Accounting Business Reporting for Decision Making

CHAPTER 10 Cost–volume–profit analysis 427

For example, if ATC sets a desired profit level (prior to any income tax consideration) of $600, then the
number of units (or players) required can be calculated as:

(Fixed costs + desired profit)

Contribution margin per unit (or players)

$(1800 + 600)

= 40 units (or players)

60

Figure 10.6 illustrates the number of units (or players) required to be sold (or to attend) to earn the
$600 profit in a CVP graph.
Another way to view this is that an additional $600 of contribution margin is required to earn the
desired profit. Given that the contribution margin per unit (or player) is $60, then an additional 10 units
(or players) are required ($600/$60) to earn $600 profit on tournament attendance.

Sales = 40 players

Prot $600

$6000 = total revenue

$5400 = total costs

$1800 Fixed costs

Sales@$150 per player

V.C.@$90 per player

FIGURE 10.6 Break-even graph showing profit

Once the basic calculations have been made, it is possible to consider alternative scenarios. For
example, what if ATC did not provide players with lunches, then variable costs would reduce to $60 per
player and if the selling price (participation charge) is reduced to $100 per player? This would alter
the contribution margin per unit (or player) to $40 ($100 less $60), and the break-even for ATC would
then be:

$1800

=45 units (or players)

$40

If ATC made changes as outlined that would decrease variable costs and reduce the selling price
(participation charge) to $100, it would increase the break-even number of units (or players) from 30 to
45 units (or players).
When calculating break-even units or units needed for a desired profit, you can always check the
accuracy of your answer by constructing a statement of profit or loss to see if the answer produces zero