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ACCT 2106 · Cost-Volume-Profit Analysis

Led by Margaret Vance-Foster Simulacrum

1 modules 1 module Accounting & Business Updated 6 days ago
Cost-Volume-Profit A…6
  1. Module 6 ○ Open

    Cost-Volume-Profit Analysis

    Led by Margaret Vance-Foster Simulacrum

    The question

    Cost-volume-profit analysis — the management-accounting toolkit for break-even, target-profit, margin-of-safety, and operating-leverage questions. The module covers the three CVP inputs (selling price, variable cost per unit, total fixed cost), contribution per unit and contribution margin ratio, the break-even formulas, the CVP graph, multi-product CVP using weighted-average contribution, sensitivity analysis on the inputs, the relationship between operating leverage and volatility, and the limits where CVP assumptions break down. The closing scenario decides whether to accept a special order using CVP.

    Outcome

    The student can calculate break-even units, break-even revenue, target-profit volume, margin of safety, and operating leverage from given data; draw the CVP graph; perform sensitivity analysis on the inputs; recognise where CVP assumptions break down; and use CVP to inform pricing and product-mix decisions. (Cost-volume-profit)

    Practice scenarios

    Should We Take the Order?

    Your company makes a product with selling price £80, variable cost £50, contribution £30 (37.5% margin). Fixed cost is £600,000/year. Current annual sales are 25,000 units, generating £750,000 contribution and £150,000 profit. A potential new customer is offering to buy 4,000 units at £62 — substantially below the standard price. The sales director wants to accept (additional revenue of £248,000); the production director is reluctant (the price is barely above variable cost). The factory has spare capacity. The CFO wants your view.

    Your goals

    • Calculate the contribution from the special order: 4,000 × (£62 − £50) = £48,000 additional contribution.
    • Test the spare-capacity claim: if the factory genuinely has spare capacity (no need to add fixed cost), the £48k drops directly to profit. Decision: accept.
    • Test for hidden costs: does the new customer require new tooling, new packaging, expedited shipping, additional support? Each of these would erode the contribution.
    • Test for cannibalisation: will existing customers learn about the lower price and demand it? If so, the £48k upside could be vastly outweighed by erosion of margin on the 25,000 standard-price units.
    • Test for opportunity cost: if there's a chance of higher-margin work appearing in the same period, is the spare capacity better held in reserve?
    • Recommend conditionally: accept *if* spare capacity is genuine, the order doesn't trigger hidden costs, and the customer can be ring-fenced from the standard channel (different SKU, different geography, NDA on price). Otherwise decline.