Accounting

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CVPAnalysisExample.xlsx
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Graphs

1) 2) 3)
Total Fixed Costs Total Variable Costs Total Costs
TC = a + bX
b = slope of line
a FC = a VC = bX a
b = slope of line
Units Produced Units Produced Units Produced
4)
Total Revenues
TR = pX
p = selling price per unit
Units Produced
5) C-V-P Graph TR = pX
p = selling price per unit
TC = a + bX
b = slope of line
BE ( Sales $)
a
BE (Units)

Breakeven

Example:
Total fixed costs (a) = 40,000
Variable cost per unit (b) = 6
Selling price per unit (p) = 10
Tax rate % 40%
1. What is the breakeven point in units?
2. What is the breakeven point in sales dollars?
At breakeven, TR = TC
Thus, BE (Units) = 10X = 40,000 + 6X where; X = BE (Units)
Then, 10X - 6X = 40,000
Then, (10 - 6)X = 40,000
Finally, X= 40,000 = 10,000 units
(10 - 6)
Now, BE (Sales Dollars) = 10,000 x $10 = 100,000
Check it!
Sales 100,000 10,000 X $10
Less: variable costs 60,000 10,000 x $6
Contribution margin 40,000
Less: fixed costs 40,000
Operating income 0
Less: income taxes expense 0
Net income 0
It Checks!

Target Pretax Profit

What sales in units and dollars will provide a pretax (operating) income of $20,000? 20,000
Let's start off using the Contribution Income Statement and filling in what we know.
Sales = 10 X
Less: variable costs = 6 X
Contribution margin 60,000 = 4 X 60,000 = 4 X
Less: fixed costs 40,000 15,000 = X
Operating income 20,000
Let's check our answers!
Sales 150,000 = 10 X 15,000
Less: variable costs 90,000 = 6 X 15,000
Contribution margin 60,000 = 4 X 15,000
Less: fixed costs 40,000
Operating income 20,000
Less: income taxes expense 8,000 = 0.40 X Operating income
Net income 12,000
Sales in units will be 15,000 Units
Sales in dollars will be $150,000

Target NI

What sales in units and dollars will provide an after-tax or net income of $18,000? 18,000
Let's start off using the Contribution Income Statement and filling in what we know.
Sales = 10 X
Less: variable costs = 6 X
Contribution margin 70,000 = 4 X 70,000 = 4 X
Less: fixed costs 40,000 17,500 = X
Operating income 30,000 = 1.00 P
Less: income taxes expense = 0.40 P
Net income 18,000 = 0.60 P 18,000 = 0.60 P
30,000 = P
Let's check our answers!
Sales 175,000 = 10 X 17,500
Less: variable costs 105,000 = 6 X 17,500
Contribution margin 70,000 = 4 X 17,500
Less: fixed costs 40,000
Operating income 30,000
Less: income taxes expense 12,000 = 0.40 X Operating income
Net income 18,000
Sales in units will be 17,500 Units
Sales in dollars will be $175,000

Target % Pretax

What sales in dollars will provide a pretax (operating) income equal to 20 percent of sales dollars? 0.20
Let's start off using the Contribution Income Statement and filling in what we know.
Sales = 1.00 X
Less: variable costs = 0.60 X
Contribution margin 40,000 + 0.20 X = 0.40 X 40,000 + 0.20 X = 0.40 X
Less: fixed costs 40,000 40,000 = 0.20 X
Operating income 0.20 X 200,000 = X
Let's check our answers!
Sales 200,000 = 1.00 X 200,000
Less: variable costs 120,000 = 0.60 X 200,000
Contribution margin 80,000 = 0.40 X 200,000
Less: fixed costs 40,000
Operating income 40,000
Less: income taxes expense 16,000 = 0.40 X Operating income
Net income 24,000
It checks out! $40,000 of operating income is equal to 20 percent of $200,000 in sales!
Sales in units will be 20,000 Units
Sales in dollars will be $200,000

Target % NI

What sales in dollars will provide an after-tax or net income equal to 18 percent of sales in dollars? 0.18
Let's start off using the Contribution Income Statement and filling in what we know.
Sales = 1.00 X
Less: variable costs = 0.60 X
Contribution margin 40,000 + 0.30 X = 0.40 X 40,000 + 0.30 X = 0.40 X
Less: fixed costs 40,000 40,000 = 0.10 X
Operating income 0.30 X = 1.00 P 400,000 = X
Less: income taxes expenses = 0.40 P
Net income 0.18 X = 0.60 P 0.18 X = 0.60 P
0.30 X = P
Let's check our answers!
Sales 400,000 = 1.00 X 400,000
Less: variable costs 240,000 = 0.60 X 400,000
Contribution margin 160,000 = 0.40 X 400,000
Less: fixed costs 40,000
Operating income 120,000
Less: income taxes expense 48,000 = 0.40 X Operating income
Net income 72,000
It checks out! $72,000 of net income is equal to 18 percent of $200,000 in sales!
Sales in units will be 40,000 Units
Sales in dollars will be $400,000