1. Cost-volume-profit analysis
OBJECTIVES
You should be able to:
Use knowledge of this distinction to deduce the break-even point for some activity
Distinguish between fixed costs and variable costs
Make decisions about the acceptance or rejection of a contract or activity, based on knowledge of the relationship between fixed and variable costs
Make decisions on the use of space capacity, using knowledge of the relationship between fixed and variable costs

2. Those that vary according to the volume of activity
The behaviour of costs
Those that stay fixed (the same) when changes occur to the volume of activity
Those that vary according to the volume of activity
Costs may be broadly classified as
Fixed
Variable

3. Graph of fixed cost(s) against the volume of activity
Volume of activity (units of output) F

4. Graph of rent cost against the volume of activity

5. Graph of variable costs against the volume of activity

6. Graph of electricity cost against the volume of activity
The slope of this line gives the variable cost per unit of activity
Electricity cost (£)
Fixed cost element
Volume of activity

7. Graph of total cost against the volume of activity
Volume of activity (units of output) F
Total cost
Fixed costs
Variable costs

8. Volume of activity (units of output)
Break-even chart
Cost (£)
Volume of activity (units of output) F
Total cost
Fixed costs
Variable costs
Break-even point
Total sales revenue

9. Calculating the break-even point
Fixed costs Sales revenue per unit – Variable costs per unit
b =

10. Volume of activity (number of baskets)
Break-even chart for Cottage Industries’ basket-making without the machine
OHT 7.10a
Fixed costs
Cost (£000)
Volume of activity (number of baskets) 1 5 4 3 2
Total revenue
100
400
300
200
500
Total costs
Break-even point

11. Volume of activity (number of baskets)
Break-even chart for Cottage Industries’ basket-making with the machine
OHT 7.10b
Cost (£000) 1
Fixed costs 5 4 3 2
Volume of activity (number of baskets)
100
400
300
200
500 6
Total costs
Break-even point
Total revenue

12. The effect of operating gearing
OHT 7.12

13. Profit-volume chart OHT 7.12 Profit (£) Break-even point Profit
Volume of activity
Loss
Profit
Break-even point
Loss (£)
Fixed cost

14. Weaknesses of break-even analysis
OHT 7.13
Three general problems
Non-linear relationships
Stepped fixed costs
Multi-product businesses

15. Marginal analysis Accepting/rejecting special contracts
OHT 7.14
The most effective use of scarce resources
Make-or-buy decisions
Accepting/rejecting special contracts
Closing or continuation decisions
Can be used for the following short-term decisions: