CVP analysis is focusing on: Prices of products Volume or level of activity Per unit variable costs Total fixed costs Mix of product sold
Contribution Margin
It is a measure of the extent to which fixed costs are being used in an organization Illustration: (the blueberry farm)
Sterling
Farm (SF) has a higher proportion of fixed costs than does Bogside Farm (BF). Total costs are the same $100,000 sales level. Previous illustration showed that with a 10% increase in sales, the net income of SF increases by 70%, whereas the net income of BF increases by only 40%. The reason is that ST has greater OL as a result of the greater amount of fixed cost in its cost structure.
OL..(cont`)
Contribution margin = Degree of operating leverage Net Income Degree of Operating Leverage is a measure, at a given level of sales, of how a percentage change in sales volume will affect profits Illustration: The degree of OL for the two farms at a $100,000 sales level would be as follows: BF: $40,000 / $10,000 = 4 SF: $70,000/ $10,000 = 7
OL..(cont`)
Model
XR7 Selling Price Less variable expenses Contribution margin $100 75 $ 25 Turbo $150 132 $ 18
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Contribution Income Statement For the Month of September
Le Louvre CD
Amount Percent 100 75 25
Le Vin CD
Amount $80,000 40,000 $40,000 Percent 100 50 50
Total
Amount $100,000 55,000 45,000 27,000 $18,000 Percent 100 55 45*
Sales Less variable expenses.... Contribution margin......... Less Fixed expenses.. Net Income.
Computation of the break even point: Fixed expenses. $27,000 = $60,000 Overall CM ratio, 45%
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Contribution Income Statement For the Month of September
Le Louvre CD
Amount Percent
Le Vin CD
Amount Percent
Total
Amount Percent
Sales
Less variable expenses.... Contribution margin......... Less Fixed expenses.. Net Income.
$80,000
60,000 $20,000
100
75 25
$20,000
10,000 $10,000
100
50 50
$100,000
70,000 30,000 27,000 $ 3,000
100
30 30*
Computation of the break even point: Fixed expenses. $27,000 = $90,000 Overall CM ratio, 30% * ($30,000 : $100,000) X 100% = 30%
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Per Unit Contribution Margin Analysis For the Month of September and October
Average per unit contribution margin September ($45,000:2,500 units) October ($30,000:2,500 units). $18 $12
Selling price is constant throughout the entire relevant range Costs are linear throughout the entire relevant range, and they can be accurately divided into variable and fixed elements In multi product companies, the sales mix is constant In manufacturing companies, inventories do not change