PAPER

Cost-Volume-Profit

Supervising Lecturer:
Rita Yuniarti, Dr., S.E., M.M., Ak., C.A.

Prepared by:
Fasya Yosifa 1619103006
Yani Suryani Selamarta 1619103009
Desi Aryanti 1619103013

Master of Accounting
WIDYATAMA UNIVERSITY
YEAR 2019
 CHAPTER I

THEORY STUDY
1.1. Break Even Point
Cost-volume-profit analysis (CVP analysis) is a powerful tool for
planning and decision making. Because CVP analysis emphasizes the relationship
the relationship between cost, quantity sold, and price, it brings everything together
company financial information. CVP analysis can be a valuable tool in
identifying the level and extent of the economic problems faced by the company and
help to show the necessary solutions.
CVP analysis can address many issues, such as the number of units that must
sold to reach the break-even point, the impact of certain reductions in fixed costs can
impact on the breakeven point, and the impact of price increases can affect profits.
In addition, CVP analysis allows managers to conduct analysis
sensitivity by examining the impact of various price or cost levels on profits.
A. Break Event Point per Unit
The starting point for presenting CVP analysis is to find the company's breakeven point.

in units sold. The break-even point is the zero profit point. Two approaches that are often
used to find the break-even point in units is the revenue approach
operational and contribution margin approach. The company's initial decision in
Applying a unit-sold approach to CVP analysis involves determining what that unit is.
The more complicated a service is, the more productive units are assigned, so
standardizing service efforts. The second decision is focused on separating costs
become fixed and variable components. CVP analysis focuses on factors that
influencing changes in profit components.
i. Operational Revenue Capture
The operating income approach focuses on the income statement as a tool.
useful in categorizing company costs into fixed and variable.
The income statement can be expressed as a narrative equation:

Operating income = Sales revenue - Variable costs - Fixed costs

Operating income only includes income and expenditures from

normal operation of the company. Net profit is operational income minus
income tax. After having the size of the units sold, the equation can be
expanding operational income by stating sales revenue and
variable costs in terms of dollar amount per unit and number of units. Specifically,
Sales revenue is expressed as the selling price per unit multiplied by the number of units.
sold, and the total variable cost is the variable cost per unit multiplied by the number of units that

sold. With these expressions, the operating profit and loss report becomes:

Operational income = (Price × Number of units) - (Variable cost per unit × Number
unit) - Total fixed costs.

The following example is to determine the breakeven point in units. Assume that
More-Power Company produces one type of electrical tool: sanders. For the year
In the future, the controller has prepared a projected income statement.
as follows:
72,500 units @ $40
Less: Variable expenses 1,740,000
Contribution margin $1,160,000
Less: Fixed expenses 800,000
Operating income 360,000

The price per unit is $40, and the variable cost is $24 ($1,740,000 / 72,500
The fixed cost is $800,000. At the break-even point, the revenue equation is...
the operation will take the following form:
0 = ($40 × Units) – ($24 × Units) – $800,000
0 = ($16 × Units) – $800,000
$16 × Units = $800,000
Units = 50,000

Therefore, More-Power must sell 50,000 sanders just to cover the costs.
all fixed and variable costs. A good way to check this answer is
by formulating the profit and loss report based on 50,000 units sold.
Sales (50,000 units @ $40) $2,000,000
Less: Variable expenses 1,200,000
Contribution margin $800,000
Less: Fixed expenses 800,000
Operating income $ 0
Indeed, selling 50,000 units results in zero profit. Profit
The important thing about the operational revenue approach is that all CVP equations
further derived from the variable-cost income statement.
ii. Contribution Margin Approach
The improvement of the operational income approach is the margin approach.
contribution. As a result, only the break-even point is recognized, total contribution margin.

the same as fixed costs. Contribution margin is sales revenue minus

total variable cost. If we replace the unit contribution margin with the price
subtract variable unit costs in the operating income equation and
solving it with the number of units, we obtained the following break-even expression:

Break-even units = Fixed costs / Contribution margin per unit

Using More-Power Company as an example, it can be seen that the margin

The contribution per unit can be calculated in one of two ways. One of the ways is
is by dividing the total contribution margin by the units sold resulting in
$16 per unit ($1,160,000 / 72,500). The second way is to calculate the price minus
variable cost per unit. Doing so results in the same outcome, $16 per unit
( $ 40 - $ 24 ). Now, we can use the contribution margin approach to
calculating the break-even unit count.
Number of units = $800,000/($40 - $24)
800,000 dollars divided by 16 dollars per unit equals 50,000 units

iii. Profit Target

While the break-even point is useful information, most companies
want to achieve operational income greater than zero. CVP analysis provides
we need a way to determine how many units must be sold to achieve
targeted income. Targeted operating income can be expressed
in dollar amounts (e.g., $20,000) or as a percentage of income
sales (e.g., 15 percent of revenue). Both operational revenue approaches
or the contribution margin approach can be easily adjusted for
enables targeted revenue.
Sales Target
Assume that More-Power Company wants to obtain
operating income of $424,000. How many sanders should be
sold to achieve this result? By using an approach
operational income, we form the following equation:
$424,000 = ($40 × Units) – ($24 × Units) – $800,000
$1,224,000 = $16 × Units
 Units = 76,500
Using the contribution margin approach, only
adding the targeted profit of $424,000 to fixed costs and
completing it for the number of units.
Units = ($800,000 + $424,000)/($40 - $24)
$1,224,000/$16
= 76,500
More-Power must sell 76,500 sanders to make a profit
Before tax of $424,000. The following income statement verifies.
this result:
76,500 units @ $40 $3,060,000
Less: Variable expenses 1,836,000
Contribution margin $1,224,000
Less: Fixed expenses 800,000
Income before income taxes $ 424,000
Break-even point of 50,000 units, to achieve a profit of $424,000.
The contribution margin per sander is $16. Multiplying $16 by 26,500.
sanders above the break-even point generates a profit of $424,000 ($16 ×
26,500). This result shows that the contribution margin per unit for each
The unit above the break-even point is equivalent to profit per unit. Because the break-even point has been

calculated, the number of sanders that will be sold to generate revenue

Operational $424,000 can be calculated by dividing the contribution margin per unit.

into profit targets and adding the amount generated to the volume
impasse. Generally, assuming that fixed costs remain the same, the impact
on the company's profit generated from changes in the number of units sold
should be assessed by multiplying the unit contribution margin by the change
units sold. For example, if 80,000 sanders and not 76,500 are sold,
How much profit will be obtained? Changes in units that
sold is an increase of 3,500 sanders, and the unit contribution margin is $
Thus, the profit will increase by $56,000 ($16 × 3,500).

Targeted Income as a Percentage of Revenue

Sales
Assume that More-Power Company wants to know
the number of units that need to be sold to achieve equivalent profit
with 15 percent of sales revenue. Sales revenue is
 the selling price multiplied by the number of sales. Therefore,
the targeted operating income is 15 percent of the selling price
multiplied by quantity. Using the income approach
operational (which is simpler in this case), we obtain that
the following:
0.15($40)(Units) = ($40 × Units) - ($24 × Units) - $800,000
$6 × Units = ($40 × Units) – ($24 × Units) – $800,000
$6 × Units = ($16 × Units) – $800,000
$10 × Units = $800,000
Units = 80,000
Does a volume of 80,000 sanders achieve a profit equal to 15?
percentage of sales revenue? For 80,000 sanders, total revenue
is $3.2 million ($40 × 80,000). Profit can be calculated without
preparing a formal income statement. Remember that above the break-even point,
The contribution margin per unit is profit per unit. The break-even volume is

50,000 sander. If 80,000 sander are sold, then 30,000 (80,000 - 50,000)
sander above the break-even point is sold. Therefore, profit before tax
is $480,000 ($16 × 30,000), which is 15 percent of
sales ($480,000 / $3,200,000).
Target Profit After Tax
When calculating the break-even point, income tax does not play a role. This

because the tax paid on zero income is zero. However,

when the company needs to know how many units will be sold for
to obtain a certain net profit, several additional considerations
required. Remember that net profit is operating income.
after income tax and that our income figure that
targeted to be stated in the provisions before tax. As a result, when
The target revenue is stated as net profit, we must
reintroducing income tax to generate revenue
operational. Therefore, to use one of the approaches,
target profit after tax must first be converted to target profit
before tax. Generally, taxes are calculated as a percentage of
income. Profit after tax is calculated by subtracting tax from
operating income (or earnings before tax).
 Net income = Operating income – Income taxes
Operating income – (Tax rate × Operating income)
Operating income × (1 – Tax rate)
Operating income = Net income/(1 – Tax rate)

So, to convert net profit after tax into profit before tax
tax, enough for profit after tax divided by quantity (1 - tax rate).
Suppose More-Power Company wants to achieve a net profit of $487,500.
and the income tax rate is 35 percent. To convert
the target profit after tax becomes the target profit before tax, complete
the following steps:
$487,500 = Operating income - 0.35(Operating income)
$487,500 = 0.65(Operating income)
Operating income
In other words, with an income tax rate of 35 percent, More-
The Power Company must earn $750,000 before income tax.
to have $487,500 after income tax. With this conversion,
We can now calculate the number of units that need to be sold.
Units = ($800,000 + $750,000)/$16
$1,550,000/$16
= 96,875
Let's check this answer by preparing a profit report.
loss based on the sale of 96,875 sanders.
96,875 at $40 $3,875,000
Less: Variable expenses 2,325,000
Contribution margin $1,550,000
Less: Fixed expenses 800,000
Income before income taxes $750,000
Less: Income taxes (35% tax rate) 262,500
Net income $487,500

B. BREAK-EVEN POINT IN SALES DOLLARS

In some cases when using CVP analysis, managers may be more
like to use sales revenue as a measure of sales activity rather than
The sold units. The size of the sold unit can be converted to the size of sales revenue.
just by multiplying the unit selling price by the units sold. For example, the point
the impasse for More-Power Company is calculated to be 50,000 sanders. Because of the selling price

for each sander is $40, the breakeven volume in sales revenue is

$2,000,000 ($40 × 50,000)
Every answer stated in the sold unit can be easily
converted into one stated in sales revenue, but the answer is
it should be calculated more directly by developing separate formulas for cash
sales. In this case, the important variable is sales dollars, so revenue
and variable costs must be expressed in dollars, not units. Because revenue
Sales are always stated in dollars, measuring that variable is not an issue.
To calculate the break-even point in sales dollars, variable costs are defined.
as a percentage of sales and not as a number per unit sold.

In this exhibition, the price is $10, and the variable cost is $6. Of course,
the remaining is a contribution margin of $4 ($10 - $6). Focusing on 10 units sold,
the total variable cost is $60 ($6 × 10 units sold). Alternatively, because each
each unit sold generates $10 in revenue, it can be said that for every
$10 of the income earned, $6 of variable costs were spent, or, which
equal, that 60 percent of every dollar of income earned is caused by
variable cost ($ 6 / $ 10). Thus, focusing on sales revenue,
we expect total variable costs of $60 for revenue of $100 (0.60 × $100).
In stating variable costs in terms of sales dollars, we calculate the ratio
variable cost. This is just the proportion of each dollar of sales that must be used.
to cover variable costs. The variable cost ratio can be calculated using
total data or unit data. Of course, the percentage of sales dollars remaining after costs
the closed variable is the contribution margin ratio. The contribution margin ratio is the proportion

from every dollar of sales available to cover fixed costs and provide
profit.
If the variable cost ratio is 60 percent of sales, then the contribution margin
it must be 40 percent of the sales. It makes sense that the complement of the ratio
variable costs are the contribution margin ratio. After all, the proportion of sales dollars that
remaining after the variable costs are covered must become part of the contribution margin. Like
variable cost ratio, contribution margin ratio (40 percent in our exhibition) can
calculated using total numbers or units — that is, by dividing the total
contribution margin with total sales ($ 40 / $ 100), or by dividing units
contribution margin based on price ($ 4 / $ 10).
Of course, if the variable cost ratio is known, it can be subtracted from one to
producing a contribution margin ratio (1 - 0.60 = 0.40). Because the contribution margin is
the income that remains after variable costs are covered, it should be income that
available to cover fixed costs and contribute to profit.
 Display 17-2 uses the same price data and variable costs from Display
previously to show the impact of fixed costs on profits. Panel A of the Exhibition
17-2 shows the company at the breakeven point, with total fixed costs equal to
contribution margin. Of course, profit is zero. Panel B shows fixed costs.
less than the contribution margin. In this case, the company makes a profit. Finally,
Panel C shows fixed costs greater than the contribution margin. Here, the company
facing operational losses. Now, let's turn to some examples
based on More-Power Company to describe the sales approach
Income. Presented below is the variable income statement from More-
Power Company for 72,500 sanders.

Dollars Percent of Sales

Sales $2,900,000 100%
Less: Variable costs 1,740,000 60%
Contribution margin $1,160,000 40%
Less: Fixed costs 800,000
Operating income $360,000

Note that sales revenue, variable costs, and contribution margin

has been stated in the form of sales percentage. The variable cost ratio is 0.60
( $1,740,000 / $2,900,000 ); the contribution margin ratio is 0.40 (calculated as 1 - 0.60
or as $1,160,000 / $2,900,000). The fixed cost is $800,000. Here is
calculation to determine the break-even point:

Sales - Variable_costs - Fixed_costs

0 = Sales - (Variable cost ratio × Sales) - Fixed costs
0 = Sales × (1 − Variable cost ratio) − Fixed costs
0 = Sales × (1 - 0.60) - $800,000
Sales × (0.40) = $800,000
$2,000,000

Thus, More-Power must generate revenue of $2,000,000.

to reach the breakeven point. (To verify this answer by preparing
profit and loss report based on revenue of $2,000,000 and verifying that it is
producing zero profit.) Note that 1 - 0.60 is the contribution margin ratio.
We can skip a few steps by acknowledging that Sales - (Ratio
Variable cost × Sales is equal to Sales × Contribution margin ratio.
What about the contribution margin approach used in determining
break-even point in units? We can use that approach here as well. Remember
that the formula for the break-even point in units is as follows:

Break-even point in units = Fixed costs/(Price − Unit variable cost)

If both sides are multiplied, the equation above with price, the left side will be equal to
sales revenue at the break-even point.
Break-even units × Price = Price [Fixed costs/(Price − Unit variable cost)]
Break-even sales = Fixed costs × [Price/(Price − Unit variable cost)]
Break-even sales = Fixed costs × (Price/Contribution margin)
Fixed costs / (Contribution margin / Price)
Break-even sales = Fixed costs/Contribution margin ratio

Once again, using data from More-Power Company, the break-even sales dollars
will be calculated as $800,000 / 0.40, or $2,000,000. The same answer, just
a slightly different approach.
 i. Target Profit
Consider the following question: How much is the sales revenue?
what More-Power must generate to achieve profit before tax
amounting to $424,000? (This question is similar to the one we asked earlier)
in terms of units, but the question is expressed directly in terms of
sales revenue.) To answer the question using an approach
contribution margin, add the targeted operating income of $
Divide $424,000 by $800,000 of fixed costs and split the total by the margin ratio.
contribution.
$3,100,000
$3,060,000
$3,060,000
2,000,000, additional sales of $1,060,000 ($3,060,000 - $2,000,000) must
obtained at the break-even point. Note that multiplying the margin ratio
contribution with revenue above the break-even point generates a profit of $
424,000 (0.40 × $1,060,000). Above the break-even point, the contribution margin ratio is
profit ratio; therefore, it represents the proportion of each dollar of sales that
given in profit. For this example, every dollar of sales earned in
at the breakeven point, profits increase by $0.40. In general, assuming
that fixed costs remain unchanged, the contribution margin ratio can be used
to find the profit impact of changes in sales revenue. For
to obtain the total profit change from the change in revenue, simply multiply
the contribution margin ratio with changes in sales. For example, if the revenue
Sales are $3,000,000, not $3,060,000, how is the profit?
is expected to be affected? A decrease in sales revenue of $60,000 will
causing a decrease in profit of $ 24,000 (0.40 × $ 60,000).

C. MULTIPLE-PRODUCT ANALYSIS
More-Power Company has decided to offer two models of sanders:
a regular sander for sale at $40 and a mini-sander, with a variety of tips
like a drill that will fit into tight angles and grooves, for sale at $
60. The marketing department believes that 75,000 regular sanders and 30,000 mini sanders
to be sold during the coming year. The controller has prepared the profit and loss statement
projected as follows based on sales estimates:

Note that the controller has separated direct fixed costs from costs
fixed in general. Direct fixed costs are fixed costs that can be traced to each
segments and that will be avoided if the segment is not present. General fixed costs
is a fixed cost that cannot be traced to segments and it will remain
even though one segment is eliminated.
a. Break Even Point per Unit
The owner of More-Power is somewhat concerned about the addition of a new product line and

want to know how many of each model must be sold to reach the point
impasse. Using the equation developed earlier where the cost
still divided by the contribution margin. This equation presents several
direct problems. This is developed for single product analysis. For two
product, there are two unit contribution margins. Regular sander has a contribution margin

per unit $ 16 ($ 40 - $ 24), and the mini-sander has one for $ 30 ($ 60 - $ 30).
One possible solution is to implement separate analysis.
for each product line. It is possible to achieve individual break-even points
when income is defined as product margin. Breakeven for the sander
the usual is as follows:
Regular sander break-even units = Fixed costs / (Price - Unit variable cost)
$250,000 divided by $16

15,625 units
Breakeven for the mini-sander can be computed as well.
Mini-sander break-even units = Fixed costs / (Price - Unit variable cost)
 = $450,000/$30
= 15,000 units
Thus, 15,625 regular sanders and 15,000 mini sanders must
sold to achieve the break-even product margin. But the break-even product margin

only covers direct fixed costs; general fixed costs must

covered. Selling a number of these sandals will incur a loss that
the same as general fixed costs.

Sales Mix
Sales mix is the relative combination of products sold by a certain
The sales mix can be measured in units sold or in
revenue proportion. For example, if More-Power plans to sell 75,000
ordinary sanders and 30,000 mini sanders, the mixed makasales in units are
75,000: 30,000. Usually, the sales mix is reduced to an integer.
the smallest possible.
Thus, the relative mixture of 75,000: 30,000 can be reduced.
becomes 75:30 and then becomes 5:2. That is, for every five sanders
Usually sold, two mini sanders are being sold. The expected sales mix will be
achieved must be used for CVP analysis.
By defining the product as a package, the multi-product issue
converted into a single product. To use the break-even approach-
In-unit, the selling price of the package and variable costs per package must be known.

To calculate the values of this package, the sales mix, product price
individuals, and individual variable costs are required. Considering product data

individual found in the projected income statement, value

the package can be calculated as follows:

Considering the contribution margin of the package, the CVP equation of the product

single can be used to determine the number of packages that need to be sold
 to reach the break-even point. From the income statement of More-Power that
it is projected, we know that the total fixed costs for the company are
$ 1,300,000. Thus, the break-even point is calculated as follows:
Break-even point = Fixed cost / Package contribution margin
=$1,300,000/$140
9,285.71 packages
More-Power must sell 46,429 regular sanders (5 × 9,285.71) and
18.571 mini-sanders (2 × 9.285.71) to reach the break-even point.

Sales Mix

To illustrate the break-even point in sales dollars, an example that

it will be used. However, the only information needed is
projected income statement for MorePower Company
overall.

Sales $4,800,000

Less: Variable costs 2,700,000

Contribution margin $2,100,000

Less: Fixed costs 1,300,000

Operating income $800,000

 Note that this income statement corresponds to the total column of
a more detailed income statement that was previously examined. Income statement
the projected losses are based on the assumption that 75,000 ordinary sanders and
30,000 mini sanders will be sold (sales mix 5:2). Break-even point in
Sales income is also based on the expected sales mix.
(Like with the unit-sold approach, different sales mixes will
producing different results.) With the income statement, the CVP question
usually can be resolved. For example, how much sales revenue should
obtained to reach the break-even point? To answer this question, we
dividing the total fixed costs of $1,300,000 by the contribution margin ratio of 0.4375 ($

2,100,000 / $4,800,000.

Break-even sales = Fixed costs/Contribution margin ratio

$2,971,428.57

$2,971,429

D. GRAPHICAL REPRESENTATION OF CVP RELATIONSHIP

i. The Profit Volume Graph
The profit-volume graph visually illustrates the relationship between profit.

and sales volume. The profit-volume chart is a graph of the equation

operating income [Operating income = (Price × Units) - (Costs
variable unit × Unit) - Fixed costs]. In this graph,
Total fixed costs $100
Variable cost per unit 5
Selling price per unit 10
Using these data, operating income can be expressed as follows:
($10 × Units) − ($5 × Units) − $100
= ($5 × Units) − $10
We can create this relationship graph by plotting the units in
along the horizontal axis and operating income (or loss) at
along the vertical axis. Two points are needed to create a graph
linear equation. Meanwhile, two points will be done, the two points that
those who match a zero sales volume are often selected
zero profit. When the units sold are zero, Tyson experiences
operating loss of $100 (or profit -$100). Related points
with zero sales volume, therefore, it is (0, -$100). With
In other words, when no sales occur, the company suffers.
The loss is equal to the total fixed costs. When operational income
no, the units sold equal 20. The points related to zero profit.
(break-even point) is (20, $0).

For example, the profit associated with the sale of 40 units can be read
from the graph with (1) drawing a vertical line from the horizontal axis to
profit line and (2) draw a horizontal line from the profit line to the axis
vertical. As illustrated in View 17-4, the associated profit
With sales of 40 units being $100. The volume-profit graph, however
easy to interpret, fails to express how costs change
when sales volume changes. An alternative approach to the graph can
provide these details.
ii. Cost-Volume-Profit Graph
The volume-profit graph illustrates the relationship between costs, volume,
and profits. To obtain a more detailed relationship, it is necessary to create
a graph of two separate lines: the total revenue line and the total cost line. The lines
these are represented by the following two equations:
Revenue = Price × Units Total cost
(Unit variable cost × Units) + Fixed costs
Using the Tyson Company example, the revenue and cost equations are as
follows:
$10 × Units Total cost
(5 dollars × Units) + 100 dollars

To plot both equations on the same graph, the axis

vertical measured in dollars of revenue and the horizontal axis in units that
sold. It takes two points to create a graph for each equation. We will
using the same x coordinates used for the volume-profit graph.
For the income equation, set the number of units equal to zero.
generating revenue $0; setting the number of units equal to 20 results
income $200. Therefore, two points for the income equation are
(0, $ 0) and (20, $ 200). For the cost equation, 0 units sold and 20 units sold
producing points (0, $100) and (20, $200). The graph of both equations
appears in Display 17-5.

Note that the total revenue line starts at the origin and rises.
with a slope equal to the selling price per unit (slope 10). Cost line
 total intersects the vertical axis at the same point as total fixed cost and
increases with the same slope as the variable cost per unit (slope 5).
When the total revenue line is below the total cost line, the area is a loss.
determined. Similarly, when the total revenue line is positioned above the line
total cost, profit area determined. The point where the total revenue line and the line
The total cost at the cutoff point is the break-even point.
To break even, Tyson Company must sell 20 units and
therefore receiving $200 in total income. Now, let's
compare the information available from the CVP graph with that available from
volume-profit graph. To do this, consider sales of 40 units.
Remember that the volume-profit graph reveals that sales of 40 units.
generated a profit of $100. Check Exhibit 17-5. CVP graph
also shows a profit of $100, but more than that. CVP Graph
indicating that total revenue is $400 and total costs are $300
with the sale of 40 units. In addition, the total cost can be broken down into fixed costs.
$100 in fixed costs and $200 in variable costs. The CVP graph provides information on revenue.

and expenses that are not provided by the volume-profit graph. Unlike the graph
volume-profit, several calculations are needed to determine the profit that
related to the given sales volume. However, due to
larger information content, managers tend to find CVP graphs
more useful tools.
Assumption Break Even Point
1.3.User Break Even Point
1.4.

The definition of cost structure is the expenses incurred in

running a certain business model. When we develop a product, marketing
products, maintaining relationships with customers as well as after-sales services certainly

costs are necessary. Costs can be easily calculated when we study.

regarding Key Resources, Key Activities, and Key Partnerships.

Costs generally include fixed costs and variable costs. We understand fixed as
cost that remains fixed regardless of the amount of products produced. For example, fixed cost
is the cost of building rent, employee salaries, and so on. Meanwhile, variable cost
is the cost that changes according to the change in the number of units of product produced.
An example of variable cost is raw materials where the raw cost increases accordingly.
with the increase in the number of products produced.

In this cost structure, the company must understand the cost structure in carrying out
the business model. In general, companies must reduce costs as much as possible.
companies. But there are business models that are sensitive to costs while others are not.
A business model that emphasizes low prices certainly pays close attention to costs.
businesses that prioritize comfort will place more emphasis on user experience
compared to how to reduce costs.

Operating leverage

Operating leverage is how much a company uses fixed costs.

operational (Hanafi, 2004:327). According to Syamsuddin (2001:107), operating leverage is
the company's ability to use fixed operating costs to enlarge
the impact of changes in sales volume on earnings before interest and taxes
(EBIT).

Leverage operations arise as a result of fixed costs.

borne in the company's operations. Companies that have fixed operating costs
or fixed capital costs, the company uses leverage. With
using operating leverage companies expect that changes in sales
will result in a larger change in earnings before interest and taxes. Fixed expenses
Operational costs usually come from depreciation costs, production, and marketing expenses.
which is permanent, for example, employee salary. The opposite is variable costs.
operational. An example of variable costs is the labor costs paid based on
the products produced.

Operating leverage is the influence of fixed operational costs on the ability

the company to cover those costs. In other words, the impact of the change
sales volume (Q) against earnings before interest and taxes (EBIT). The magnitude
Operating leverage is calculated with DOL (Degree of Operating Leverage) which is formulated
as follows:

Operating Leverage Formula

Operational leverage analysis is meant to determine how sensitive operating profit is.
regarding changes in sales results and what is the minimum sales that must be obtained in order to
the company does not suffer losses.

1.5.The impact of ABC on CVP

It is only natural for company managers in services, trade, or manufacturing to...

continue to strive for ways to continuously increase profits. Referring to
The Income Statement will be understood that in order to increase profits, there are two things that must be done.

managed, which is an effort to increase sales and/or decrease costs.

Cost-Volume-Profit (CVP) Analysis is known to have uses (1) to determine

the number of units sold to reach the breakeven point, (2) determining the impact of reductions
fixed costs against the break-even point, (3) determine the impact of price increases on profit.
In conventional CVP Analysis, it is assumed that,

Changes in production/sales volume are the sole cause of changes.

costs and revenues total cost consists of fixed costs and variable costs revenues and
behavioral costs can be presented graphically as a linear function (straight line)

selling price, variable cost per unit, and fixed costs are all known and constant
In many cases, only a single product will be analyzed. If there are many products
the analysis, the relative sales proportion of these products is known and constant

the time value of money (interest) is disregarded

 In Activity Based Costing (ABC), it is realized that distinguishing between fixed costs and
Variable costs alone would oversimplify the problem. The ABC system divides costs into
categories based on unit and non-unit, meaning some costs vary depending on
the number of units produced, some other costs are not, and can also be costs based on
Non-unit changes related to its cost driver.

CVP Analysis can also be used in the scope of cost calculation based on
activities, but need to be modified, as illustrated in the writings of Hansen &
Mowen, for example, in addition to identifying fixed costs and variable costs, there are also three
activity drivers, which are units sold at the unit level, the number of arrangements in
batch level, and engineering hours at the product level, the modifications are as follows:

The benefits of the ABC System are to improve the accuracy of cost information, urgent.

to be implemented in conditions of increasingly tight competition, in the company

with high overhead costs, and certainly for companies that produce a variety
more than one product. Thus, the CVP Analysis used applies to those
multiproduct, where the sales mix must be known and assumed constant. Contribution
The margin package as a divider in the calculation of the break-even point of the package.

CVP Analysis provides a framework to answer various 'what-if' scenarios.

for example, 'what' happens to profit 'if' the number of regulations is reduced, or 'what'
what happens to profits 'if' the amount of engineering is increased. In a business environment
the tighter, CVP Analysis modification within the scope of ABC systems is certainly beneficial

for profit planning. Various scenarios have been created that can be realized,
among other things the possibility of raising prices, the possibility of reducing or even

eliminating activities that do not add value, and other possibilities.

The break-even point is recalculated for various scenarios, and subsequently can
determined how many units must be sold in order to achieve the desired profit.
 Chapter II

JOURNAL STUDY

Research Title Developing a cost-volume-profit model in production decision system based

on MAD real options model

Author Stefan Daniela,*

Background Currently, the CVP model represents a well-organized model with

known capabilities and limitations based on the literature that
developed in this field Demski & Kreps, 1982, Tsai & Lin, 1990,
Kaplan & Atkinson, 1998, González, 2001, Horngren, Datar, & Foster, 2003.
One of the limitations of the model is its poor capacity for
working with multiproduct situations. Following these guidelines we propose
Stefan D, Stefan B, Savu, Sumandea, & Comes, 2008 CVP function model
based on independent variables with value constraints. We prove
the usefulness of this model by changing, in this way, solving problems
The break-even point becomes an optimization problem.
Theory :
Framework of Thought :
Methodology Using Analytical Methods and MAD Technique
Research Results CVP analysis can be considered a useful tool for determining
accurately the interaction between various profitability drivers and design
in accordance with the assessment framework of real options. On the other hand, the budget control procedures

must take the necessary feedback from financial modeling

decision flexibility, focusing their attention on variables that
considered the most important in determining profitability. Because the model
CVP is a decision model related to the value of the function.
The result, with a strict positive value, can be considered as the price.
the implementation for the waiver and production options can be seen as
long-term project. Because in this case it is almost impossible to
identifying a traded asset portfolio that exactly replicates
the risk and return of the company, we can use Copeland
and Antikarov, 2001, Marketed Asset Disclaimer model MAD.
They proposed a simple approach free from any assets.
traded in the market. This new, simpler approach
 based on the assumption of marketed MAD asset release. MAD technique
using the present value of the project without options as the best estimate
that is not biased for the market value of the project. The MAD assumption eliminates

difficulty in identifying the twin portfolio of independent linear securities

that can generate the same risk and cash flow as the project.
In our approach, we can use the present value of profits.
futures; determined using the presented profit function
previously. If we consider the fact that price volatility,
demand, cost is a source of uncertainty for the final outcome, we can
using the combined volatility of the profit function as asset volatility
which is used in the real options model.
Conclusion The purpose of this paper is to investigate several new methods and
the results are offered under a new hypothesis. Its main aim is to
explaining how to use the real options model in
decisions related to the production process. This is done by drawing
the parallelism between traditional CVP analysis and real options approach for
investment evaluation. In addition, this approach can be adjusted to
other real options evaluation methods.