5dternwx6ju7acost-Volume-profit (Cvp) Analysis Project

7/28/2019 5dternwx6ju7acost-Volume-profit (Cvp) Analysis Project

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Outline What is CVP analysis The importance of CVP to use in decision making

Break-Even point ( BEP)

Contribution Margin (CM)

Contribution Margin Ratio (CMR) Target Profit

Safety Margin

CVP Analysis with single Product

What Is Sales Mix CVP Analysis with Multiple Products

Assumptions of CVP Analysis

Limitation of CVP


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What is CVP analysis

The cost-volume-profit study is the manner of how toevolve the total revenues, the total costs and operatingprofit, as changes occur in volume production, saleprice, the unit variable cost and / or fixed costs of aproduct.


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The importance of CVP to use in decision

makingManagers use this analysis to answer different questionslike: How will incomes and costs be affected if we stillsell 1.000 units? But if you expand or reduce sellingprices? If we expand our business in foreign markets ?The cost-volume-profit is a necessary tool for forecastingalso for management control. Cost volume profit analysis(CVP analysis) is one of the most powerful tools thatmanagers have at their command.


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Break even point is the level of sales at which profit iszero. According to this definition, at break even pointsales are equal tofixed cost plusvariable cost . Thisconcept is further explained by the following equation:

[Break even sales = fixed cost + variable cost]TR-TC=Profit TR-TC=0

Where: Q= output and P=price

if: (Q*P)-TFC-(Q*UVC)=0 (Q*P)-(Q*UVC)-TFC=0Q(P-UVC)=TFC

Q=TFC/P-UVC


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Assumption of (BEP)

The Break-even Analysis depends on three keyassumptions:

Average per-unit sales price (per-unit revenue)Average per-unit cost

Monthly fixed costs


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To calculate the BEP Equation two Methods are used :A) equation method

B) Contribution Margin Method


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equation method

The format of this method can be expressed inequation form as follows:

[Profit = (Sales Variable expenses) Fixed expenses]Rearranging this equation slightly yields the following

equation, which is widely used in cost volume profit(CVP) analysis:

[Sales = Variable expenses + Fixed expenses + Profit]


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Break-Even point (Equation Method)

Q = 350 Units


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Contribution Margin

The contribution margin is total revenue minus totalvariable costs. Similarly, the contribution margin perunit is the selling price per unit minus the variable cost per

unit. Both contribution margin and contribution marginper unit are valuable tools when considering the effects of

volume on profit. Contribution margin per unit tells ushow much revenue from each unit sold can be applied

toward fixed costs. Once enough units have been sold tocover all fixed costs, then the contribution margin per unitfrom all remaining sales becomes profit.

[Contribution Margin = Sales revenue Variable cost ]CM=P-VC


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Contribution Margin method (contd)ABC company

Total Per Unit Percent

Sales : (1000 units) X 1,000,000$ 1,000$ 100%

Less: variable expense 600,000 600 60%

Contribution margin 400,000$ 400$ 40%

Less: fixed expenses 160,000

Net income 240,000$

Note:

For each additional product X sold, the company willgenerate $400 in contribution margin.


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Contribution Margin method (contd)

We can use CM method to find the BEP

BEP (in units)= FC/UCM

$160,000/$400= 400 units of product X


Sales : (400 units) X 400,000$ 1,000$ 100%

Less: variable expense 240,000 600 60%

Contribution margin 160,000$ 400$ 40%


Net income -$


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Contribution Margin Ratio

The contribution margin as a percentage of total sales isreferred to as contribution margin ratio (CM Ratio).

Formula or equation of CM ratio is as follows:[ CM Ratio = Contribution Margin / Sales ]

Therefore in our example:

CMR= 160,000/400,000= 0.4 0r 40%


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The Importance of (CMR) The CM ratio is extremely useful since it shows how

the contribution margin will be affected by a change intotal sales. To illustrate notice that in our example has

a CM ratio of 40%. This means that for each dollarincrease in sales, total contribution margin willincrease by 40 cents ($1 sales CM ratio of 40%). Netoperating income will also increase by 40 cents,

assuming that fixed cost do not change.


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Break- Even Point in sales Formula: FC/ CMR

Therefore : 160,000/40% = $400,000 sales


Sales : (400 units) X 400,000$ 1,000$ 100%

Less: variable expense 240,000 600 60%Contribution margin 160,000$ 400$ 40%


Net income -$


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Constructing the Break-Even Chart

100,000

200,000

300,000

400,000

500,000

600,000

200100 300 500400 600 700 Units Sold


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Target Profit analysis Question:

How many units of product X should be produced and

soled to reach a profit of$ 200,000 ? Formula:

Units sold to earn the target profit :Q= FC + Target Profit/UCM

Therefore in ABC company :160,000+200,000/ 400= 900 units


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Margin of safety (MOS)

Margin of safety (MOS): is the excess of budgeted or actualsales over the break even volume of sales. It stats the amount by

which sales can drop before losses begin to be incurred. The

higher the margin of safety, the lower the risk of not breakingeven.

Formula:

[Margin of Safety = Total budgeted or actual sales Break even sales]

The margin of safety can also be expressed in percentage form.

[MOS = Margin of safety in dollars / Total budgeted or actual sales]


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Margin of safety (MOS) Contd

Example:

The company has a BEP of $400,000. If actual sales are $1000,000 thesafety margin is: 1000,000-400,000= $600,000 or 600 units of product X

OR: 600,000/1000,000= 60% Margin of safety as a percentage of sales

Break-even

sales

400 units

Actual sales

1000 unitsSales of product X 400,000$ 1,000,000$

Less: variable expenses 240,000 600,000

Contribution margin 160,000 400,000

Less: fixed expenses 160,000 160,000

Net income -$ 240,000$


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CVP Analysis with Multiple Products

Sale mix: Definition and Explanation of the Concept:

The term sale mix refers to the relative proportion in which acompany's products are sold. The concept is to achieve the

combination, that will yield the greatest amount of profits.Most companies have many products, and often theseproducts are not equally profitable. Hence, profits willdepend to some extent on the company's sales mix. Profits

will be greater if high margin rather than low margin itemsmake up a relatively large proportion of total sales.


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Sales Mix and Break Even Analysis: If a company sells multiple products, break even

analysis is somewhat more complex .The reason is thatthe different products will have different selling prices,

different costs, and different contribution margins.Consequently, the break even point will depend on themix in which the various products are sold.


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Table of information of ABC company in August

Product 101 Product 102

Units produced and sold 12,000 8,000

Direct Material 22,000 32,000

Direct labor 15,000 12,000

Variable overhead cost 26,000 34,000

Selling price ( per unit) 34 40

total fixed costs 48,000

CVP Analysis with Multiple Products (Example)

1. To calculate BEP in September?

2. Units to be sold to obtain profit of $3o,ooo?

3. To find X= 55% and Y= 45% ?


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contd (1) Formula of BEP in multiple products:

BEP=total FC/WAUCMUVC(X)=22,000+15,000+26,000/12,000=5.25

UVC(Y)=32,000+ 12,000+34,000/8,000=9.75UCM= P-UVCUCM(X)=34-5.25 =28.75UCM(Y)=40-9.75 =30.25

WAUCM =UCM* % of totalWAUCM(X)= 28.75*60%=17.25

WAUCM(Y)=30.25*40%= 12.1total of sales mix 29.35

12,000+8000=20,00012,000/20,000= 0.6

8,000/20,000= 0.4


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contd BEP=total FC/WAUCM

BEP=48,000/ 29.35=1635.5X=1635.5 *0.6= 981 unitsY=1635.5 *0.4= 654 units

(2) Units to be sold to obtain $3o,ooo?BEP=total FC+P/WAUCMBEP=48,000+ 30,000/ 29.35=2,657

X=2,675*0.6=1,605 units

Y=2,675*0.4=1070 units


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contd(3) X= 55% and Y= 45% ?

28.75*55% =15.8

30.25*45%= 13.6

total of sales mix 29.4

BEP=total FC/WAUCM48,000/29.4=1632

1632*55%=897 units

1632*45%=734 units


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cost volume profit analysis assumptions

1. All costs can be analysed into their fixed and variable elements.

2 . Fixed costs remain fixed even over a wide range of activity.

3. Variable costs always vary directly with activity.

4. Selling prices are constant per unit. 5 . Only levels of activity affect costs and revenues

6. usually only one product can be effectively dealt with

7. Uncertainty does not exist.


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Limitations of Cost-Volume-Profit (CVP) Analysis:

Cost volume profit (CVP) is a short run, marginalanalysis: it assumes that unit variable costs and unitrevenues are constant, which is appropriate for smalldeviations from current production and sales, and assumes

a neat division between fixed costs and variable costs,though in the long run all costs are variable. For longer-term analysis that considers the entire life-cycle of aproduct, one therefore often prefers activity-based costing

or throughput accounting.


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references

GABRIELA BUAN, IONELA-CLAUDIA DINA, USING COST-VOLUME-PROFITANALYSIS IN DECISION MAKING, Annals of the University of Petroani, Economics,9(3), 2009, 103-106

www.wiley.com/college/sc/eldenburg/ch03.pdf

http://www.accountingformanagement.com/cost_volume_profit.htm http://www.entrepreneur.com/tradejournals/article/173229705.html

http://www.accountingformanagement.com/Break_even_analysis.htm

http://www.accountingformanagement.com/contribution_margin_definition.htm

http://www.accountingformanagement.com/contribution_margin_ratio.htm

faculty.lebow.drexel.edu/KlineS/Acct601/Chap008.ppt

http://www.accountingformanagement.com/concept_of_sales_mix.htm

http://business.fortunecity.com/discount/29/cvpassweb.html, Cost Volume ProfitAnalysis: Its Assumptions and Their Pitfalls , by: Duncan Williamson

http://en.wikipedia.org/wiki/Cost-Volume-Profit_Analysis


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Thank you for pay attention

Presented by :

Meytham PoormollaKhalid Malik

Barnabas Eze

5dternwx6ju7acost-Volume-profit (Cvp) Analysis Project

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