1. Chapter 3 Cost/Volume/Profit Relationships
Principles of Food, Beverage, and Labour Cost Controls,
Canadian Edition

2. Learning Objectives 3.3 Define variable rate and contribution rate
3.1 Understand profitability comparing profit percentages, and dollar profit is also significant
3.2 State cost/volume/profit equation and explain
3.3 Define variable rate and contribution rate
3.4 Apply formulas to determine; sales in dollars, sales in units, variable costs, fixed costs, profit, contribution rate, contribution margin, variable rate, and break-even point
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

3. Cost/Volume/Profit Assumptions
Costs can be fixed or variable
VC are directly variable
Fixed costs are stable
Sales prices are constant
Sales mix will remain constant
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

4. Cost/Volume/Profit Analysis
A cost/volume/profit (CVP) analysis helps predict the sales dollars and volume required to achieve desired profit (or break even) based on your known costs.
CVP calculations can be done either on the dollar sales volume required to break even or achieve the desired profit, or on the basis of the number of units required.
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

5. Important Equations Sales = VC + FC + Profit Variable rate = VC/Sales
Contribution rate = 1 - VR
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

6. Cost/Volume/Profit Equation
Sales = Sales cost + Labour cost + OH Profit
$325,000 = $108, $81, $97, $37,375
This can be re-stated as:
S = VC + FC + P
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

7. Cost/Volume/Profit Equation
Calculate the components: VC = Food & Beverage Cost + Variable LC (40% Total Labour) FC = Fixed LC ( 60% Total Labour) + Overhead Based on the example: S ($325,000) = VC ($141,375) + FC ($146,250)+ Profit ($37,375)
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

8. Variable Rate We can calculate using the following:
Ratio of variable cost to dollar sales
Variable rate = VC/Sales
VR = VC($141,375)/Sales($325,000)
VR = .435
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

9. Contribution Rate We can calculate using the following: CR = 1 – VR
= .565
CR = .565
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

10. Break-Even Point
Profitability can be viewed as existing on a scale. The midpoint on the scale, indicated by the zero, is called the break-even point. At the break-even point, operational expenses are exactly equal to sales revenue.
The point at which the sum of all costs equals sales, thus profit = 0
BE=Break-Even Point
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition
Losses Profits
Large $$ Small $$ $$ Small $$ Large

11. CVP Calculations
Use the following formula to determine the sales required to earn the profit desired:
Sales Dollars to achieve Desired Profit =
Fixed Costs + Profit
Contribution Rate
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

12. CVP Calculations
To determine break-even point, use the same formula with $0 for desired profit: 
Break-Even Point =
FC + $0 CR
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

13. 4/20/2017
BE Calculation in $$
To determine the dollar sales required to break even, use the following formula:
Break-Even Point in Sales =
Fixed Costs
Contribution Rate
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition
Remember that each additional dollar of sales after reaching BE (break even) still has variable costs associated with it. Sales after BE must be multiplied by VR to calculate profit

14. Cost/Volume/Profit Analysis
Contribution margin is the difference between the selling price of the unit and the cost of the unit
Calculated as follows:
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition
CM = Selling Price - Variable Costs of item

15. BE Calculation of Customers
In terms of the number of customers that must be served in order to break even, use the following formula:
Break-Even Point in Customers =
Fixed Costs__
Average Contribution Margin
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

16. Key Terms Break-even point, p. 76 Contribution margin, p. 79
Contribution rate, p. 76
Cost/volume/profit equation, p. 72
Variable rate, p. 75
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

17. Chapter Web Links Encyclopedia:
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

18. Copyright
Copyright © 2014 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.
Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition