Practical Guide 3: Cost-Volume-Profit Analysis

1. Objectives

Understanding the characteristics of cost-volume-profit analysis.

Determine the breakeven point and the minimum production levels for
reach that point.
Carry out a sensitivity analysis in the determination of the point of
balance to optimize decision-making
2. Topics to address

Cost-volume-profit analysis.
Break-even point.
Sensitivity analysis at the break-even point.

3.Duration of the practice

Two sessions (4 hours).

4.Theoretical framework

1. Definition
The Cost-Volume-Profit (CVP) analysis studies the behavior and the

relationship between revenues and the components of total costs, as the

that changes occur in the units sold, the selling price, the cost

variable per unit or the fixed costs of a product.

2. Assumptions of cost-volume-profit
a) Changes in production/sales volume are the only cause for
the changes in costs and in revenues.
b) Total costs consist of fixed costs and variable costs.
c) Revenues and costs behave and can be graphed as a
linear function (a straight line).
d) The selling price, the variable cost per unit, and the fixed costs are known.
and they are constant.
In many cases, only a single product will be analyzed. If studied
multiple products, their relative sales proportions are known and are
constants.
f) The value of money over time (interest) is ignored.
 5.Exercises

1. Fill in the blanks for each of the following independent cases.

Costs Costs Costs Utility % contribution

Case Income fixed variables Operational Totals marginal

A. - $500 $800 $1,200 -

B. $2,000 $300 - $200 -

C. $1,000 $700 $1,000 - -

D. $1,500 - $300 - - 40%

(R: Table)

Income CV CF Costs Utility Contribution percentage

total marginal operation
A 2000 500 300 800 1200 0.75
B 2000 1500 300 1800 200 0.25
C 1000 700 300 1000 0 0.3
D 1500 900 300 1200 300 0.4

Patel Manufacturing sold 180,000 units of its product at $25 per unit.

2005. The variable unit cost is $20 and the total fixed costs amount to

$800,000.

Calcule (a) la contribución marginal y (b) la utilidad operativa.( R: MC=900,000;

UO=100,000

The current manufacturing process of Patel requires intensive use of labor.

work. Kate Schoenen, production manager at Patel, has proposed to invest in

 manufacturing equipment with cutting-edge technology, which will increase the annual fixed cost

$2,500,000. Variable costs are expected to decrease to $10 per unit.

Patel plans to maintain the same sales volume and selling price next year.

year. How would the acceptance of Schoenen's proposal affect its responses to (a)

y (b) in requirement 1? (R: MC=2,700,000; UO=200,000)

INNOVA is a company that manufactures and sells accessories in the local market.

for personal computers at the price of 75 sols each and their annual production

normal is 120,000 units.

For this year, their estimated sales are only 110,000 units, so

it would increase its finished product inventory by 10,000 units.

The cost of each accessory is:

Direct raw material 6:00 PM

Direct labor 9:00

Variable indirect costs 2.40

Variable selling expenses 6.60

Total variable cost 36.00

Total fixed indirect costs 1,768,650.00

Requirements:

a) INNOVA has received an offer from abroad to export 4,000 units to

equivalent price in soles of 60 per unit. To fulfill this order, a

special packaging that increases the variable cost by 1.80 and the fixed costs by 54,000.00.

Is it worth accepting the order? Why? (A: Yes, it is worth it because UO(additional) =

34,800
 b) In the event that the order in item a) is accepted, what would be the net profit if

Is the tax rate 30%? (R: UN = 1,789,305)

4. The company SUPERTECH has a maximum capacity of 300,000 units per

year and the normal activity is considered as 200,000 units per year.

The variable manufacturing costs are $9 per unit and the overhead costs of

fixed factory costs are $728,000 per year.

Variable selling expenses are $4 per unit while selling expenses

fixed are $252,000 per year.

The selling price is $23.60 per unit including VAT.

Requirements:

What is the break-even point expressed in sales dollars? (A: Ie =

2,800,000

What is the break-even point expressed in units? (A: Qe = 140,000)

How many units need to be sold to achieve a target net profit

of $70,000 per year if the income tax rate is 30%? (R: Qm =

154,286

How many units must be sold to achieve a net profit of 7%?

Can you produce them? (A: Qm = 196,000; Yes, can produce)

5. Temareas S. A. uses an absorption costing system based on standard costs for

its only product that is sold for $30 per unit.

The initial inventory in 2013 was 3,000 units and at the end of the year it was

4,000. That year, sales were 54,000 units.

 The total variable manufacturing costs are $13.50 per unit, which includes

the costs of direct materials.

The standard production rate is 10 units per machine hour.

The budgeted and actual fixed manufacturing overhead costs are

$315,000.00

The fixed indirect manufacturing costs are allocated at $52.50 per machine hour.

The variable operating costs are $3.00 per unit and are caused by the

units sold.

The fixed operating costs are $270,000.00. The following is required:

What is the break-even point expressed in dollars of sales? (A: Ie =

1,300,000

¿Cuál es el punto de equilibrio expresado en unidades?(R: Qe = 43,333)

How many units must be sold to achieve a net profit of $35,000.00

if the income tax rate is 30%? (A: Qm = 47,037)

Super Donut owns and operates six donut shops in the city and its
surroundings. You are provided with the following corporate data for the next
year:
Income $10 million
Fixed costs $1,700.000
Variable costs $8,200.00

Variable costs change in relation to the number of donuts sold.

Calculate the budgeted operating profit for each of the following

deviations from the original budget data. (Consider each case individually)

independent.)

A 10% increase in the budget for the marginal contribution, with income
constants.(R: UO= 280,000)
 A 10% decrease in the marginal contribution, with constant income.
UO= -80,000
A 5% increase in fixed costs. (R: UO= 15,000)
4. A decrease of 5% in fixed costs. (R: UO= 185,000)
An 8% increase in units sold. (R: UO = 244,000)
A decrease of 8% in units sold. (R: UO= -44,000)
7. An increase of 10% in fixed costs and units sold. (R: UO= 110,000)
8. An increase of 5% in fixed costs and a decrease of 5% in variable costs.
(R: UO= 425,000)

7. Doral Company is a company that is engaged in the manufacturing and sale of pens.
The company sells five million pieces a year at $0.50 per unit. Its fixed costs
annual costs are $900,000 and their variable costs are $0.30 per unit.
Consider each case separately:

What is the current operating utility?

b. ¿Cuál es el punto de equilibrio actual en ingresos?(R: Ie= 2,250,000)

Calculate the new operating profit for each of the following changes:

An increase of $0.04 per unit in variable costs. (R: UO= -100,000)

3. An increase of 10% in fixed costs and in units sold. (R: UO = 110,000)
4. A decrease of 20% in fixed costs and in the selling price, a decrease
10% reduction in the unit variable cost, and a 40% increase in units sold.
(R: UO= 190,000)
Calculate the new breakeven point in units for each of the following changes:

5. An increase of 10% in fixed costs. (R: Qe = 4,950,000)

A 10% increase in the selling price and $20,000 in fixed costs. (R: Qe=
3,680,000

8. Diego Motors is a small car dealership. On average, it sells a

automobile for $25,000 which is purchased from the manufacturer for $22,000. Each month, Diego Motors
pays $50,000 in rent and utilities and $60,000 in salaries to the salespeople.
In addition to their salaries, salespeople are paid a commission of $500 for each
car they sell. Diego Motors also spends $10,000 each month on advertisements.
locales. Their tax rate is 40%.
How many cars does Diego Motors need to sell each month to reach the
Equilibrium point? (A: Qe= 48)
 Diego Motors has a monthly net profit goal of $54,000. What is their
monthly operational utility target? How many cars does it need to sell to
achieve the monthly net profit goal of $54,000? (A: UO = 90,000; Qm =
84)
Almo is a company dedicated to the manufacture of adjustable covers for houses.
wheels and trailers. For its 2012 budget, Almo estimates the following:
Selling price $400.00
Variable cost per cover $200.00
Annual fixed costs $100,000.00
$240,000.00
Income tax rate 40%
The income statement for the month of May revealed that sales were not
meeting expectations during the first five months of the year, only
they sold 350 units at the established price, with the planned variable costs, and
it was evident that the net profit projection for 2012 could not be reached
less than some actions would be taken. A management committee presented the
mutually exclusive alternative.
i. Decrease the variable unit cost by $10.00 through the use of materials
less expensive direct routes and a slight modification in the techniques of
manufacturing. The selling price would also be reduced by $30.00 and it is expected
sales of 2200 units for the rest of the year.
ii. Reduce fixed costs by $10,000.00 and decrease the selling price by 5%. The
unit variable cost would remain unchanged. Sales would be expected to
would be more than 2,000 units for the rest of the year.
iii. Reduce the selling price by $40.00. The sales organization forecasted that
At this reduced price, 2700 units could be sold for the remainder of the year.
Total fixed costs and the unit variable cost would remain as they are.
budgeted.
Required:

a) If no changes are made to the selling price or to the cost structure

determine the number of units that Almo must sell to reach its
break-even point and to achieve its net profit objective.
Qe=500; Qm= 2,500)
b) Determine the option that Almo should choose to achieve his goal.
of net utility. Show the results. (R: alternative iii;
UN(alternativa i)= 219,600; UN(alternativa ii)= 204,000;
UN(alternativa iii)= 241,200)
6. Bibliographic References

Charles Horngren, Cost Accounting. Pearson Publishing 14th

Edition, 2012.
 Kung H. Chen, Cost Management: A Strategic Approach.

McGraw-Hill, 4th Edition, 2008

7. Attached documents

NONE