cvp anal.ppt

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CHAPTER 12

Cost-Volume-Profit and

Break-Even Analysis

Copyright 2009 Macmillan Publishers India Ltd, All rights reserved.


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CHAPTER12

Cost-Volume-Profit Analysis

CVP analysis is a study of the relationships between a businesss costs,

volume and their impact on profit.

Analyses the interplay of various factors that affect profits.

An important part of the budgeting activities. Assists management in effectively utilising the fixed resources in the short run.

Is a tool used in both the planning and control functions.

Used to measure the performance of the different departments in a company.

Is static as it is based on a given set of factors.

Basic application of CVP analysis is the break-even analysis.


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CHAPTER12

CVP Analysis helps the manager to solve

following Questions :-

Q 1: How many units must be sold to break-even?

Q 2: How will the break-even point change if additional fixed

costs are incurred?

Q 3: How will profits be impacted if price changes?

Q 4: What is the break-even point for a desired level of profit?


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CHAPTER12

Importance of CVP Analysis

CVP Analysis is useful to find :-

Sales volume required to produce desired profits

Minimum level of sales needed to avoid losses

Effect on profits of changes in fixed costs and variable costs

Change in sales mix and its effect on profits

The most profitable product

Effect of a simulation change in prices, costs and volume on profits


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CHAPTER12

Break-even Analysis

The break-even analysis is conducted by organisations to identify the

level of operations at which the entity has covered all costs but has not

earned any profits.


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CHAPTER12

Break-even Point

The break-even point is that volume of activity at which total revenue

equals the sum of all variable and fixed costs.

It can be computed both algebraically and graphically.

It is expressed in either units of output or sales rupees.

Charts can also be used to illustrate the break-even point.Fixed Costs

Unit Contribution Margin

AND

Fixed Costs

Contribution Margin Expressed as a

percentage of Sales Revenue

B.E. Point (in Sales Rs) =

B.E. Point (in Units) =


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CHAPTER12

Contribution Margin

Contribution margin (CM) is the amount of revenue in excess of variable costsand contributes towards the fixed cost and profit of the company.

It is the difference between selling price per unit and the variable cost per unit

CM provides the operating profit for the company

Contribution Margin Ratio (CM)

Sales- Variable Costs

Sales

CM (in units) = SP- VC

Where ,SP = Sales Price per Unit

VC = Variable Cost per Unit

SalesVC x 100

Sales

CM =

CM (In Percentage) =


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CHAPTER12

Example

Online Company manufactures and sells a single product called SPARK.

The following financial projections have been made for the product:

Unit SP = Rs 25

Unit VC = Rs 15Unit Contribution Margin = Rs 10

The total fixed costs for the company are Rs 30,000. Presently, the sales of

the company are Rs 1,00,000. How many units must be sold by the

company to break-even? Also calculate the break-even point for the

company in rupees.


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CHAPTER12Solution:


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CHAPTER12

Assumptions underlying CVP Analysis

All costs can be classified into two types: fixed costs and variable costs.

The total fixed cost remains constant with changes in sales volume for the time

period being examined.

The total variable cost per unit is constant for the time period being examined

but the total variable cost changes in direct proportion to sales volume.

Selling price per unit remains constant, i.e. it does not change with volume or

because of other factors for the time period being examined.

Sales mix does not change if there are multiple products or the firm

manufactures only one product.

The productivity remains constant.


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CHAPTER12

Profit Planning

Profit planning is an extension of B.E Analysis

This technique helps to find the sales (in units/ in Rs) to achieve a target

profit

Fixed Costs+ Desired Profits

Contribution Margin Per Unit

Fixed Costs + Desired Profit

CM Expressed as a Percentage of Sales Revenue

BE Point ( in Sales Units)=

BE Point ( in Sales Rs) =


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CHAPTER12

Example:-

Fixed cost = Rs. 30,000/-

Contribution Margin = Rs.10/unit

Contribution Margin as % of sales = 40%

Desired profit = Rs. 10,000Find out the BEP in units and in sales Rs.

30,000 + 10,000

= 4000 units10

30,000 + 10,000

= 1, 00,000

0.4

Solution:-

Profit Planning

BE Point ( in Sales Units)=

BE Point ( in Sales Rs) =


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CHAPTER12

Tabular data to be presented in the form of Graphs

The Break-Even Graph and

The Profit-Volume Graph

Units Sold (in thousands) Loss (Rs) Thousands omitted

2Th B k E G h


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CHAPTER12The Break-Even Graph

Units Sold (in Thousands)

CostandReven

ue(Rsthousandso

mitted)

25

50

75

100

125

1 2 3 4 5 6

Break-even Point

Fixed Cost Line

Total Revenue Line

Profit

Total

Variable

Cost

Total

Fixed

Cost

Total Cost Line

Loss

2


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CHAPTER12

The Profit-Volume Graph (P/V Graph)

The profit-volume graph shows a direct relationship

between sales and profits and is easy to understand.

30 __

20 __

10 __

0 __

10 __

20 __

30 __

Profit AreaBreak-even Point

Loss Area

Fixed Cost Point

1 2 3 4 5 6

Loss(Rs)Profit(Rs)Thousandsom

itted

Units Sold (in thousands)

2


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CHAPTER12

P/V Ratio

When contribution margin expressed as a percentage of sales, it is called

Profit Volume Ratio.

The P/V Ratio is calculated as :

P/V Ratio =

B.E.P through P/V Ratio =

SP per Unit VC per Unit

SP per Unit

Fixed Expenses

P/V Ratio

2


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CHAPTER12

Example:Online Company manufactures and sells a single product called SPARK. The following financial

projections have been made for the product:

Unit SP = Rs 25

Unit VC = Rs 15

Unit Contribution Margin = Rs 10

The total fixed costs for the company are Rs 30,000. Presently, the sales of the company are Rs 1,00,000.

How many units must be sold by the company to break-even? Also calculate the break-even point for the

company in rupees.

P/V Ratio

P/V Ratio = 25- 15/25 = 40% = 0.4Solution:

2


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CHAPTER12

Margin of Safety (M/S)

The difference between the actual sales volume and the break-even sales

volume is called the margin of safety (M/S).

It represents that proportion of the current sale which determines the profit of

the firm.

The M/S ratio is calculated as:

=Sales- B E Sales

Sales

M/S Ratio =

1,00,00075,000

1,00,000= 25%

= 2.5

2


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CHAPTER12

Limitations of CVP Analysis

The assumptions imposed by accountants in calculating the CVP ratios also

serve as the possible limitations of the technique. Most CVP analyses are based

on the concept of static or fixed cost.

Semi-variable costs also affect the cost composition.

Fixed costs will not change at all levels of sales within the assumed relevant range at

activity.

Selling price per unit remains constant.

Variable costs vary in direct proportion to changes in activity, i.e. as a percentage of

sales revenue they remain constant.

The sales mix is assumed to remain constant if more than one product is sold.

The projections are over a short period of time only.

2


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CHAPTER12

Problem and Solution of Cost-Volume-

Profit and Break-Even Analysis :

12P bl I


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CHAPTER12Problem I:

The following information pertains to the half year ending 30 June 2006 of a

company:

Fixed Expenses 30,000Sales Value 1,20,000

Profit 30,000

The company has projected a loss of Rs 6,000 for the second half of the same year

ending 31 December 2006.

(a) Calculate the break-even point, P/V ratio and margin of safety for six months ending

30th June 2006.

(b) If the selling price and fixed expenses remain unchanged in the second half of the

year, what is the expected sales volume for the second half?

(c) Calculate the break-even point and margin of safety for the whole year.

12S l i I


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CHAPTER12

(a) P/V Ratio = (Contribution / Sales) X 100

= (Fixed Expenses + Profit) 100/ Sales Value = (60 000/ 1,20,000) 100 = 50%

BE Point = Fixed Expenses / P/V Ratio = 30 000 / 50% = Rs 60,000

Margin of Safety = SalesBEP = 1,20,00060,000 = Rs 60,000

(b) Contribution = Fixed ExpensesLoss = 30,0006,000 = Rs 24,000

Contribution= Sales x P/V Ratio

= 24,000 = Sales 50%or Sales = Rs 48,000 for second half year.

(c) For Full Year :

Sales = 1,20,000 + 48,000 = Rs 1,68,000

Fixed Expenses = 30,000 + 30,000 = Rs. 60,000

P/V Ratio = 50%

Profit = 30,000-6,000 = Rs 24,000

Break-Even Point = 60,000 / 50% = Rs. 1,20,000

Margin of Safety = 1,68,0001,20,000 = Rs 48,000

Solution I:

12P bl II


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CHAPTER12Problem II:

Following is the data for a company for the year 2007.

Variable Costs per Unit:

Particulars Rs.

Direct Materials

Direct Labour

Factory Overhead

Total Fixed Costs:

Factory Overhead

Other Fixed Costs

Selling Price per Unit

2,000

800

1,400

1,95,000

1,23,000

9,500

(a) Compute the break-even point in units.

(b) If the company sold 70 units in 2007, how much profit did the firm realise?

(c) How many units should the company sell to generate a profit of Rs 84,800?

(d) Calculate net income if the company increases the number of units sold by 20

percent and reduces the selling price by Rs 500 per unit.

12S l ti II


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CHAPTER12Solution II:

12P bl III


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CHAPTER12Problem III:

The Panasonic Company produces and sells a single product with the following

costs and revenues for the year:

Particulars Rs.

Total Revenues

Total Fixed Costs

Total Variable Costs

Units Produced and Sold Units

5,00,000

1,00,000

2,00,000

1,00,000

(a) What is the selling price per unit?

(b) What is the variable cost per unit?

(c) What is the contribution margin per unit?(d) What is the break-even point?

(e) How many units should be produced by the company to produce a profit of Rs 2,50,000

for the year?

12S l ti III


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CHAPTER12Solution III:

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