CVP analysis
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Transcript of CVP analysis
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• Describe the importance of CVP analysis as a managerial accounting technique.• Classify cost by their behaviour:
a.Variable costb.Fixed costc.Mixed cost
• Explain how to compute the contribution margin, the contribution margin ratio, and the unit contribution margin, and explain how they maybe useful to managers.
The usage of CVP analysis
The relationships between cost volume and profit
Concept of break-even point (BEP)
Techniques in CVP analysis
Application of CVP analysis
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Cost-volume-profit (CVP) analysis is the study of the effects of changes of costs and volume on a
company’s profits.
Cost-volume-profit (CVP) analysis is important in profit planning.
It also is a critical factor in management decisions.
Setting the selling price.
Determining product mix.
Maximizing the use of production
facilities.
Evaluating the impact of changes in
costs.
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All costs can be classified either fixed or variable costs.
Changes in activity are the only factors that affect cost.
All units produced are sold. When more than one type of product is
sold, the sales mix will remain constant.
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Relationship between fixed costs and activity
Costs
Activity (unit)
Total fixed cost
10 20 300
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Relationship between variable costs and activity
Costs
Activity (unit)
Total variable cost
10 20 300
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Contribution margin (CM) is one of the key relationships in CVP analysis and is the amount of revenue remaining after deducting variable costs.
Sales revenue - Variable Cost = ContributionMargin
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Sales revenue RM 100,000
Variable cost 60,000
Contribution margin 40,000
Fixed Cost 25,000
Income from operation 15,000
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Selling price per unit RM 10.00
Variable cost per unit 6.00
Contribution margin per unit 4.00
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Sales - Variable costs-----------------------------
Sales
RM100,000 - RM60,000 -------------------------------- RM100,000
X 100 = 40%
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The break-even point is the second key relationship in CVP analysis and is the level of activity at which total revenues equal total costs – both fixed and
variable.
At break-even point, a business will have neither an income nor loss from operation.
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Illustration 1:
Syarikat PC Canggih sells each unit of product “Murai”at RM4,000. The variable cost per unit is RM3,250. Total fixed cost is RM450,000 per year.
How many units of “murai” must be sold in one year in order to break-even.
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Sales (RM4,000 x unit)
(-) Variable costs (RM3,250 x unit)
Contribution margin
(-) Fixed costs
Net income / loss
1,000 units 500 units 600 units
4,000,000
3,250,000
750,000
450,000
300,000
2,000,000
1,625,000
375,000
450,000
(75,000)
2,400,000
1,950,000
450,000
450,000
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RM’000
Unit0
Fixed costs
Total costs
Sales revenue
1000500 600
4,000
2,000
2,400
450
Contribution margin approach
Mathematical Equation approach
Graphical approach
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Break-Even Point
Target profit
In units
In RM
In units
In RM
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Contribution margin = Sales - Variable Costs
Net income = Contribution margin - Total Fixed Costs
BEP is when net income = 0,
Therefore, BEP is when:
Contribution margin = Total Fixed Costs
BEP In unitsBEP
In units=
Total Fixed Costs-------------------------------
Contribution Margin Per unit
Total Fixed Costs-------------------------------
Contribution Margin Per unit
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Illustration 2: Selling price per unit RM12.00
Variable costs per unit RM7.20
Total fixed costs RM60,000
BEP (units) =60,000
12.00 – 7.20
= 60,000
4.80= 12,500 units
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BEP (RM) =60,000
12.00 – 7.20 / 12.00
= 60,000
40%= RM150,000
BEP In RMBEP
In RM= Total Fixed Costs
-------------------------------Contribution Margin Ratio
Total Fixed Costs-------------------------------
Contribution Margin Ratio
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Sales revenue (12,500 units x RM12.00) 150,000
Total variable costs (12,500 units x RM7.20) 90,000
Total contribution margin 60,000
Total fixed costs60,000
Net income 0
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Net income = Contribution margin - Total Fixed Costs
Therefore:
Net income + Total Fixed Costs = Contribution margin
Target IncomeIn units
Target IncomeIn units
= Total Fixed Costs + Target Income----------------------------------------------
Contribution Margin Per unit
Total Fixed Costs + Target Income----------------------------------------------
Contribution Margin Per unit
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Illustration 3: Selling price per unit RM12.00Variable costs per unit RM7.20
Total fixed costs RM60,000
Target income (units)
60,000 + 15,000
12.00 – 7.20
= 75,000
4.80
= 15,625 units
Target income RM15,000
=
25
Target income (RM)
60,000 + 15,000
12.00 – 7.20 / 12.00
= 75,000
40%= RM187,500
Target IncomeIn RM
Target IncomeIn RM = Total Fixed Costs + Target Income
-------------------------------Contribution Margin Ratio
Total Fixed Costs + Target Income-------------------------------
Contribution Margin Ratio
=
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Sales revenue (15,625 units x RM12.00) 187,500
Total variable costs (15,625 units x RM7.20) 112,500
Total contribution margin 75,000
Total fixed costs60,000
Net income 15,000
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BEP, when net income = 0
When sales = total costs (variable & fixed)
Therefore, the equation:
Sales = Variable costs + Fixed Costs
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Illustration 4: Selling price per unit RM10.00
Variable costs per unit RM6.00
Total fixed costs RM20,000
BEP (units):
Sales = Variable Costs + Fixed Costs
RM10 x X units = RM6.00 x X units + RM20,000
RM4 x X units = RM20,000
X units = RM20,000 RM4.00
= 5,000 units
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BEP (RM):
Sales = Variable Costs + Fixed Costs
X = 0.6 X + RM20,000
0.4 X = RM20,000
X = RM20,000 0.4
= RM50,000
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Sales revenue (5,000 units x RM10.00) 50,000
Total variable costs (5,000 units x RM6.00) 30,000
Total contribution margin 20,000
Total fixed costs20,000
Net income 0
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When sales = total costs (variable & fixed) + target income
Therefore, the equation:
Sales = Variable costs + Fixed Costs + Target Income
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Illustration 5: Selling price per unit RM10.00Variable costs per unit RM6.00Total fixed costs RM20,000
Target income (units):
Sales = Variable Costs + Fixed Costs + Target Income
RM10 x X units = RM6.00 x X units + RM20,000 + RM15,000
RM4 x X units = RM35,000
X units = RM35,000 RM4.00
= 8,750 units
Target income RM15,000
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Target income (units):
Sales = Variable Costs + Fixed Costs + Target Income
X = 0.6 x X + RM20,000 + RM15,000
0.4 X = RM35,000
X = RM35,000 0.4
= RM87,500
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Sales revenue (8,750 units x RM10.00) 87,500
Total variable costs (8,750 units x RM6.00) 52,500
Total contribution margin 35,000
Total fixed costs20,000
Net income 15,000
Margin of safety Changes in selling price Changes in variable costs Changes in fixed costs Profit forecasting Interdependent changes
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It is the difference between actual or expected sales and sales at the break-even point.
RM
Units
Sales revenue
Total costs
BEP
Current sales revenue
MOS
0
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Margin ofSafety = Current / Expected - BEP
Sales
Illustration 6: Current sales = 300,000 unitsBEP = 180,000 units
Margin of safety = 300,000 - 180,000
= 120,000 units Or 40% of current sales
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Selling price increased from RM12.00 to RM15.00.Assumed that there’s no changes in costs.
Selling price per unit RM12.00 RM15.00
Variable costs per unit 7.20 7.20
Contribution margin 4.80 7.80
Total fixed costs RM60,000 RM60,000
BEP (units) 12,500 7,692
BEP (RM) RM150,000 RM115,385
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Variable costs per unit increased from RM7.20 to RM8.00.Assumed that there’s no changes selling price & fixed costs.
Selling price per unit RM12.00 RM12.00
Variable costs per unit 7.20 8.00
Contribution margin 4.80 4.00
Total fixed costs RM60,000 RM60,000
BEP (units) 12,500 15,000
BEP (RM) RM150,000 RM180,000
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Total fixed costs increased from RM60,000 to RM65,000.Assumed that there’s no changes selling price & variable costs.
Selling price per unit RM12.00 RM12.00
Variable costs per unit 7.20 7.20
Contribution margin 4.80 4.80
Total fixed costs RM60,000 RM65,000
BEP (units) 12,500 13,542
BEP (RM) RM150,000 RM162,500
