presentation of cvp final

8/3/2019 Presentation of CVP Final

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WELCOME


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Members ( M.Phil Group )

FIROZA RASHID ( ID- 6002)

MD. MONIR HOSSAIN (ID-6003)

RUMANA NASRIN (ID- 6004)

NIGAR SULTANA (ID- 6005)


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Cost-Volume-Profit Analysis

Revenue

Costs


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Presentation outline

Accounting Approach to BreakevenAnalysis.

Single Product firm BEP

Multi-product firm BEP

Without constraint

With many resource constraints

Economic Approach to Breakeven Analysis.

Cost Volume Profit Analysis underUncertainty

Discrete variable approach

Continuous variable approach


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Concept of Cost-Volume Profit Analysis

A. Concepts of CVP

B. Cost-Volume-Profit Assumptions

C. Concepts of BEP & CM

D. CVP Equation Approach

E. Contribution Margin Approach

F. Graphical presentationG. Target profit

H. Margin of Safety

I. Limitations of CVP analysis


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What is Cost-Volume Profit Analysis?

Costvolume-profit analysis involves an examination ofcost and revenue behavioral patterns and their

relationships with profit.The analysis ---

separates costs into fixed and variablecomponents and

determines the level of activity where costs andrevenues are in equilibrium.


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Use CVP Analysis to

Compute the break-even point

Study interrelationships of

prices

volumes

fixed and variable costs

contribution margins

Profits Calculate the level of sales necessary to achieve a target

profit

Set sales price


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The Basic Assumptions of CVP Analysis

Selling price remains constant.

Production is equal to sales i.e.inventory level do not changes.

Costs are linear throughout the entirerelevant range and they can accurately

be divided into variable and fixedelements.

In multi-product companies, the salesmix is constant.


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Accounting approaches to BEP analysis

The CVP analysis also known as break even analysis, to

compute the volume or level of activity for which theprofit generated is zero (cost=revenue) and beyond

which any increase in production will lead to a positiveresult or profit.


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Concepts of BEP &CM

Breakeven point:

Break-even point is the point in which the volume of

activity where the organizations revenues and expensesare equal.BEP is the point where operating income equalszero.

Contribution margin:

Contribution margin =sales variable cost

Total revenues = Total costs


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Contribution Margin Ratio

Calculation of the break-even point in dollarrather thanunits by using the contribution margin ratio.

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Contribution marginSales

= CM Ratio

Fixed expenseCM Ratio

Break-even point( sales in dollar)=


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Methods of BEP analysis

In accounting approaches there are some methods of BEP

analysis -----

Equation method

CM approach

Graphically representation


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CVP Equation Approach

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Sales revenue Variable expenses Fixed expenses = Profit

Unit variableexpenses salesvolume in units

Unit sales price salesvolume in units


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In algebraic terms, profit or loss may be given by

= Pq-(F+Vq)

where, = Profit before tax

P = Unit selling price=$50

q = Sales volume in units=1000units

V = Unit variable cost = $30

F = Total fixed costs=$10000

= 501000 (10000 +301000)

=$ 10000


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Breakeven computation in equation

approachSales = variable cost +fixed cost +profit

Q = quantity of unit sold

Unit selling price = $50

Unit variable cost = $30

Fixed cost = $10000

In the break even point , profit = $o

50Q = 30Q +$10000+$0Q = 10000/20

Q = 500 units

BEP sales in dollar = 500units$50

=$ 25000


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Break Even Point by CM approach

BEP sales in units :q=F/P-V

Where, q=Break even volume

P-V=Contribution margin

F=fixed cost

Calculation of BEP sales in units :

If , Sales price per unit=$ 50

Variable cost pr unit=$ 30

Fixed cost =$ 10000

Contribution margin per unit=$ (50-30) =$ 20

Break even sales in units, Y = 10000/20

= 500 units


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BEP sales in dollar: y=F/ 1-P/V

Where, y=Break even sales in dollar

1-P/V=Contribution margin ratio

F=fixed cost

Calculation of BEP sales in units :If , Sales price per unit=$ 50

Variable cost pr unit=$ 30

Fixed cost =$ 10000

Contribution margin ratio=1-30/50

=0.40

Break even sales in dollar , y = 10000 /0.40

= $25000


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Breakeven Point

Sales Variableexpenses =

Fixedexpenses

Proof

Sales $ 25000Less : variable expense $ 15000Contribution margin $ 10000Less : fixed expense $ 10000

Net income ---


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BREAK EVEN CHART

Break even chart depicting the interactions between thecost and revenue structures .It shows the relationship

between sales volume as an independent variable and thetotal cost as a dependent variable .

Break-even chart illustrates relationships among -

RevenueVolume

Costs


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Graphing Cost-Volume-Profit Relationships

Viewing CVP relationships in a graph gives managers aperspective that can be obtained in no other way.

Consider the following information for Curl, Inc.:

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300 units 400 units 500 units

Sales 150,000$ 200,000$ 250,000$

Less: variable expenses 90,000 120,000 150,000Contribution margin 60,000$ 80,000$ 100,000$

Less: fixed expenses 80,000 80,000 80,000

Net income (loss) (20,000)$ -$ 20,000$


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Cost-Volume-Profit Graph

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Dollars

600 700 800

Units

200 300 400 500

450,000

100

200,000

150,000

100,000

50,000

400,000

350,000

300,000

250,000

Fixed expenses

Break-evenpoint


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Profit-Volume Graph

Break even point is the intersection between the totalrevenues line and the total cost line. The area between thetotal revenues line and the total cost line at a volume belowthe breakeven point represent the loss area. Thecorresponding area above the break even point represents

the profit area.


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Profit-Volume Graph

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100 200 300 400 500 600 700

Units

Profit

0

100,000

(20,000)

(40,000)

(60,000)

80,000

60,000

40,000

20,000

Break-evenpoint


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EFFECT OF CHANGING SELLING

PRICE,VARIABLE COST AND FIXED COSTChanges in the unit selling price :

An increase in the unit selling price will raise thecontribution margin and decrease in the breakeven

volume.Changes in the unit Variable costs :

An increase in the unit variable cost leads to a decline inthe unit contribution margin and an increase in the

breakeven volume.Changes in the total fixed costs :

An increase in the total fixed costs will results in anincrease in the breakeven volume .


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Target sales for a given target profit

The breakeven formula can be adopted to determine thesales volume necessary to achieve a desire net income.

Target sales for a given target profit Before tax

Target sales for a given target profit after tax


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Target sales for a given target profit Before tax

Before tax target sales in units, q=F+/P-V

=(10000+20000)/(50-30)

=1500 units

Before tax target sales in dollars, Y=F+/ (1-V/p)=(10000+20000)/1- 30/50

=$ 75000

where , q=sales volume in units =1000 units

P=selling price per unit= $50

V=variable cost per unit =$30

F=fixed cost =$10000

=desired profit before tax =$20000


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Target sales for a given target profit Aftertax

After tax target sales in units , q=F+Z/1-t /(P-V)=10000+(20000/1-.50) /(50-30)

=2500 units

After tax target sales in dollars , Y=F+Z/1-t /(1-V/P)

=10000+(20000 /1-.50) /1- 30/50

=$125000

where , q=sales volume in units =1000 units

P=selling price per unit= $50V=variable cost per unit =$30

F=fixed cost =$10000

Z=desired profit after tax =$20000

T=tax rate=50%


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Operating profit at a given sales volume

The operating profit before taxes at the breakeven volumeequals zero .The operating profit for any given sales volumegreater than the breakeven volume equals the profitrealised by the additional volume beyond the breakeven

volume .


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Effects of multiple changes

If the interaction of volume , selling price , variable costsand fixed costs and taken into account , the breakevenformula can be adapted to reflect the simultaneouschanges in all relevant variables .

Example: Assume that Smith is considering theimpact of different changes on his original estimates . Hebelieve that a decrease of 20% per unit in the selling pricemay lead to a 30% increase in the sales volume . Animprovement of production techniques would lead to adecrease of 90% per unit variable cost and an increase of$46500 per year in the fixed costs . What level of salesdollar must Smith achieve to attain an after tax netincomeof $18000 if the current tax rate is 50% .


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Effects of multiple changeswhere , q=sales volume in units =1000 units

P=selling price per unit= $50

V=variable cost per unit =$30

F=fixed cost =$10000Z=desired profit after tax =$18000

T=tax rate=50%

q=f+{FZ/(1-t)} 1-(VV / PP)

Where , stands for changes

q=(10000+46500+18000/1-.5) 1-{30(1-.9)/50(1-.20)

=$10000


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Margin ofSafety

The difference between budgeted sales revenue andbreak-even sales revenue.

The amount by which sales can drop before lossesbegin to be incurred.

OTHER COST-VOLUME-PROFITRELATIONSHIP


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Margin of safety

Actual unit sales

- Breakeven unit sales

= Margin of Safety in Units

Actual sales in tk- Breakeven sales in tk

= Margin of Safety in tk

How much cansales drop

before we incuraloss?


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LIMITATIONS OF CVP ANALYSIS :

CVP analysis is criticized on the following grounds:

1.Separation of variable & fixed element from mixed cost isthe precondition of CVP analysis. But it is really very

difficult and costly in consideration of both time &money.2.This analysis assumes that selling price is constantthroughout the entire relevant range but it in reality lit isnever constant even within the relevant range.

3.The assumption that there is no inventory or inventorylevels do not change is irrelevant.4.Managers cannot rely absolutely on CVP analysis for anydecision rather it can only be used with other techniques toarrive at a decision.


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END OF PRESENTATION

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