9 CVP (Breakeven) Analysis

Question 1

CVP Assumptions

Answer 1

a. Cost/Revenue Relationship Linear, Predictable over the Relevant Range and Time span
b. Unit Selling Prices don’t change
c. Inventory doesn’t change. Production = Sales
d. TOTAL variable costs change proportionally with volume, but unit variable doesn’t change.
e. FIXED Costs are constant over relevant range, but vary indirectly with volume.
f. Relevant Range of VOLUME may vary based on time frame. Therefore classification as fixed or variable may change based on time frame.
g. Revenue (sales) mix DOES NOT CHANGE

H. Time value is ignored

Question 2

Breakeven Point Formulas

BEP Units = Units to Break Even

BEP Dollars = Revenue to Break Even

Answer 2

BEP (Units)

Unit Contribution Margin $

or X UNITS * UCM$ = Fixed $
X = Fix/UCM

BEP Dollars:
Fixed Costs
_________
CMR (contribution Margin Ratio - %)

or X Dollars Sales * CM% = Fixed
X = Fixed/CM%

Question 3

Margin of Safety

Answer 3

Excess of Budgeted Sales over Breakeven

M.O.S. = Planned Sales - BREAKEVEN SALES
* IN Units or Dollars

Margin of Safety Ratio:

Planned Sales

Question 4

Target OPERATING Income

Answer 4

Amt of Operating Income (Dollars or % of Sales)

• Treat O.I. as an ADDITIONAL FIXED COST

In Units:

UCM

In dollars:

Fixed + OI
_____________
CM%

Question 5

Target NET Income

Answer 5

In Units:

Fixed + (Target * 1-Tax Rate)
__________________
UCM

Units to get Target OI as a Percent

Fix = 37,500
Sales = 6
Var = 2
15% Desired OI

CM = 6-2 = 4
Target OI = 6 * .15 = .90

37,500 + (Q(ty) * .9)
————————— = Q
4

37,500 + .9Q = 4Q
37,500 = 3.1Q
= 12,097

Question 6

Multi-Product Breakeven

Answer 6

Wtd Avg Sell - Wtd Avg Var = (Wtd Avg UCM)

1. Calc Each Products UCM
2. Unit A/Total Units = % of Total
3. % of total * UCM
4. Repeat for “B”
5. Add the UCMs
6. Get BEP Units(Or dollars as normal)

UCM

7. Get BE Dollars as Usual: Just get Wtd Average Sales and Wtd Avg Var to Get Wtd Avg CM%