Question

create an example that illustrates the usefulness of cost-volume-profit analysis for small business owners. In your example, ensure that you illustrate calculation of: the contribution margin in dollars, the contribution margin ratio, the break even point in units and dollars, and the margin of safety.   

Answer 1

Cost volume profit analysis is a method for analyzing the interrelationship among total cost, volume and profits in an organization.

Eg: No of units sold = 5000

Selling price = $45

Variable cost per unit = $20

Fixed cost = $ 80000

calculate Contribution margin in dollars, Contribution margin ratio, Breakeven point in dollars and units, margin of safety.

ans) Sales ( 5000*45)= $225000

variable cost (5000*20)= $100000

Fixed cost                   = $80000

Contribution margin in dollars = Sales - variable cost

                                = 225000-100000

                                = $125000

Contribution margin ratio = Contribution margin per unit / selling price

                                         or Contribution margin / sales

                                        = 125000/225000

                                        = .5555

Breakeven point = Fixed cost / Contribution margin per unit

                           = 80000/25

                           = 3200 units

Breakeven point in dollars = Fixed cost/ contribution margin ratio

                                            or Breakeven unit * selling price

                                            = 80000/.5555

                                             = $144000

Margin of safety = Actual sales - breakeven sales

                           = 225000 - 144000

                            = $81000

Breakeven point is the point were the company earns zero profit and zero loss you can calculate that breakeven qty= 3200 units selling price= $45, Fixed cost =$80000, variable cost per unit =$20 here operating profit is zero.

hope you understand