Chapter 3

Cost/Volume/Profit Relationships Principles of Food, Beverage, and Labour Cost Controls,

Canadian Edition

Learning Objectives

• 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

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• Costs can be fixed or variable• VC are directly variable• Fixed costs are stable• Sales prices are constant• Sales mix will remain constant

Cost/Volume/Profit Assumptions

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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.

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Important Equations

1. Sales = VC + FC + Profit

2. Variable rate = VC/Sales

3. Contribution rate = 1 - VR

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Cost/Volume/Profit EquationSales = 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

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Cost/Volume/Profit EquationCalculate 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)

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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

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Contribution Rate

We can calculate using the following:

• CR = 1 – VR

• 1 - .435 = .565• CR = .565

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Losses Profits

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

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

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Sales Dollars to achieve Desired Profit

=Fixed Costs + ProfitContribution Rate

CVP CalculationsUse the following formula to determine the sales

required to earn the profit desired:

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Break-Even Point =FC + $0 CR

CVP CalculationsTo determine break-even point, use the same

formula with $0 for desired profit: 

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BE Calculation in $$To determine the dollar sales required to

break even, use the following formula:

Break-Even Point in Sales

=Fixed CostsContribution Rate

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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:

CM = Selling Price - Variable Costs of item

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BE Calculation of CustomersIn 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

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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

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Chapter Web Links• Encyclopedia:

http://www.enotes.com/business-finance-encyclopedia/cost-volume-profit-analysis

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Copyright

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