MODUL PERKULIAHAN

Akuntansi
Manajemen
Cost Volume Profit
Relationship

Fakultas Program Studi Tatap Muka Kode MK Disusun Oleh

04
Economic & Business Accountancy 84033 Alfiandri. MAcc

Abstract
Cost-volume-profit (CVP) analysis is
a powerful tool that helps managers
to understand the relationships
among cost, volume, and profit. CVP
analysis focuses on how profits are
affected by the following five factors
Selling price, sales volume, unit
variable costs, total fixed cost and
mix product sold
Kompetensi
1. Understand basic concept CVP
analysis
2. Understand CVP relationship in
equation form and graphic form
3. Understand contribution margin
ratio
Pembahasan
1. Introduction

According to Garrison (2006) Cost-volume-profit (CVP) analysis is a powerful tool that

helps managers to understand the relationships among cost, volume, and profit. CVP
analysis focuses on how profits are affected by the following five factors Selling price,
sales volume, unit variable costs, total fixed cost and mix product sold.

Because CVP analysis helps managers understand how profits are affected by these key
factors, it is a vital tool in many business decisions. These decisions include what
products and services to offer, what prices to charge, what marketing strategy to use,
and what cost structure to maintain.

2. The Basic of cost volume profit (CVP) Analysis

The basic of cost volume profit (CVP) Analysis provide the understanding how the
contribution income statement emphasize the behavior costs and help the manager to
judge based on the effect of profit of change in selling price, cost or volume.

For example, Sonic Blaster is trading company who sells boost sound system as well as
designer automobile sound system. It uses advance microprocessor and proprietary
software to boost amplifier to awesome levels. The business prospect of this company is
growing up. The owners rent office lot in the industrial area, hire receptionist, an
accountant, a sales manager and some sales staff to sell speaker to retail store. The
owner’s a bit worry about tight competition nowadays, which will impact to financial
performance of the company. Therefore, the owners ask the accountant to provide the
information about selling price, cost and sales volume.

In order to fulfill the owner’s requirements, the accountant tries to analysis the
contribution of income statement prepared last month. See table below

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 Notice that Sales, variable expenses and contribution margin are expressed on per unit
basis and also in total contribution on the contribution income statement.

What is the contribution margin? Contribution margin is the amount remaining from sales
revenue after variable expenses have been deducted. Thus, it is the amount available to
cover fixed expenses and then to provide profits for the period (Garrison & Noreen
2006). Notice that, contribution margin it’s used to cover fixed expenses thus toward to
net operating income. If the contribution does not enough cover fixed expense, then
definitely company loss.
Continue with example of Sonic Blaster, assuming that the company sell only one sound
system speaker in the period then the company income statement will appear as below

Sold one speaker during the period, then the contribution margin will add $100 to cover
fixed expenses and the company loss $ 34.900

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 If the company sells 2 speakers then the contribution margin will add $ 200 and the
company’s loss will decrease by $ 100 to $34.800. See table below

If the company sells 350 speakers, then the contribution margin will reach $ 35.000 and
finally covers fixed expenses, but no profit and loss recognition neither. Furthermore, by
selling 350 speakers in the period, the break-even-point is reached. This is because,
each speaker sold yields $100 in contribution margin. See table below

Once the break-even point has been reached, net operating income will increase by the
amount of the unit contribution margin for each additional unit sold. For example, if the
company sells 351 speakers in the period, then net operating income will increase $100.
Because the company have sold 1 speaker which beyond than number needed to break-
even-point. See table below

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Frankly speaking, if the company sells 2 speakers (above break-even-point), then net
operating income increases $ 200 and if the company sells 3 speakers (above break-even-
point) then net operating income increases $ 300 and so forth. Then the company consider
earn profit.

To estimate the profit at any sales volume above the break-even point, multiply the number
of units sold in excess of the break-even point by the unit contribution margin. The result
represents the anticipated profits for the period. Or, to estimate the effect of a planned
increase in sales on profits, simply multiply the increase in units sold by the unit contribution
margin. The result will be the expected increase in profits (Garrison & Noreen 2006).

Assuming that the company sells 400 speakers in the period and they have planned to
increase sales to 425 speakers in the period. Therefore, the distance increases 25 speakers.
See below of the calculation

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3. CVP Relationship in Equation form

The contribution format income statement can be expressed in equation form as follows:

Profit = (Sales − Variable expenses) − Fixed expenses

Which is,

P = Selling price per unit

Q = Quantity sold
V = Variable expenses

Saying that, Sonic Blaster company sell 351 speakers then the calculation:

Profit = (P X Q – V X Q) – Fixed expenses

($250 X 351 – $150 X 351) – $35.000
($250 - $150) 351 – $35.000
($100) 351 - $35.000
$35.100 - $35.000 = $ 100

Or short calculation:

Profit = Unit CM × Q − Fixed expenses

= $100 × 351 − $35,000
= $35,100 − $35,000 = $100

4. CVP Relationship in graphic form

The relationships among revenue, cost, profit, and volume are depicted on a cost-
volume-profit (CVP) graph. A CVP graph highlights CVP relationships over wide ranges
of activity (Garrison & Noreen 2006).

In CVP is consist of X represents unit volume and Y represent dollar. Referring to

example above, Sonic Blaster sell 600 speakers in the period therefore the calculation is:

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 Fixed Expenses $ 35.000
Variable Expenses (600 speakers x $150 / speaker) $ 90.000
Total Expenses $ 125.000

Fix expenses and variable expenses will plot as picture below

Flat line shows fixed expenses, and line goes up is total expenses which is accumulation
from fix expenses and variable expenses. The red line which also goes up is total
revenue in the period.

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 The interpretation of the completed CVP is depicting above. The anticipated profit or loss
at any given level of sales is measured by the vertical distance between the total
revenue line (sales) and the total expense line (variable expense plus fixed expense).
The break-even point is where the total revenue and total expense lines cross. The
break-even point of 350 speakers in the picture above agrees with the break-even point
computed earlier.

When sales are below the break-even point, for instance, 350 units, the company suffers
a loss. Note that the loss (represented by the vertical distance between the total expense
and total revenue lines) gets bigger as sales decline. When sales are above the break-
even point, the company earns a profit and the size of the profit (represented by the
vertical distance between the total revenue and total expense lines) increases as sales
increase

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5. Contribution Margin Ratio

The contribution margin as a percentage of sales is referred to as the contribution margin

ratio (CM ratio). Example of Sonic Blaster case the ratio is computed as follows:

CM ratio = Total contribution margin

Total sales

= $40,000
$100,000

= 40%

CM ratio = Unit contribution margin

Unit selling price

= 100
250

= 40%

As this illustration suggests, the impact on net operating income of any given dollar
change in total sales can be computed by applying the CM ratio to the dollar change. For
example, Sonic Blaster plans a $30,000 increase in sales during the coming month the
contribution margin should increase by $12,000 ($30,000 increase in sales × CM ratio of
40%)

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6. Some application of CVP Concept

Change fixed cost and Sales volume

Sonic Blaster s is currently selling 400 speakers per month at $250 per speaker for total
monthly sales of $100,000. The sales manager feels that a $10,000 increase in the
monthly advertising budget would increase monthly sales by $30,000 to a total of 520
units. Should the advertising budget be increased? The table below shows the financial
impact of the proposed change in the monthly advertising budget

Short calculation:

Change in variable costs and sales volume

Saying the company is currently selling 400 speakers per month. The accountant is
considering the use of higher-quality components (raw material), which would increase
variable costs (and thereby reduce the contribution margin) by $10 per speaker.
However, the sales manager predicts that using higher-quality components would

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 increase sales to 480 speakers per month. Should the higher quality components be
used?
The $10 increase in variable costs would decrease the unit contribution margin by $10—
from $100 down to $90.

According to this analysis, the higher-quality components should be used. Because fixed
costs would not change, the $3,200 increase in contribution margin shown above should
result in a $3,200 increase in net operating income.

Change Fixed Cost, Sales Price and Sales Volume

Refer to the original data and recall again that Acoustic Concepts is currently selling 400
speakers per month. To increase sales, the sales manager would like to cut the selling price
by $20 per speaker and increase the advertising budget by $15,000 per month. The sales
manager believes that if these two steps are taken, unit sales will increase by 50% to 600
speakers per month. Should the changes be made? A decrease in the selling price of $20
per speaker would decrease the unit contribution margin by $20 down to $80

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Change in Variable Cost, Fixed Cost and Sales Volume

Refer to Acoustic Concepts’ original data. As before, the company is currently selling 400
speakers per month. The sales manager would like to pay salespersons a sales commission of
$15 per speaker sold, rather than the flat salaries that now total $6,000 per month. The sales
manager is confident that the change would increase monthly sales by 15% to 460 speakers per
month. Should the change be made?

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Daftar Pustaka

Garrison, R.H. 2006. Managerial Accounting. Edisi 11. Penerbit Salemba Empat. Jakarta.

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