CVP-graph
© 2016 South University
(VP-graph
Now that we've explored cost behavior and taken a look at breakeven analysis, profit analysis and the
contribution format income statement, let's spend a few minutes looking at this in a graphical
presentation. What I've done here is I've created two firms; firm X and firm Y and these firms have
different cost structures.
So notice that firm X has a $40 sales price per unit, $25 variable cost per unit and that leaves it with a
$15 contribution margin per unit, taking a look at firm Y we have that same sales price of $40,
however we only have a $10 variable cost per unit which leaves us with a contribution margin of $30.
Also notice that firm X has fixed cost of $18,000 while firm Y has fixed cost of 30,000. Now what we are
seeing here is a tradeoff and this is usually a tradeoff between labor and automation, IE machinery. So
just looking at these numbers we can probably say that firm Y is more automated than firm X. They
have higher fixed cost from that machinery and they've reduced their variable cost per unit by
eliminating some of their direct labor. Firm X however has lower fixed costs but higher variable cost
per unit, so they probably have a higher amount of direct labor cost built into their cost structure.
Let's take a look at the graph, this top line I've labeled total revenue and the way I calculated that was I
had a range of Oto 2000 unit sold and I simply did some multiplications, so 2000 times my 40 dollar
unit cost gave me this point at 80,000. So the coordinates are 2000, 80000 on this top coordinate and
then off course if we sell zero units we would have zero revenues, so that describes the total revenue
line.
area of loss.
Now let's explore this beyond the breakeven point of a 1000 units. If I sell a 1000 in one units, I am
going to have profit of $30. So for every unit that I sell above the breakeven point I get $30 of
additional profit. On the flip side if I fall below the breakeven point, if I sell 999 units I have a net
operating loss of $30 and every unit I fall short of the breakeven point I incur an additional $30 of
operating loss.
Let's compare the area of profit and the area of loss for Firm Y with Firm X and we see a much
narrower triangle here. And that's because we have a smaller contribution margin per unit. So at the
breakeven point at 1200 units for Firm X, if I sell 1200 and one units, I will have net operating income
of $15. And for every unit that I sell above that 1200 unit breakeven point I am going to add an
additional $15 of operating income. So I leverage my operating income at a much lesser rate over here
in this area of profit then I did over here. But this is a double edged sword.
This line is horizontal line is my total fixed cost line and we see that comes right in 18000 for Firm X. The middle line is my total cost line. Now that includes fixed and variable cost and look where it starts out, it starts out at 18000 that's my fixed portion and then it continues up at a slope and that slope is $25 per unit. That's my variable portion. Now where these lines intersect is the breakeven point and I've calculated the breakeven point up here just to exemplify this and if you look at this and follow it down it winds up at the 1200 unit level on the x-axis. Let's take a look at Firm Y, I calculated the lines the same way and look where the total revenue and total cost line meet that's the breakeven point that makes sense doesn't it? If total revenues are equal to total costs and your net operating income is going to be zero. So I've got a 1000 unit breakeven point there it is, right there on the x-axis and Page we 2 of 3 can also see my breakeven point in dollars of 40000 points up ovFinancial er here on Management the of y-axis, Healthcare right at Organizations40000.
©2016 South University
* SCTheAccountant. (2013). CVP-graph [Video]. Available from https://www.youtube.com/watch?v=7T7EH3t8SJU
Let's take a look at these triangles that will be described by the total revenue and the total cost line.
We have got a triangle above the breakeven point and we call this triangle the area of profit. Below the
breakeven point the triangle described by the total revenue and the total cost line is called the
