CVP ANALYSIS
Cost-volume-profit (CVP) analysis is concerned with the effects on net operating income of:
• Selling prices.
• Sales volume.
• Unit variable costs.
• Total fixed costs.
• The mix of products sold.

AGENDA
A. Review of contribution income statement.
B. Effects of changes in sales volume on net operating income.
C. CVP graph.
D. Contribution margin (CM) ratio.
E. Break-even analysis.
F. Target profit analysis.
G. Margin of safety.
H. Operating leverage.
I. Multi-product break-even analysis.

THE CONTRIBUTION APPROACH
A contribution format income statement is very useful in CVP analysis because it highlights cost behavior.
EXAMPLE: Last month’s contribution income statement for Nord Corporation, a manufacturer of exercise bicycles, follows:

Total Per Unit
Sales (500 bikes) $250,000 $500
Variable expenses 150,000 300
Contribution margin 100,000 $200
Fixed expenses 80,000
Net operating income $ 20,000

CONTRIBUTION MARGIN:
• The amount that sales (net of variable expenses) contributes toward covering fixed expenses and then toward profits.
• The unit contribution margin remains constant so long as the selling price and the unit variable cost do not change.

VOLUME CHANGES AND NET OPERATING INCOME
Contribution income statements are given on this and the following page for monthly sales of 1, 2, 400, and 401 bikes.

Total Per Unit
Sales (1 bike) $ 500 $500
Variable expenses 300 300
Contribution margin 200 $200
Fixed expenses 80,000
Net operating income (loss) $(79,800)

Total Per Unit
Sales (2 bikes) $1,000 $500
Variable expenses 600 300
Contribution margin 400 $200
Fixed expenses 80,000
Net operating income (loss)$(79,600)

Note the following points:
1. The contribution margin must first cover the fixed expenses. If it doesn’t, there is a loss.
2. As additional units are sold, fixed expenses are whittled down until they have all been covered.

VOLUME CHANGES AND NET OPERATING INCOME (continued)
Total Per Unit
Sales (400 bikes) $200,000 $500
Variable expenses 120,000 300
Contribution margin 80,000 $200
Fixed expenses 80,000
Net operating income (loss) $ 0

Total Per Unit
Sales (401 bikes) $200,500 $500
Variable expenses 120,300 300
Contribution margin 80,200 $200
Fixed expenses 80,000
Net operating income (loss) $200

Note the following points:
1. If the company sells exactly 400 bikes a month, it will just break even (no profit or loss).
2. The break-even point is:
• The point where total sales revenue equals total expenses (variable and fixed).
• The point where total contribution margin equals total fixed expenses.
3. Each additional unit sold increases net operating income by the amount of the unit contribution margin.

PREPARING A CVP GRAPH- Download the file for the rest of the material