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

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

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

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

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

Cost/Volume/Profit Equation Sales = Sales cost + Labour cost + OH + Profit $325,000 = $108,875 + $81,250 + $97,500 + $37,375 This can be re-stated as: S = VC + FC + P Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

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

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

Contribution Rate We can calculate using the following: CR = 1 – VR 1 - .435 = .565 CR = .565 Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

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 $$ Small $$ 0 $$ Small $$ Large

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

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

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

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

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

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

Chapter Web Links Encyclopedia: http://www.enotes.com/business-finance-encyclopedia/cost-volume-profit-analysis Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

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