ACCT2002 Chap.3 Cost-Volume-Profit Analysis and Breakeven
Cost-Volume-Profit Analysis and Breakeven
Cost-volume-profit analysis links sales volume, price, variable cost, fixed cost and operating income through contribution margin. It is most useful as a transparent decision model: assumptions are visible, sensitivity can be tested and the margin of safety makes risk concrete.
This chapter develops contribution margin per unit and ratio, breakeven in units and revenue, target operating income, after-tax extensions, multiproduct sales mixes and service applications. The formula is not the hard part. The hard part is keeping the volume base consistent, treating the sales mix as an assumption, and recognising that price, efficiency, fixed capacity and demand may change together outside a narrow range.
What this chapter covers
- 01
Contribution margin per unit and ratio
- 02
Breakeven in units and revenue
- 03
Target operating income
- 04
Margin of safety and operating leverage
- 05
Sensitivity analysis under uncertainty
- 06
Multiproduct sales mix
- 07
Service and capacity applications
Breakeven, target income and margin of safety
- 2Contribution margin per job is $140 − $56 = $84, and the contribution-margin ratio is $84 ÷ $140 = 60%.
- 2Breakeven volume is $33,600 ÷ $84 = 400 jobs.
- 3Target-income volume is ($33,600 + $12,600) ÷ $84 = 550 jobs. The target income belongs in the numerator because contribution must cover both fixed cost and profit.
- 3Expected margin of safety is 620 − 400 = 220 jobs, or 220 ÷ 620 = 35.48% of expected volume. Expected operating income is 220 × $84 = $18,480.
Key terms
- Contribution margin
- Revenue less all variable costs.
- Contribution-margin ratio
- Contribution margin divided by revenue.
- Breakeven point
- The activity level at which operating income is zero.
- Margin of safety
- Expected or actual sales above breakeven sales.
- Operating leverage
- The sensitivity of operating income to a percentage change in sales, influenced by the cost structure.
- Sales mix
- The relative quantities of products or services expected to be sold.
- Weighted-average contribution margin
- The average contribution per composite sales package under an assumed sales mix.
Cost-Volume-Profit Analysis and Breakeven FAQ
Should fixed cost be divided by selling price?
No. Each sale covers variable cost first. Breakeven units equal fixed cost divided by contribution margin per unit, not by revenue per unit.
Why can a multiproduct breakeven answer change?
It depends on the assumed sales mix. A shift toward products with lower contribution margin increases the composite breakeven volume even when total fixed cost is unchanged.
What does margin of safety tell a manager?
It shows how far demand may fall before the organisation reaches zero operating income under the model assumptions. It is a risk measure, not a probability forecast.
Which CVP assumptions should I name?
Constant selling price and unit variable cost, fixed total fixed cost within the relevant range, production equal to sales where inventory matters, and a stable sales mix for multiple products.
Exam move
Learn one contribution equation and derive the special cases rather than memorising disconnected formulas. Reconcile every answer through a second path: profit from total contribution, or profit from margin of safety. Build sensitivity tables that change one assumption at a time, then discuss which assumptions could move together in practice. For mixed products, define a composite bundle before dividing fixed cost.
For viva practice, explain why breakeven is conditional rather than a permanent property of the business.
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