Cost-volume-profit and break-even analysis in accounting

Finance

PowerPoint Presentation for CVP Calculations

With the figures given it is possible to calculate the variable cost per member. To calculate the variable cost, with the knowledge that the break even point for the firm is 300 monthly memberships, it is necessary to allocate the fixed costs for each membership; it is the surplus from the price of membership less the fixed costs that will be the variable cost. The first stage is to add together the fixed costs, to get the total fixed costs. In this case they are $6,000.

If the Snap Fitness will break even when 300 memberships are sold, this is the point when the membership fees will cover exactly the fixed and the variable costs. So, the second stage is to divide the total fixed costs between the 300 memberships. This gives $20.

Slide

With the knowledge that the break even point sees each membership pay $20 towards the fixed costs, the reaming amount paid in the membership fee must be the variable cost.

Therefore, to calculate the variable cost, we take the membership fee charged, which is given as $26 per month, and deduct the fixed costs per member, which gives a variable cost of $6.

Slide 5

To assess the level of sales needed to achieve a set level of profit, the first piece of information needed is the level of the contribution. The contribution is the revenue each sale generates, less the variable costs for that unit. These figures have already been calculated, but the calculation has been shown for clarity.

Slide 6

The next stage is to look at how much contribution is needed in total, as this is the part of the revenue that will cover the fixed costs and generate the profit. The amount needed is calculated by adding together the fixed costs and the profit needed. This gives a total of $16,000.

Slide 7

To calculate the total number of membership that the business needed to generate the $16,000, the $16,000 is divided by $20, as this is the contribution level per member. The result is 800, which means that for the business to make a profit of $10,000 per month it needs to sell 800 monthly memberships. This figure can be used to calculate the total revenue that will be generated. The revenue per member is $26, so the total revenue generate a month when profit if $10,000 will be $26 x $800 giving us $20,800.

Reference

Chadwick L, (2001), Essential Management Accounting, London, Routledge

Calculating Variable Costs

Variable costs are incurred for each unit sold.

Revenue after the variable costs are cover fixed costs and then profit

Stage 1; calculate total fixed costs