1. 3. Cost-Volume-Profit Analysis
Hanif Kanjer
Dean, Rustomjee Business School

2. Index
Contribution Margin
Contribution margin per unit
Contribution margin %
Profit-Volume Graphs
Break-even Analysis
Margin of Safety
Sensitivity Analysis
Solved Examples

3. (=Contribution/ Sales Rev.) 0.40
E.g. 3-20, Pg 112
Contribution & Operating Income
Break-even point in Revenues
Break-even point in units
The Doral Company manufactures and sells pens.
Sales: 5,000,000 $0.50per unit.
Fixed costs $900,000/yr
Variable costs are $0.30/yr
Given
Units
US$/unit
Cost (US$)
Revenues
5,000,000
0.5
2,500,000
(-) Variable Costs
0.3
1,500,000
Contribution
1,000,000
(-) Fixed Costs
900,000
Operating Income
100,000
Contribution Margin %
(=Contribution/ Sales Rev.)
0.40
Contribution Margin per unit (=Contribution/Sales Qty)
0.20
Break-even point in revenues
(=Fixed Costs/cm%)
2,250,000
Break-even point in Units (=FC/cm per unit)
4,500,000

4. E.g. 3-20, Pg 112 2. $0.04per unit incr in VC 3. 10% incr in FC,
10% incr in units sold
The Doral Company
1. Current
Given
Units
US$/ unit
Cost (US$)
Revenues
5,000,000
0.5
2,500,000
(-) Variable Costs
0.3
1,500,000
Contribution
1,000,000
(-) Fixed Costs
900,000
Operating Income
100,000
Contribution Margin %
(=Contribution Margin/ Sales Rev.)
0.40
Contribution Margin per unit (=CM/Sales Qty)
0.20
Break-even point in revenues (=Fixed Costs/cm%)
2,250,000
Break-even point in Units (=FC/cm per unit)
4,500,000
$/ unit
Cost (US$)
0.5
2,500,000
0.34
1,700,000
800,000
900,000
-100,000
0.32
0.16
2,812,500
5,625,000
Units
$/ Unit
Cost
5,500,000
0.5
2,750,000
0.3
1,650,000
1,100,000
990,000
110,000
0.40
0.20
2,475,000
4,950,000

5. 4. 20% decr in FC, 20% decr in SP, 10% decr in VC, 40% in Qty Sold
E.g. 3-20, Pg 112
4. 20% decr in FC, 20% decr in SP, 10% decr in VC, 40% in Qty Sold
The Doral Company
Given
Units
US$/unit
Cost (US$)
Revenues
5,000,000
0.5
2,500,000
(-) Variable Costs
0.3
1,500,000
Contribution
1,000,000
(-) Fixed Costs
900,000
Operating Income
100,000
Contribution Margin % (=Contribution Margin/ Sales Rev.)
0.40
Contribution Margin per unit (=CM/Sales Qty)
0.20
Break-even point in revenues (=Fixed Costs/cm%)
2,250,000
Break-even point in Units (=FC/cm per unit)
4,500,000
Units
Per Unit
Cost
7,000,000
0.4
2,800,000
0.27
1,890,000
0.1
910,000
720,000
190,000
0.33
0.13
2,215,385
5,538,462

6. Delicious Donuts - 1 E.g. 3-19, Page 112, Given US$
1) A 15% increase in contribution margin, holding revenues constant
2) A 15% decrease in contribution margin, holding revenues constant
3) An 8% increase in Fixed cost
4) An 8% decrease in Fixed cost
Revenues
12,500,000
Variable Costs
10,000,000
Fixed Costs
2,250,000
Given
US$
1) A 15% increase in contribution margin, holding revenues constant
2) A 15% decrease in contribution margin, holding revenues constant
3) An 8% increase in Fixed cost
4) An 8% decrease in Fixed cost
Revenues
12,500,000
(-) Variable Costs
10,000,000
9,625,000
10,375,000
Contribution
2,500,000
2,875,000
2,125,000
(-) Fixed Costs
2,250,000
2,430,000
2,070,000
Operating Income
250,000
625,000
-125,000
70,000
430,000

7. Delicious Donuts - 2 E.g. 3-19, Page 112 Given US$
5) A 10% increase in units sold
6) A 10% decrease in units sold
7) A 15% increase in fixed costs and a 15% increase in units sold
8) An 8% increase in Fixed costs and 8% decrease in Variable costs
Revenues
12,500,000
Variable Costs
10,000,000
Fixed Costs
2,250,000
Given
US$
5) A 10% increase in units sold
6) A 10% decrease in units sold
7) A 15% increase in fixed costs and a 15% increase in units sold
8) An 8% increase in Fixed costs and 8% decrease in Variable costs
Revenues
12,500,000
13,750,000
11,250,000
14,375,000
(-) Variable Costs
10,000,000
11,000,000
9,000,000
9,200,000
Contribution
2,500,000
2,750,000
2,250,000
4,375,000
3,300,000
(-) Fixed Costs
2,587,500
2,430,000
Budgeted Operating Income
250,000
500,000
1,787,500
870,000

8. Break-even Point E.g. 3-21, Pg 112 Selling Price per car 29,000
Sanborn Motors is a small-car dealership. Sells a car for $29,000 per month Purchases the car for $25,000 per month Pays $65,000 in rent & utilities, $75,000 for sales people’s salaries. Sales people are paid a commission of $600 per car they sell. Sanborn spends $12,000 each month for local advertising. Its tax rate is 25% Find the Break-even point
Selling Price per car
29,000
Variable Costs/car
Cost price per car
25,000
Commission per car
600
Contribution per car
3,400
Fixed Costs
Rent/month
65,000
Salaries/month
750,000
Advertisement/month
120,000
935,000
Break-even quantity
275

9. Break-even Point and income taxes E.g. 3-21, Pg 112
To achieve a target monthly net income of $69,000, how many cars should be sold?
Per unit
Selling Price per car
29,000
Variable Costs
Cost price per car
25,000
Commission per car
600
Contribution per car
3,400
Fixed Costs
Rent/month
65,000
Salaries/month
750,000
Advertisement/month
120,000
935,000
Operating Income
Taxes (25%)
Net Income
Break-even quantity
275
Total Amount
1,027,000
302.06
935,000
92,000
23,000
69,000
302.06

10. Break-even Analysis Qty Produced/Sold SP/unit VC/unit Sales Revenue VC
Fixed costs
Total Costs
250,000
0.5
0.3
125,000
75,000
900,000
975,000
500,000
150,000
1,050,000
750,000
375,000
225,000
1,125,000
1,000,000
300,000
1,200,000
1,250,000
625,000
1,275,000
1,500,000
450,000
1,350,000
1,750,000
875,000
525,000
1,425,000
2,000,000
600,000
2,250,000
675,000
1,575,000
2,500,000
1,650,000
2,750,000
1,375,000
825,000
1,725,000
3,000,000
1,800,000
3,250,000
1,625,000
1,875,000
3,500,000
1,950,000
3,750,000
2,025,000
4,000,000
2,100,000
4,250,000
2,125,000
2,175,000
4,500,000
4,750,000
2,375,000
2,325,000
5,000,000
2,400,000
5,250,000
2,625,000
2,475,000
5,500,000
2,550,000
5,750,000
2,875,000
6,000,000
2,700,000
6,250,000
3,125,000
2,775,000
6,500,000
2,850,000
6,750,000
3,375,000
2,925,000
7,000,000
7,250,000
3,625,000
3,075,000
7,500,000
3,150,000
7,750,000
3,875,000
3,225,000
Break-even Analysis

11. Break-even Graph