Cost Volume Profit (CVP) Formulas:
Contribution margin = Sales - Variable expenses (manufacturing and non-manufacturing)
Net operating income = Contribution margin - Fixed expenses (manufacturing and nonmanufacturing)
Contribution margin ratio = Contribution margin / Sales
Break even point (units) = Fixed expenses / Unit contribution margin
Break even point (dollar sales) = Fixed expenses / CM ratio
Units sales to attain target profit = (Fixed expenses + Target profit) / Unit contribution margin
Dollar sales to attain target profit = (Fixed expenses + Target profit) / Contribution margin ratio
Margin of safety = Total budgeted or actual sales - Break even sales
Margin of safety ...view middle of the document...
In order to make profit the contribution margin of a business must exceed its total fixed costs. In short:
CM = S − VC |
Unit Contribution Margin (Unit CM)
Contribution Margin can also be calculated per unit which is called Unit Contribution Margin. It is the excess of sales price per unit (p) over variable cost per unit (v). Thus:
Unit CM = p − v |
Contribution Margin Ratio (CM Ratio)
Contribution Margin Ratio is calculated by dividing contribution margin by total sales or unit CM by price per unit.
Activity-Based vs. Traditional Costing
Assume the Busy Ball Company makes two types of bouncing balls; one has a hollow center and the other has a solid center. The same equipment is used to produce the balls in different runs. Between batches, the equipment is cleaned, maintained, and set up in the proper configuration for the next batch. The hollow center balls are packaged with two balls per package, and the solid center balls are packaged one per package. During the year, Busy Ball expects to make 1,000,000 hollow center balls and 2,000,000 solid center balls. The overhead costs incurred have been allocated to activity pools as follows:
Purchasing of materials | $200,000 |
Setup of machines | 350,280 |
Packaging | 300,000 |
Testing | 270,000 |
Cleaning and maintenance | 288,540 |
Total overhead costs | $1,408,820 |
By analyzing the activity pools, the accountants and production managers have identified the cost drivers, estimated the total expected units for each product, and calculated the unit cost for each cost driver.
Activity | Cost Driver | Total Expected Units for Cost Driver (1) | Total Cost (2) | Unit Cost per Cost Driver (3) = (2)÷ (1) |
Purchasing of Materials | #purchase orders | 100 | $200,000 | $2,000.00 |
Set up of Machines | #setups | 252 | 350,280 | 1,390.00 |
Packaging | #containers filled | 2,500,000 | 300,000 | 0.12 |
Testing | # tests | 3,000 | 270,000 | 90.00 |
Cleaning and maintenance | #of runs | 252 | 288,540 | 1,145.00 |
The activity by product is shown in the following table.
| | | Expected Use | ABC Cost Assigned |
Activity | Cost Driver | Unit Cost (3) | Hollow Center (4) | Solid Center (5) | Hollow Center (3) × (4) | Solid Center (3) × (4) |
Purchasing | # purchase orders | $2,000.00 | 50 | 50 | $100,000 | $100,000 |
Setup | # setups | 1,390.00 | 126 | 126 | 175,140 | 175,140 |
Packaging | # containers filled | 0.12 | 500,000 | 2,000,000 | 60,000 | 240,000 |
Testing | # tests | 90.00 | 1,000 | 2,000 | 90,000 | 180,000 |
Cleaning and maintenance | #runs | 1,145.00 | 84 | 168 | 96,180 | 192,360 |
Totals | | | | | $521,320 | $887,500 |
To calculate the per unit overhead costs under ABC, the costs assigned to each product are divided by the number of units produced. In this case, the unit cost for a hollow center ball is $0.52 and the unit cost for a solid center ball is $0.44.
Under the traditional method of...