Cost-Volume-Profit Analysis

Also known as Break-Even Analysis

Costs and Volume (Output)

Fixed Costs Variable Costs Semi-Variable Costs

Stay the same over (small) changes in output and short periods of time

Increase with the level of output

Somewhat fixed, Somewhat variable

Fixed Costs

Variable Costs

Question: What are the implicit assumptions about variable costs (per unit)?

Semi-Fixed (Semi-Variable) Costs

Price Variable Cost is also known as the contribution or, expressed as a percentage of price, the contribution margin ratio.

Calculating and Graphing a Break-Even Point

Costs Fixed Costs = $100 Variable Costs = $4/unit Semi-Variable Costs = $60 + $2/unit

Price = $8/unit Exercise: (a) Graph the Total Cost and Total Revenue Curves; and (b) identify the Break-Even point.

Solution

Revenue = 8Q Cost = 160 + 6Q

160

BE = 160/(8 - 6) = 80

Example (cont.): What Happens If..?

1. 2. 3. 4. 5. 6. The price goes up to $10/unit? The price goes down to $7/unit? The variable cost goes up to $7/unit? The variable cost falls to $4/unit? The fixed costs go up to $200? The fixed costs fall to $100?

NextIntroducing Risk

Margin of Safety Operating Gearing

How much does planned volume (quantity) exceed the break-even point? How much do profits go up (down) when volume is unexpectedly high (low)?