Faculty of Commerce – Cairo University MA -2023/2024 4th year English Section
Chapter 2 – Part 3: Introduction to Cost Behavior and Cost-
Volume-Profit Relations
A. Non-profit Application
• The managers of non-profit organizations also benefit from the study of CVP relationships.
• For example, administrators of non-profit hospitals are concerned about the behavior of
costs as the volume of patients fluctuates.
• Many non-profit organizations do not derive revenue from selling goods or services, so
their revenue function is not simply number of units sold multiplied by selling price per
unit.
• For example, some non-profit organizations receive a fixed allocation of funds to cover
their costs and must plan operations based on that fixed budget. Other non-profit
organizations use CVP analysis to plan how to adjust operations in response to changes in
the level of donations received.
• Still other non-profits receive a fixed allocation of funds and a revenue subsidy that covers
a portion of the cost of the services provided. CVP analysis can be adapted to reflect the
source or form of the organization’s revenue.
Example (1):
a) Suppose a city has a $100,000 lump-sum budget appropriation (donations similar to
Sales revenue at business organizations) to conduct a counselling program for drug
addicts. The variable costs for counselling are $400 per patient (uvc) per year. Fixed
costs are $60,000.
If the city spends the entire budget appropriation(donations), how many patients can
it serve in a year? Or what is the break-even number of patients???
Solution:
Let Q be the number of patients, substitute the $100,000 lump-sum budget for sales Revenue,
At BEP: Sales Revenue = Total Variable Costs + Total Fixed expenses
$100,000 = $400Q + $60,000
$400Q = $100,000 – $60,000
Q = $40,000 ÷ $400 = 100 patients
b) Now, suppose the city cuts the total budget appropriation for the following year by
10% (donations reduced). Fixed costs will be unaffected, but service will decline.
Solution:
Budget sales revenue after 10% Cut = $100,000 X 90% = $90,000
At BEP: Sales Revenue = Total Variable Costs + Total Fixed expenses
$90,000 = $400Q + $60,000
$400Q = $90,000 – $60,000
Q= $30,000 ÷ $400 = 75 patients
Prepared by Dr. Sabah Soliman Page 1
Faculty of Commerce – Cairo University MA -2023/2024 4th year English Section
The percentage reduction in service is (100 – 75) ÷ 100 = 25%, which is more than the 10%
reduction in the budget. Unless the city restructures its operations, the service volume must
fall by 25% to stay within budget.
Solution:
1. VC% = 25% so, CM%= 75%
BEP in $ = TFC/CM% = 45,000,000/75% = $60,000,000
2. Daily revenue per patient = $60,000,000 ÷ 37,500 = $1,600. This may appear high, but it
includes the room charge plus additional charges for drugs, x-rays, and so forth.
Solution:
1. The break-even point in total revenue = TFC / CM%
CM% = 1 – Variable-Cost Ratio. 1-70% =30%
Break-even point in total revenue = Fixed Cost ÷ CM% = $42,000,000 ÷ 30% =
$140,000,000.
2. a.
Total revenue $150,000,000
- Variable cost (.7 × 150,000,000) (105,000,000)
= Contribution margin 45,000,000
- Fixed costs (42,000,000)
= Net profit $ 3,000,000
Prepared by Dr. Sabah Soliman Page 2
Faculty of Commerce – Cairo University MA -2023/2024 4th year English Section
b.
Total revenue $150,000,000
- Variable cost (1.1 × 105,000,000) ( 115,500,000)
= Contribution margin 34,500,000
- Fixed costs (42,000,000)
= Net loss $ (7,500,000)
B. Sales Mix Analysis
• Sales mix is the relative proportions or combinations of quantities of products that
comprise total sales.
• If the proportions of the mix change, the cost-volume-profit relationships also
change.
Solution:
Strawberries Raspberries
SP 1.05 1.3
- UVC (0.85) (0.9)
= UCM 0.2 0.4
The proportion of Sales Mix 5 2
TFC = 15300
1. A) Get bundle (package) UCM = Proportion of sales mix x UCM
= (0.2 x 5) + (0.4 x 2) = 1.8
B) Get bundle (package) QBEP = TFC / bundle (package) UCM
= 15300 / 1.8 = 8500 units
C) Get QBEP of each product = bundle (package) QBEP x Proportion of sales mix
QBEP of Strawberries = 8500 units x 5 = 42,500 units pints of strawberries
QBEP of Raspberries = 8500 units x 2 = 17,000 units pints of raspberries
Prepared by Dr. Sabah Soliman Page 3
Faculty of Commerce – Cairo University MA -2023/2024 4th year English Section
2. Strawberries QBEP = 15300 / 0.2 = 76,500 pints of strawberries
3. Raspberries QBEP = 15300 / 0.4 =38,250 pints of raspberries
*
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