin Income Statement is an income statement that is based on the separation
of costs into fixed and variable components.

Contribution Margin is the difference between sales and variable expense.

Total Variable Expense = DM + DL + variable OH + variable selling expense

Total Fixed Expense = fixed OH + fixed selling and administrative expenses

Total Contribution Margin = sales – variable expense

Unit Contribution Margin = price – variable cost per unit

Basic CVP Equation/ Operating Income = sales – total variable expense – total fixed expense

Operating Income = (unit selling price x number of units sold) – (variable cost per unit x number of
units sold) – total fixed cost

Break-Even Units = Total fixed expenses/ (price – variable cost per unit)

Break-Even Sales = Total fixed expenses/ contribution margin ratio

, The contribution margin income statement
Sales XXX
Total Variable Expense
Direct materials (XXX)
Direct labour (XXX)
Variable overhead (XXX)
Variable selling and admin expenses (XXX)
Contribution Margin XXX
Total Fixed Expense
Fixed overhead (XXX)
Fixed selling and admin expenses (XXX)
Operating Income XXX


i Example:
HannaH Inc plans to sell 1 000 mowers @ R400 each in the coming year. Product costs include:
Direct Materials per mower 180
Direct Labour per mower 100
Variable factory overhead per mower 25
Total fixed factory overhead 15 000

Variable selling expense is a commission of R20 per mower; fixed selling and admin expense totals
R30 000.

1. Calculate the total variable expense per unit.
Total Variable Expense = DM + DL + variable OH + variable selling expense
Variable Expense per unit = 180 + 100 + 25 + 20 = R325 per unit

2. Calculate the total fixed expense for the year.
Total Fixed Expense = fixed overhead + fixed selling and administrative expenses
Total Fixed Expense = 15 000 + 30 000 = R45 000
Hannah Inc .




I


3. Prepare a contribution margin income statement for atten
Du Toit for the coming year.
HannaH Inc.
Contribution Margin Income statement
400 000
Sales (1 000 x 400)
(325 000)
Total Variable Expense (1 000 x 325) Contribution Margin
s
⑤ 75 000
Total Fixed Expense
(45 000)
Operating Income
30 000
Hannah Inc .




4. Calculate the number of mowers that atten
Du Toit must sell to break even.
Break-Even Units = Total fixed expenses/ (price – variable cost per unit)
= 45 000/400 – 325 = 600 Units

5. Check answer = prep a contribution margin income statement based on the break-even point.

HannaH Inc.
Contribution Margin Income statement

Sales (600 x 400) 240 000
Total Variable Expense (600 x 325) (195 000)
Contribution Margin 45 000

Total Fixed Expense (45 000)
Operating Income 0