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Textile Costing · Lecture 07
Cost-Volume-Profit Relationship
Contribution margin, gross margin, the break-even point and sensitivity analysis.
Contribution marginBreak-evenSensitivity
The three ideas
- Contribution margin
- Revenues minus all costs that vary with the number of output units.
- Unit contribution margin (UCM)
- Unit sales price − unit variable cost.
- Break-even point
- The quantity of output where total revenues equal total costs.
TR = TVC + TFC → USP × Q = UVC × Q + TFC → QBE = TFC / UCM
Example. New Marketing sells orange juice at a university conference: bought at Rs 6.00, sold at Rs 10.00, unsold units returnable, stall cost Rs 5,000. Break-even = 5,000 / (10 − 6) = 1,250 units. To earn a target profit, add it to the fixed cost.
| A | B | |
|---|---|---|
| 1 | Unit selling price (USP) | |
| 2 | Unit variable cost (UVC) | |
| 3 | Total fixed cost (TFC) | |
| 4 | Target profit | |
| 5 | Unit contribution margin | 4.00 |
| 6 | Units to sell | 1,250 |
| 7 | Revenue at that volume | 12,500 |
| 8 | Contribution margin ratio | 40.0% |
blue = input (edit me)grey = formula (click to see it)
Sensitivity analysis — units needed for different fixed costs, variable costs and profit targets
The lecture left blanks to fill in; here the whole table is live. Rows are combinations of fixed cost and unit variable cost at a selling price of Rs 10.
| A | B | C | D | E | F | |
|---|---|---|---|---|---|---|
| 1 | Fixed cost | UVC | Profit 0 | Profit 1,000 | Profit 1,500 | Profit 2,000 |
| 2 | Selling price | |||||
| 3 | 800 | 1,000 | 1,100 | 1,200 | ||
| 4 | 1,000 | 1,250 | 1,375 | 1,500 | ||
| 5 | 1,333 | 1,667 | 1,833 | 2,000 | ||
| 6 | 1,000 | 1,200 | 1,300 | 1,400 | ||
| 7 | 1,250 | 1,500 | 1,625 | 1,750 | ||
| 8 | 1,667 | 2,000 | 2,167 | 2,333 | ||
| 9 | 1,200 | 1,400 | 1,500 | 1,600 | ||
| 10 | 1,500 | 1,750 | 1,875 | 2,000 | ||
| 11 | 2,000 | 2,333 | 2,500 | 2,667 |
blue = input (edit me)grey = formula (click to see it)