CHAPTER SIX
Cost-Volume-Profit Analysis
In this chapter, we develop a set of tools that focus on the distinction
between fixed and variable costs. These tools include measures of a
company’s contribution margin, contribution margin ratio, and operating
leverage – the cornerstones of cost-volume-profit (CVP) analysis. CVP
Key Concepts
• The contribution margin income statement is structured to emphasize
cost behavior as opposed to cost function.
• The contribution margin per unit and the contribution margin ratio will
Learning Objectives
LO1— Use the contribution margin in its various forms to determine the impact of
changes in sales on income
Key Formula
Instructor’s Manual
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Lecture Outline
A. Introduction
o Cost-volume-profit (CVP) analysis focuses on the relationship
among the following five factors and the overall profitability of
a company:
B. The Contribution Margin and its Uses (LO1)
o A traditional income statement focuses on function (product
1. Contribution margin per unit
2. Contribution Margin Ratio
Key Formula
Key Concept
Chapter 6- Cost-Volume-Profit Analysis
6-3
C. What-If Decisions Using CVP (LO2)
1. Option 1-Reduce Variable Costs
D. Break-Even Analysis (LO3)
o The break-even point is the level of sales where net income is
zero.
1. Break-Even Calculations with Multiple Products
o An average (weighted average) contribution margin is needed
Making It Real
Smart Ways to Cut Prices
Instructor’s Manual
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E. Target Profit Analysis (Before and After Tax) (LO4)
o The break-even formula can be easily adapted to solve for a
desired level of profit.
1. The Impact of Taxes
F. Cost Structure and Operating Leverage (LO5)
o Highly automated manufacturing companies are likely to have
1. Operating Leverage
o Operating leverage is a measure of the proportion of fixed
costs in a company’s cost structure and is used as an indicator
Key Formula
Key Formula
Key Concept
Key Concept
Chapter 6- Cost-Volume-Profit Analysis
low for low operating leverage companies.
End-of-Chapter Material
This chapter has a number of very good short exercises dealing with the key
Key Concept
A company operating near the break-even point will have a high level of
Key Formula
Operating Leverage = Contribution margin ÷ Net income