1. COST-VOLUME-PROFIT
ANALYSIS

2. Essentials of CVP Analysis
Cost-volume-profit (CVP) analysis
examines the behavior of total revenues,
total costs, and operating income as
changes occur in the units sold, the selling
price, the variable cost per unit, or the
fixed costs of a product.

3. Essentials of CVP Analysis
Illustrative case:
Mary Frost is considering selling Do-All Software,
a home-office software package, at a computer
convention in Chicago. Mary knows she can
purchase this software from a computer software
wholesaler at $120 per package, with the
privilege of returning all unsold packages and
receiving a full $120 refund per package. She
also knows that she would pay $2,000 to
Computer Conventions, Inc. for the booth rental
at the convention. She will incur no other costs.
She must decide whether she should rent a
booth.

4. Essentials of CVP Analysis
1. Identify the problem and uncertainties.
uncertainties:
selling price ?
number of packages she can sell ?
booth rental ?

5. Essentials of CVP Analysis
2. Obtain information.
attendees to the convention
competitors at the convention
past experiences on selling

6. Essentials of CVP Analysis
1. Make predictions about the future.
Selling price can be at $200 per software
Estimated units to be sold 30-60
Consider competitors in the upcoming
convention
Review predictions, retest assumptions
Establish confidence on the predictions
Consult a friend in the same line of
business

7. Essentials of CVP Analysis
1. Make decisions by choosing among
alternatives.
identify fixed costs
booth rental $2000
identify variable costs
cost of software package $120

8. Essentials of CVP Analysis
Calculation of operating income at different
assumptions:
@5 @ 40
packages packages
Revenues 200 1,000 8,000
Variable cost 120 600 4,800
Fixed cost 2,000 2,000
Operating Income (1,600) 1,200
Contribution margin – difference between total revenues and
total variable costs

9. Essentials of CVP Analysis
1. Implement the decision, evaluate
performance, and learn.
compare actual with predicted
performance
feedback will help future decisions
about renting booths at
subsequent conventions