Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed

All revenues and costs can be added and compared without taking into account the time value of money. 8.4

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5
All revenues and costs can be added and compared without taking into account the time value of money.
8.4
CVP certainly is simple, with its assumption of a single revenue driver, a single cost driver, and linear revenue and cost relationships. Whether these assumptions make it simplistic depends on the decision context. In some cases, these assumptions maybe sufficiently accurate for CVP to provide useful insights. The examples in Chapter 8 illustrate how CVP can provide such insights. In more complex cases, the general case can be used in a computer planning model.
8.5
Contribution margin
is calculated as revenues minus all costs that vary with respect to the output level.
Gross margin
is calculated as revenues minus cost of goods sold.
Contribution margin percentage
is the total contribution margin divided by revenues.
Variable-cost percentage
is the total variable costs (with respect to units of output) divided by revenues.
Margin of safety
is the excess of budgeted revenues over breakeven revenues.
8.6
Examples include
•
Manufacturing
– substituting a robotic machine for hourly paid workers.
•
Marketing
– changing a sales force compensation plan from a percentage of sales revenue to a fixed salary.
•
Customer service
– hiring a subcontractor to do customer repair visits on an annual retainer basis rather than a per visit basis.
8.7
Examples include
•
Manufacturing
– subcontracting a component to a supplier on a per unit basis to avoid purchasing a machine with a high fixed depreciation cost.
•
Marketing
– changing a sales compensation plan from a fixed salary to a percentage of sales revenue basis.
•
Customer service
– hiring a subcontractor to do customer service on a per visit basis rather than an annual retainer basis.

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012
8.8
CVP analysis is always conducted fora given specified time horizon. One extreme is a very short time horizon. For example, some holiday cruises offer deep price discounts for people who offer to take any cruise on a day’s notice. One day prior to a cruise most costs are fixed. The other extreme is several years. Here, a much higher percentage of total costs typically is variable.
CVP itself is not made any less relevant when the time horizon lengthens. What happens is that many items classified as fixed costs in the short run may become variable costs with a longer time horizon.

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