ALSARHANI YAHYA1 Analysis of the relationship between the size, cost and profit CH(3)
COST-VOLUME-PROFIT RELATIONSHIP
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Transcript of COST-VOLUME-PROFIT RELATIONSHIP
COST-VOLUME-PROFIT COST-VOLUME-PROFIT RELATIONSHIPRELATIONSHIPCHAPTER 5
CVP FormulaCVP FormulaSx = VCx + FC + PS= Selling PriceX= Sales VolumeVC = Variable Cost per unitFC = Fixed CostP= ProfitVery powerful equationIf all else fails just work the
equation
Things you can find out using CVP Things you can find out using CVP formulaformulaBreakeven pointsUnits to sell to get a certain profitHow many more to sell if Fixed
Cost increasedSelling Price
Apply CVP FormulaApply CVP FormulaSelling Price $36Variable Cost $24 per unitFixed Costs $12,000Units 2,000Profit= ?Put in CVP formula
CONTRIBUTION MARGINCONTRIBUTION MARGINThe amount that contributes to fixed
costs and profits i.e ContributionCalculated In per unit, $ and in %
$100 Sales 60 VC$ 40 CM 40% Ratio
($40/$100= .40) 35 FC $ 5 NI
CONTRIBUTION MARGIN CONTRIBUTION MARGIN FORMATFORMAT Income Income StatementStatementSALES
-VARIABLE COST=CONTRIBUTION MARGIN- FIXED EXPENSESNET OPERATING INCOME
Exercise 5-1 page 213
Application of CVP Application of CVP DataDataExercise 5-5 page 2141- Increase advertising budget2- Increase quality of product
BREAK EVEN (BE) IN UNITS & BREAK EVEN (BE) IN UNITS & $$The units or $ that will cover the
fixed costs with no profit.
Sx – VCx= FC BE in equation method
FC/CM% = BE$ CM MethodYou can determine: BE in units,
BE in $Exercise 5-7 pg 214
PROFIT PLANNINGPROFIT PLANNINGAnswers these questions:How many do I need to sell to
make $100,000 profitFor example: If I reduce my fixed
costs by $2,000 and increase my sales in units by 100 how will my profit change?
Target Profit Target Profit AnalysisAnalysis Formula for units to make a $
profit FC + Profit Unit CM
X sales price = Sales to attain target profit
Exercise 5-6 pg 2141- equation method2- CM approach
Margin of Safety Margin of Safety (MS)(MS) Amount you can drop before losses
are incurredHow much can our sales drop
before we start losing moneyEvery company has a different %
because each is structured differently
How much excess you have over break even.
How much you have after you cover your fixed costs.
Margin of Safety formulaMargin of Safety formulaBudgeted Sales – BE$ = MS$MS$/Budgeted Sales=MS%Example:Sales $100,000BE$ 87,500MS$ $ 12,500 / 100,000 =
12.5%Exercise 5-8 page 214
Operating Leverage (OL) pg Operating Leverage (OL) pg 202202How sensitive income is to a %
change in Sales $How a % change in Sales volume
will affect profits.It is a MultiplierIf OL is high a small % change in
Sales will reuslt in a higher change in NI
Operating Leverage Operating Leverage FormulaFormulaContribution Margin $Net Income in $
It OL is 2 and sales increased by 5% then net income will increase by 10%
Exercise 5-9 pg 215
Operating leverage proofOperating leverage proof
Sales 100,000 110,000VC 60,000 66,000CM 40,000 44,000FC 35,000 35,000NI 5,000 9,000
$4,000OL 40,000/5000= 8 times x 10%80% x $5000 = $4000
CM Ratio CM Ratio Another way to determine effect on net
incomeChange in Net Income with the change in
Total Sales
If we sell 10,000 more units, how would our net income increase?
10,000 X25%CM= 2500 change in units X $24 per unit = $60,000 increase in NI
How much would our net income increase if our sales increase by $240,000
$240,000 X 25% = $60,000
Sales Mix Sales Mix Multi Product CM Multi Product CMProportions in which a company’s products
are soldMix that will yield the greatest profitSteps to determine1- Total all sales2- VC % for each product and total sales3- = CM% for all sales4- Determine total BE$ FC/CM%5- Each product % of total sales X BE$6- Use VC% for each product for VC7- =CM for each product = total fixed costs Page 206 Exhibit 5-4Exercise 5-10, pg 215