Cost volume profit analysis sample problems

At a breakeven point, a company’s revenue is equal to the total cost. Companies use Cost-Volume-Profit (CVP) analysis to calculate the units that need to be sold to break even or achieved a target income. It is a powerful tool that is used widely in business to help managers make better decisions and figure the retail price (Datar & Rajan, 2017, p.78). Also, a variable costing income statement provides all variable expenses that are subtracted from revenue to result in contribution margin. The expenses include fixed and variable cost needed to determine a breakeven. In addition, sales volume and selling price do affect the profit.

Subway used the CVP analysis in its strategy of lowering prices to boost profits. When Subway’s operating income equal to zero, it reaches the breakeven point. Subway used the lower selling price strategy to increase the sale volume. In other words, the higher the number of sales, the more profit it would make.

Examples of Subway’s fixed costs are rent, franchise license, and manager’s salary, etc. The variable costs include many types of costs such as utilities, supplies like cups, straws, plastic utensils, and sub sandwich bread, toppings, etc.

Reference:

Datar, S. & Rajan, M. (2017). Horngren’s cost accounting: A managerial emphasis (16thed.). Pearson. Retrieved from https://purdueuniversityglobal.vitalsource.com/#/books/9780134475950/cfi/6/108!/4/2/26/4@0:100

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Information needed from a variable costing income statement to compute the break even point are the revenues, variable production expenses, and fixed costs. Subway used CVP by estimating how their contribution margin would increase by lowering the cost of their sandwiches and encouraging add on sales of chips, cookies, and sodas. They analyzed that 2/3 of their customers added on chips or soda which had a higher contribution margin than their sandwiches. (Datar, 2017) Subway's fixed costs include their equipment and any leases they have for their buildings. A variable cost for them would be their food costs, because they will change as their volume changes.