Cvp Analysis(2)

8/8/2019 Cvp Analysis(2)

http://slidepdf.com/reader/full/cvp-analysis2 1/28

Chapter 22

Cost-Volume-Profit Analysis



Analysis

CVP analysis is a technique for studying the relationship betweencost, volume and profits. Examines the behavior of totalrevenues, total costs, and operating income as changes occur inthe output level, selling price, variable costs or fixed cost

It can be used to answer the questions like:

a. How much sales should be made to avoid the losses?

b. How much should be the sales to earn a desired profit?

c. What will be the effect of change in prices, costs and volume onprofits

d. Which product or product mix is most profitable?

e. Should we manufacture or buy some product or component?

Page 67



Assumptions of CVP

Analysis Expenses can be classified as either variable or fixed. CVP relationships are linear over a wide range of production and

sales. Sales prices, unit variable cost, and total fixed expenses will not vary

within the relevant range.

Volume is the only cost driver. The relevant range of volume is specified. Inventory levels will be unchanged. The sales mix remains unchanged during the period. revenues change in relation to production and sales

costs and prices are known if more than one product exists, the sales mix is constant we can ignore the time value of money



Objectives Identify how changes in volume affect costs.

Use CVP analysis to compute breakeven point.

Use CVP analysis for profit planning and graph the

cost-volume-profit relations Use CVP method to perform sensitivity analysis.



Contribution Margin Contribution margin is equal to the difference between total revenue and total

variable costs

Contribution margin per unit

= Selling price - Variable cost per unit

Contribution margin percentage= Contribution margin per unit / selling price per unit

Pages 68 - 69

Revenue 200400 100%

Variable costs 120240 60%

Contribution margin 80160 40%

Total for Per Unit 2 units %



Contribution Margin

Income StatementSales

- Variable Costs

Contribution Margin

- Fixed CostsOperating Income

Sales (20,000 x 85) 1,700,000

Variable costs

(20,000 x 70) (1,400,000)Contribution margin 300,000



Contribution Margin

Income Statement

Packages Sold

0 12 2540

Revenue 0200 4005,0008,000

Variable costs 0120 2403,0004,800

Contribution margin 080 1602,0003,200

Fixed costs 2,0002,0002,000 2,0002,000

Operating income (2,000)(1,920)(1,840) 01,200

Income statement that groups line items by cost behavior to highlight the contribution margin

Page 69



The unique sales level at which a

company earns neither a profit norincurs a loss.

Sales – Variable Costs – Fixed Costs = 0

Computing Break-Even

Point



Breakeven Point Quantity of output where total revenues equal total costs

Point where operating income equals zero

Breakeven point in units

= Fixed costs / Contribution margin per unit

= 2,000 / 80

= 25 units

Breakeven point in Rupees

= Fixed costs / contribution margin %

= 2,000 / 40%

= 5,000 RS.

Page 71



Margin Of Safety Excess of actual or budgeted sales over

the break – even sales is known as MOS

MOS = Total Sales - sales at BEP

It can be improved by taking the followingsteps:

1. By increasing the level of production orselling price

2. By reducing fixed or variable cost.



Angle of Incidence Is the angle between the sales line and the

total cost line formed at the break even point

where the sales line and the total cost lineintersects each other. It indicates the profit

earning capacity of a business.

A Large angle of incidence indicate a high

rate of profit and a small angle of incidence

indicates a low rate of profit



Variable

Fixed

Mixed

Types of

Costs



Minutes Talked

Total L

ongDista

nc

e

Tele

phone

Bill

Total variable costs changewhen activity changes.

Your total long distance

telephone bill is based

on how many minutes

you talk.

Total Variable Cost



Minutes Talked

PerMinute

Telep h

oneCharg e

Variable costs per unit do not changeas activity increases.

The cost per longdistance

minute talked is

constant.

For example, 2 Rs. per minute.

Variable Cost Per Unit



Number of Local Calls

MonthlyBa

sic

Telep

honeBill

Total fixed costs remain unchanged

when activity changes. Total Fixed Cost



Variable Costs

Example

0 1 2 3 4 5

24 –

18 – 12 –

6 – ––––

Volume

(Thousands of passengers)

TotalVa

ria

(th

ousan

ds)



Mixed Costs

Contain fixed portion that is incurredeven when facility is unused & variable

portion that increases with usage. Example: monthly electric utility

charge Fixed service fee

Variable charge per kilowatt hour used



T o t a l

m i x e

d c o s

tVariable

Utility Charge

Activity (Kilowatt Hours)

Total

UtilityCos

t

Fixed Monthly

Utility Charge

Mixed Costs



Volume in Units

Costs

and

Revenue

inDo

llars Total fixed costs

Plot total fixed costs on the vertical axis.

Preparing a CVP Chart

Total costs

Draw the total cost line with a slopeequal to the unit variable cost.



Volume in Units

Costs

and

Revenue

inDo

llars Total fixed costs

Preparing a CVP Chart

Total costs

SalesStarting at the origin, draw the sales line

with a slope equal to the unit sales price.

Break-evenPoint



Various Sales Levels

Example What operating income is expected when

sales are 80,000 units?

Selling price (20/unit) 16,00,000

Less: Variable exp (10/unit) 8,00,000

Contribution 8,00,000

Less: Fixed cost 4,00,000

Operating profit 4,00,000



Computing MultiproductBreak-Even Point

Unit contribution margin is replacedwith contribution margin for a

composite unit. A composite unit is composed of

specific numbers of each product inproportion to the product sales mix.

Sales mix is the ratio of the volumesof the various products.



The resulting break-even formulafor composite unit sales is:

Break-even point

in composite units

Fixed costs

Contribution margin

per composite unit

=




Break-even pointin composite units

Fixed costsContribution margin

per composite unit

=

Break-even point

in composite units

900,000

450 per composite

unit

=

Step 2: Compute break-even point in

composite units.


Break-even point

in composite units

= 2,000 composite units



Window Doors

Selling Price $200 $500

Variable Cost 125 350

Unit Contribution 75$ 150$

Sales Mix Ratio 4 1


A company sells windows and doors. They sell 4 windows for every door.





Sales Composite

Product Mix Units Units

Window 4 × 2,000 = 8,000Door 1 × 2,000 = 2,000

Step 3: Determine the number of windows and

doors that must be sold to break even.




Windows Doors CombinedSelling Price $200 $500

Variable Cost 125.00 350.00

Unit Contribution 75.00$ 150.00$

Sales Volume × 8,000 × 2,000 Tota l Contribution 600,000$ 300,000$ 900,000$

Fixed Costs 900,000

Income $ 0

Step 4: Verify the results.

Multiproduct Break-EvenIncome Statement

Documents

Cvp Analysis(2)