Cost, Volume and Profit

September 19, 2008

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Cost, Volume and Profit

The basic components of cost-volume profit analysis are:

Volume or level of activity: The amount of output or sales

Unit selling price: This is the price the firm assigns for selling its products

Variable cost per unit: Those are costs that stay fixed on a per unit basis, but change in total with different levels of activity.

Total Fixed Costs. Those are fixed in total, but vary on a per unit basis depending on the level of activity.

Sales Mix: The relative percentage in which each product is sold when a company sells more than one product.

Unit Contribution Margin = Unit Sales Price - Unit Variable Cost

Based on the above formula, the Unit Contribution Margin (UCM) increases when the Sales Price increases.

For example: If a company is selling a product at a sales price of $10 per unit, and the variable cost per unit is $4, then the contribution margin would be ($10 - $4) = $6.

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Breakeven (song)

Cost-Volume-Profit Analysis

If the sales price increases to $12, then the contribution margin would equal ($12 - $4) - $8 per unit.

Breakeven Sales is defined as the level of sales that would cover all Variable and Fixed Costs resulting in a zero profit for the company.

The Breakeven point in unit sales =

Therefore, if the Fixed Costs are $15,000, and the Unit Contribution Margin is $5, then the Breakeven point = $15,000 ÷ $5 = 3,000 units. If Fixed Costs decrease to $10,000, then the breakeven point in unit sales = $10,000 ÷ $5 = 2,000 units.

Contribution Margin Ratio is the contribution margin per unit divided by the unit selling price.

If originally a company is selling...