Cvp Analysis - Summer 2012

7/29/2019 Cvp Analysis - Summer 2012

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Example No.1:

Total Per unit

Sale (400 Speakers) 100,000 250

Less: Variable Cost (60,000) (150)

Contribution Margin 40,000 100

Less: Fixed Cost (35,000)Net Operating Income 5,000

Explaination of change in activity affect Contribution Margin & Net Operating Income:

On Sale of 1 Speaker:

Total Per unit

Sale (1 Speaker) 250 250

Less: Variable Cost (150) (150)

Contribution Margin 100 100

Less: Fixed Cost (35,000)

Net Operating Loss (34,900)

On Sale of 2 Speakers:

Total Per unit

Sale (2 Speakers) 500 250

Less: Variable Cost (300) (150)

Contribution Margin 200 100


Net Operating Loss (34,800)



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Total Per unit

Sale (350 Speakers) 87,500 250




Net Operating Income -


Total Per unit

Sale (351 Speakers) 87,750 250




Net Operating Income 100

Rule:

Change in Income:

1. Change in Income = Change in Sales - (in units) x C.Margin per unit

2. Change in Income = Change in Sales - (in amount) x C.Margin ratio

New Income = Previous income + change in income

C. Margin ratio = C.Margin x 100

Net Sales


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Increased in numbers of speakers sold 25Contribution margin per speaker x $ 100

Increase in Net Operating Income 2,500

CONTRIBUTION MARGIN RATIO:

C. M. Ratio = 40,000

100,000

Or: C. M. Ratio = 100250

Impact on Net Operating Income on changes in Sales, by C.M. ratio:

Calculation of changes in net income, with the changes in sales, without I/S

Increase in Sales 30,000

C.M. ratio 40%

Increase in Net operating Income 12,000

Proof: Present Expected Changes Percentage

Sales 100,000 130,000 30,000 100%

Less: Variable Cost (60,000) (78,000) (18,000) 60%

Contribution Margin 40,000 52,000 12,000 40%

Less: Fixed Cost (35,000) (35,000) -

Net Operating Income 5,000 17,000 12,000

Some Applications of CVP Analysis:

Concept No.1: (Change in Fixed Cost and Sales Volume):

Sales manager feels that by increase in $10,000 fixed cost i.e, advertising budget,

TotalContribution Margin

Total Sales

Contribution Margin Per unitSales price Per unit


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then the sale will increase by $30,000 to a total 520 units. Should the advertising

budget increase,

1 Total method:

A Expected C. Margin ($130,000 x 40%) 52,000

Current C. Margin ($100,000 x 40%) 40,000Increase in Contribution margin 12,000 Benefit

Increase in Fixed Cost 10,000 Cost

2,000 Net Benefit

B Expected C. Margin (520 units x $100) 52,000

Current C. Margin (400 units x $100) 40,000

Increase in Contribution margin 12,000

Increase in Fixed Cost 10,000

2,000

2 Incremental method: - This method will applied ONLY when there is NO change

in Contribution margin:

A Increase in Contribution margin

($30,000 x 40%) 12,000


2,000

B Increase in Contribution margin

(120 units x $ 100) 12,000


2,000

Concept No.2: (Change in Variable Cost and Sales Volume):

Management consider to change the part with more high quality part.

This will increase the variable cost by $10 which decrease the

contribution margin by $ 10. It increases the sales to 480 speakers.

Increase in Profit

Increase in Profit

Increase in Profit

Increase in Profit


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Should this changes incorporated:

1 Total method:

A Expected C. Margin (480 x $250 = $120,000 x 36%) 43,200

Current C. Margin ($100,000 x 40%) 40,000Increase in Contribution margin 3,200

3,200

B Expected C. Margin (480 units x $90) 43,200

Current C. Margin (400 units x $100) 40,000


3,200

Concept No.3: (Change in Fixed Cost, Sales Price and Sales Volume):

Assumption:

Management consider to cut the selling price by $20 per speaker,

increases fixed cost by $15,000 in advertising budget per month,

these changes increases the sales by 50% i.e. 600 speakers.


1 Total method:

A Expected C. Margin (600 x $230 = $ 138,000 x 34.78%) 48,000

Current C. Margin ($100,000 x 40%) 40,000


Increase in Fixed cost 15,000

Decrease in income (7,000)

B Expected C. Margin (600 speakers x $ 80) 48,000

Current C. Margin (400 speakers x $100) 40,000



(7,000)Decrease in income

Increase in Profit

Increase in Profit


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Concept No.4: (Change in Variable Cost, Fixed Cost and Sales Volume):

Assumption:

Management decided to pay $15 per speaker commission toSales person and stop payment of $6,000 fixed amount of

salaries, this change will increase the monthly sales by 15%

i.e. to 400 speakers to 460 speakers per month.


Total method:A Expected C. Margin (460 speakers x $250 = $ 115,000 x 34%) 39,100


Decrease in Contribution margin 900

Decrease in Fixed cost 6,000

Increase in income 5,100

B Expected C. Margin (460 speakers x $85) 39,100


Decrease in Contribution margin 900



Example 1:

Company plan to reduce the sales price per unit by 10%, as a result of this

sales increase to 25%. Company also replace the part with more quality part

which increase the cost to $170. Company also increase in fixed cost of $5,000

on advertisement. Evaluate the proposal

1 Sales 225 2 Increase in sale

V. Cost (170)

CM 55

24.44% 3 Increase in fixed cost


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Total method:A Expected C. Margin ($112,500 x 24.44%) 27,000


Decrease in Contribution margin 13,000


Decrease in Income 18,000

B Expected C. Margin (500 speakers x $55) 27,500




Decrease in Income 17,500


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40%

40%


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Loss

Benefit

Loss

Benefit

112,500

500

5,000


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Loss

Loss

Loss


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Break even Analysis:

1 Computation of Break even analysis by Equation method:

Break even point (in amount)

Sale = Variable cost + Fixed Cost + Desired Profit

Computation of Break even analysis by Formula:

Break even point (in amount) =

Break even point (in units) =

Target Profit Analysis:

It is also done by break even analysis (equation method)

Margin of Safety:

Margin of safety is the excess of budgeted (or actual) sales over the break even sales.

BEP provided the line below which company suffered loss. Higher the margin of safety, the

lower the risk of not breaking even.

Margin of Safety = Total Sales (actual) - Break even sales

Margin of Safety (in Percentage) = Margin of Safety (in amount)

Actual Sales

MOS = $100,000 - $87,500 $ 12,500

MOS (%) = 12.5%$ 12,500

$100,000

Fixed Cost

C.M. Ratio

Fixed Cost

C.M. per unit


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Operating Leverage:

It is a measure of how sensitive net operating income is to percentage changes in sales.

It means that if operating leverage is high then the small percentage change can produce

large increasein net income and vice versa.

Farm A Farm B

Sales 100,000 100,000

Less: Variable cost (60,000) (30,000)

40,000 70,000

Less: Fixed Cost (30,000) (60,000)

Net Operating Income 10,000 10,000

Degree of operating leverage = Contribution Margin

Net operating Income

DOL (A)= 40,000 4 times

10,000

DOL (B)= 70,000 7 times

10,000

10%

Sales 100,000 110,000 100,000

Less: Variable cost (60,000) (66,000) (30,000)

Contribution Margin 40,000 44,000 70,000Less: Fixed Cost (30,000) (30,000) (60,000)


Change in Net Operating Income (in amount) 4,000

Change in Net Operating Income (in times) 4,000

Farm A Far

Contribution Margin


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10,000

Changes in Percentage 40

Decrease in Sale by 8%

Farm A = 8% x 4 times = 32% decrease in income

Farm B = 8% x 7 times = 56% decrease in income

Sales 100,000 92,000 100,000

Less: Variable cost (60,000) (55,200) (30,000)

Contribution Margin 40,000 36,800 70,000

Less: Fixed Cost (30,000) (30,000) (60,000)


Change in Net Operating Income (in amount) (3,200)

Change in Net Operating Income (in times) (3,200)

10,000

Changes in Percentage (32)

Farm A Far


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10%

110,000

(33,000)

77,000(60,000)

17,000

7,000

7,000

B


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10,000

70

92,000

(27,600)

64,400

(60,000)

4,400

(5,600)

(5,600)

10,000

(56)

B


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c Verify your answer through Income Statement.

7 In an effort to increase the sales and profit, management is considering the use of

a higher quality speaker. The higher quality speaker would increase the variable cost

by $3 per unit, but management could eliminate one quality inspector who is paid a

salary of #30,000 per year. The sales manager estimate that the higher quality speaker

would increase annual sales by atleast 20%.

Total method:A Expected C. Margin (1,200,000 x 120% =$ 1,440,000 x 20%) 288,000

Current C. Margin (1,200,000 x 25%) 300,000




B Expected C. Margin (20,000 x 120% = 24,000 x $12) 288,000

Current C. Margin (20,000 x $15) 300,000




a) Assuming that chanes are made as described above, prepare projected

income statement for next year. Show a data on a total, per unit and percentage basis.

b) Compute the company's new breakeven point in both units and dollar of sales.

Use C.M method.

c) Would you recommend that the change be made?

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Cvp Analysis - Summer 2012