topic 9 (short)
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KAL1013 Chapter Nine 1
Chapter Nine
COST VOLUME PROFIT ANALYSIS (CVP)
KAL1013 Chapter Nine 2
Topic objectives: Classify the cost by behavior; fixed & variable Explain the concept, computation and usage of Contribution Margin
(CM) & CM Ratio Explain the concept of Break Even Point (BEP) and its computation
using: CM approach Mathematical approach
Apply the basic concept in BEP to determine sales in unit and RM($) for any desired profit
Explain how to determine the BEP under certain condition where selling price, variable and fixed costs experienced some changes
Explain the concept of operating leverage and how to calculate and apply it.
KAL1013 Chapter Nine 3
CVP Analysis
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.
KAL1013 Chapter Nine 4
Assumptions Underlie Each CVP Analysis 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.
KAL1013 Chapter Nine 5
Contribution Margin Concept
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
KAL1013 Chapter Nine 6
Contribution Margin
Sales revenue RM 100,000
Variable cost 60,000
Contribution margin 40,000
Fixed Cost 25,000
Income from operation 15,000
KAL1013 Chapter Nine 7
Unit Contribution Margin
Selling price per unit RM 10.00
Variable cost per unit 6.00
Contribution margin per unit 4.00
KAL1013 Chapter Nine 8
Contribution Margin Ratio
Sales - Variable costs-----------------------------
Sales
RM100,000 - RM60,000 -------------------------------- RM100,000
X 100 = 40%
KAL1013 Chapter Nine 9
Break-Even Point Concept(BEP) 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.
KAL1013 Chapter Nine 10
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.
KAL1013 Chapter Nine 11
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
0
KAL1013 Chapter Nine 12
Techniques in CVP analysis
Contribution margin approach
Mathematical Equation approach
Graphical approach
KAL1013 Chapter Nine 13
Contribution margin approach
Break-Even Point
Target profit
In units
In RM
In units
In RM
KAL1013 Chapter Nine 14
Calculating BEP: In Units
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
KAL1013 Chapter Nine 15
Calculating BEP: In UnitsIllustration 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
KAL1013 Chapter Nine 16
Calculating BEP: In RM
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
KAL1013 Chapter Nine 17
BEP Proof:
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
KAL1013 Chapter Nine 18
Calculating Target Income: In Units
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
KAL1013 Chapter Nine 19
Calculating Target Income: In Units
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
=
KAL1013 Chapter Nine 20
Calculating Target Income: In RM
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
=
KAL1013 Chapter Nine 21
Target Income Proof:
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
KAL1013 Chapter Nine 22
Mathematical equation approach:BEP in units
BEP, when net income = 0
When sales = total costs (variable & fixed)
Therefore, the equation:
Sales = Variable costs + Fixed Costs
KAL1013 Chapter Nine 23
Mathematical equation approach:BEP in units
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
KAL1013 Chapter Nine 24
Mathematical equation approach:BEP in RM
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
KAL1013 Chapter Nine 25
Mathematical equation approach:Target income in units
When sales = total costs (variable & fixed) + target income
Therefore, the equation:
Sales = Variable costs + Fixed Costs + Target Income
KAL1013 Chapter Nine 26
Mathematical equation approach:Target income in units
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
KAL1013 Chapter Nine 27
Mathematical equation approach:Target income in RM
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
KAL1013 Chapter Nine 28
Application of CVP analysis Margin of safety Changes in selling price Changes in variable costs Changes in fixed costs Profit forecasting Interdependent changes
KAL1013 Chapter Nine 29
Margin of safety
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
KAL1013 Chapter Nine 30
Margin of safety:In units / RM
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
KAL1013 Chapter Nine 31
Changes in selling priceSelling 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
KAL1013 Chapter Nine 32
Changes in variable costsVariable 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
KAL1013 Chapter Nine 33
Changes in fixed costsTotal 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
KAL1013 Chapter Nine 34
Operating leverage (OL) Measures the impact of changes in sales on income from
operations. Technically, it will determine how many % increment in
operating profit if the company increase its sales at certain percentage OR vice-versa…
Calculation: OL = CM / Income form operation
E.g. The operating leverage of sykt Ahmad is 3.5. By how many % the co operating profit will increase if the co. is to increase its sales by 5%?
KAL1013 Chapter Nine 35