This assignment is done for a small business with the addition of different accounting items the small business can use to maximize their profit. It has Break-even point for the company. Sales revenue. Target profit maximization. Cost classification of the company.

1. Assignment on
CVP and sensitivity analysis of Jamal’s Pithaghor
Submitted to
Md. Qamruzzaman
Assistant Professor - Accounting
School of Business and Economics
Submitted by
Md. Ismail Hossen
112 192 017
Summer 2017
Submission Date: 17th December, 2019

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Table of Contents
Chapter 1 : Cost Classification..............................................................................................................1
Introduction...................................................................................................................................1
Business background ..........................................................................................................................1
Break-down of revenue and costs....................................................................................................2
a. Source of Revenue...............................................................................................................2
b. Variable Costs......................................................................................................................2
c. Fixed Cost............................................................................................................................2
Chapter 2 : CVP analysis......................................................................................................................3
Contribution format income statement............................................................................................3
Contribution Margin per unit...........................................................................................................3
Contribution Margin Ratio...............................................................................................................4
Break-even point in units and taka...................................................................................................4
Target profit analysis.......................................................................................................................5
Margin of Safety.............................................................................................................................5
Chapter – 3: Sensitivity analysis...........................................................................................................6
Sensitivity analysis..........................................................................................................................6
Scenario One: Effect of Changes in sell on Net profit.........................................................................6
Scenario Two: Effect of Changesin variable cost onNet profit...........................................................7
Scenario Three: Effect of Changes in Fixed cost on Net profit.............................................................8
Conclusion and Recommendations......................................................................................................9

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Chapter 1 : Cost Classification
Introduction
Managerial accounting is an essential part of any company to make financial decision regarding
the company. It provides internal insights that the financial accounting does not. We use cost
benefit analysis to understand various internal conditions of the company. Cost-volume-profit
(CVP) analysis is a method of cost accounting that looks at the impact that varying levels of
costs and volume have on operating profit. The cost-volume-profit analysis, also commonly
known as break-even analysis, looks to determine the break-even point for different sales
volumes and cost structures, which can be useful for managers making short-term economic
decisions. Here we are more concerned about the contribution format income statement
rather than the financial income statement. The main items available in a contribution margin
income statement are:
A. Sales: This provides an overview of the total sales in a given period of time for the
company and then we see the per unit price of that particular item.
B. Variable cost: Variable costs are costs that change as the quantity of the good or service
that a business produces changes. Variable costs are the sum of marginal costs over all
units produced. They can also be considered normal costs.
C. Contribution Margin: Contribution margin can be stated on a gross or per-unit basis. It
represents the incremental money generated for each product/unit sold after deducting
the variable portion of the firm's costs.
D. Fixed Costs: A fixed cost is a cost that does not change with an increase or decrease in
the amount of goods or services produced or sold.
By analyzing the data using different equations we will be identifying the current condition of
the company i.e. whether they are making a profit or loss at current scenario. Then we would
like to explore their profitability and capability to make profit in the future while addressing the
least amount they should sell to make start making profit. Finally, we would like to considerate
two scenarios for the company where we will see what happens to the overall income in a
better economic condition and vice versa.
Business background
The name of the business is Jamal’s Pithaghor. For the business I have selected a cake seller
who basically sells rice cake, which is a traditional food of Bangladesh. They are running this
business for around 2 years with success and repeated renovations. The small business owner
started their journey with a basic cart on the roadside and working in the store all by himself.
With time he has managed to grow the business and now sells the same item in a brick store.
He now employs 2 workers to assist himin making the food and serve the customers. The store
is decorated with required instruments. It is located in the center of Mirpur – 1, a prime
location to do business.

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Break-down of revenue and costs
BellowIwill be providingadetailedlistandexplanationof the revenue andcostsassociatedwiththe
business. Theyare mainlysellingone itemwhileprovidingfreeside itemstosupportthe customer
preference.While thereare variousvariable costsassociatedwiththe company,the numberof itemsin
the Fixedcostislow. Let’shave a lookon the cost below.
a. Source of Revenue: The companysellsrice cakesanda goodnumberof customerswarmsthe
area duringthe time of sale. Uponinspecting,Imanagedtoidentifythattheysell around280
rice cakes ondailybasis.Each of theirrice cake ispricedat 10 taka that totalsto 2800 taka
worthsale on a single day.Theirmonthlysellaveragesaround84000 taka.Bellow abreakdown
of theirrevenue isgiven.
Sales
Item Per unitprice Unit(daily) Total (Daily) Units(Monthly) Total (Monthly)
Rice Cake 10 280 2,800 8,400 84,000
b. Variable Costs:Theyhave a total of 7 typesof variable cost.Here the mainingredientisthe
Rice flourthat has the highestcontributiontothe total cost,whichis 53.3%. On the other hand,
Corianderiscontributingthe leastamountthe total cost – only2.4%. The total variable cost
sumsat 25,350. Belowa breakdownof the variouscostis provided foraclear picture.
Variable Costs
Item Per Kg price Unit(KG) Total (Daily) Total (Monthly) Relative %
Rice flour 30 15 450 13,500 53.3%
ChepaShutki 1,200 0.1 120 3,600 14.2%
Mola Shutki 800 0.1 80 2,400 9.5%
Chingri Shutki 800 0.1 80 2,400 9.5%
Coriander 80 0.25 20 600 2.4%
DriedChili 250 0.1 25 750 3.0%
Driedfish 700 0.1 70 2,100 8.3%
Total 25,350
c. Fixed Cost: We have collectedthe fixedcostona monthlybasis.Mostof the spendingarises
fromthe laboras theyare appointing2laborsdailyandpayingthen7k per month.While Gas
bill comesinsecondincontributiondue tothe factthat theymake rice cake and the gas burner
isalwayson as longas the store is open. The total fixedcostthe businessisoverserving35,000
taka.

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Fixed Costs
Item Total (Monthly) Relative %
Electricity 3,000 9%
Gas 10,000 29%
Rent 8,000 23%
Labor 14,000 40%
Total 35,000
Chapter 2 : CVP analysis
At thisportion,ourmainfocusis the Cost-volumeprofitanalysisand toidentifythe factors influencing
the profitsof the business.Throughthisanalysiswe canalsoensure the future prospectand
sustainabilityof the businessandprovide guidance where necessary.
Contribution format income statement
Income Statement in Contribution format (Monthly basis)
Particulars Total Per Unit
Sales 84,000 10
Total Variable Cost 25,350 3.02
Contribution Margin 58,650 6.98
Total Fixed Cost 35,000
Net Income / (Loss) 23,650
From the initiallycollectdataof the salesandvariable costwe proceedto developingthe income
statementincontributionformat.The total monthlysell was84,000 takaand per unitcost of each
productis 10 taka. Thenwe deductthe total variable cost(25,350) from the sell togetthe contribution
Margin, whichis58,650 taka. Followingthat,we deductthe fixedcost(35,000) of the businessfromthe
contributionmargintoendupwitha Netincome of 23,650 taka.
It seemsthe variable costislowercompare tothe fixedcostof the company,meaningthat the company
will increase profitby a goodamountwhentheysell more.
Contribution Margin per unit
Contributionmarginperunitsportraysthe amountof taka eachnew sell will bringforthe businessafter
crossingthe break-evenpoint.We identify the contributionmarginbydeductingthe perunitvariable
cost fromper unitsalesprice.
ContributionMarginperunit 6.98
The contributionmarginperunitof theirbusinessis6.98 taka meaningthatfor eachadditional unitof
sale aftercrossingthe break-evenpoint,theywill get aprofitof 6.98 taka

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Contribution Margin Ratio
The contributionmarginratioshowsthe percentage of takaisbeingconvertedintocontributionmargin
fromthe salesprice of the product.
ContributionRatio 0.70
The contributionmarginforthe company is 70% that indicatesthata goodamount of moneyisbeing
convertedintocontributionmarginas theyhave a low variable cost.
Break-even point in units and taka
The break-evenpointisthe pointwherethe profitof the companywill be equal tothe total costof the
company.Whenwe are consideringthe break-evenpointinunitsitindicatesthe numberof unitsthat
one mustsell inorderto cover upall the cost withoutmakinganyprofit.Onthe otherhand,if receive
the break-evenpointintaka,itshows the revenue the companymustreachto pay off theircosts. The
formulatocalculate themis
Break- even analysis Actual sales
Break-evenpointinunits 5,012.79 8400.00
Break-evenpointindollars 50,127.88 84000.00
The break-evenpointof Jamal’sPithaghoris5,012 units,whichare around 3,400 lessthan the original
monthlysell of the business.Itmeans thatafterselling5,012 units,theywill notincurneitherlossnor
any profit.Inotherwords,if theymanage to generate revenue of 50,128 taka,theywill be able topay
off all of theircostfor that monthbut will nothave anyprofit.

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Target profit analysis
Target profitanalysisare maindone tosee how much the companymustmake or the numberunits
mustbe soldto reacha certainamountof profitinany givenmonth.
Target Profit analysis
The company wants to have a target profit of atleast 15,000.00
Units required to be sold to reach target profit 7,161.13
Monthly revenue required to maintian target profit 71,611.25
Here,we have assumedthatthe companywants to reacha targetprofitof 15000 inthe nextmonth.As
perequationwe identifiedthat theywill abletoreachthisgoal onlywhentheysell atleast7,162 units
of Rice cakes or realize arevenue of 71,612 taka.
Margin of Safety
Margin of safetyisidentifiedtounderstandthe extenttowhichtheycanchange theirprice level to
generate more sellsforthatperiod.It’scalledthe safetymarginbecauseit’skindof like abuffer.Thisis
the amountof salesthatthe companyor departmentcanlose before itstartslosingmoney.Aslongas
there’sabuffer,bydefinitionthe operationsare profitable.If the safetymarginfallstozero,the
operationsbreakevenforthe periodandnoprofitisrealized.If the marginbecomesnegative,the
operationslose money.
Margin of Safety
Margin of Safety in Taka 33872.12
Margin of Safety ratio 0.40324
The margin of safetyof Jamal’sPithaghoris33,872 taka meaning the total numberof salesdollarsthat
can be lostbefore the companylosesmoney.

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Chapter – 3: Sensitivity analysis
Sensitivity analysis
A sensitivityanalysisdetermineshow differentvaluesof anindependentvariable affectaparticular
dependentvariable underagivensetof assumptions.Inotherwords,sensitivityanalysesstudyhow
varioussourcesof uncertaintyina mathematical model contribute tothe model'soverall uncertainty.
Thistechnique isusedwithinspecificboundariesthatdependonone ormore inputvariables. Here,the
dependentvariable isthe Netincome of the businesswhileSales,Variable costandFixedcostare the
independentvariable.Therefor,we want toidentifythe changesinthe Netincome of the businesswhen
we change any of the dependentvariables.We willexplore 3differentscenariostodetermine the
impact.
Scenario One: Effect of Changes in sell on Net profit
In the firstphase we wouldlike toexplorethe relationandimpactof sellsovernetprofit.Forthat, while
holdingothervariablesconstant, we have reducedthe sellby10% andthenincreaseditby10% to see
the variation.Belowasummaryof the analysisisgiven.
If the sells cost of the company increases or decreases by 10%
Income Statement in Contribution format (Monthly basis)
Particulars 10% decrease Total 10% increase
Sales 75600 84000 92400
Total Variable Cost 25350 25350 25350
Contribution Margin 50250 58650 67050
Total Fixed Cost 35000 35000 35000
Net Income / (Loss) 15250 23650 32050
Changes in Net Income -35.5% 35.5%
From the table above,itisapparentthat a change in sell will affectthe Netincome of the company.
Whenwe have increasedthe sale by10% the Netincome of the companyhas increasedby 35.5%.
Reducingthe sellsbythe same amountportraythe exactchange.

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What we can derive fromhere isthat whenthe variable costof a companyislow,the increase insale
increasesthe netincome of the companybya significantmarginandvice versa.
Scenario Two: Effect of Changes in variable cost on Net profit
At the 2nd
phase,we have heldall the independentvariableconstantbesidesthe variable costof the
company.The variable costhas beenincreasedby10% and thenreducedbythe same amount to see
changesinthe netincome.
If the fixed cost of the company increases or decreases by 10%
Income Statement in Contribution format (Monthly basis)
Particulars 10% decrease Total 10% increase
Sales 84000 84000 84000
Total Variable Cost 22815 25350 27885
Contribution Margin 61185 58650 56115
Total Fixed Cost 35000 35000 35000
Net Income / (Loss) 26185 23650 21115
Changes in net income 10.7% -10.7%
0
20000
40000
60000
80000
100000
10% decrease Total 10% increase
Sales changes
Sales Total Variable Cost Contribution Margin
Total Fixed Cost Net Income / (Loss)

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It is evident that increasing the variable cost will reduce the Net income, however, the decrease
in net income is not as drastic as the changes in sell meaning the variable cost has less of an
impact on the dependent variable of the business.
Scenario Three: Effect of Changes in Fixed cost on Net profit
Our final scenario connects fixed cost and net profit while holding the other variables constant.
As we have done previously, fixed cost will also be changed by 10%.
If the fixed cost of the company increases or decreases by 10%
Income Statement in Contribution format (Monthly basis)
Particulars 10% decrease Total 10% increase
Sales 84,000 84,000 84,000
Total Variable Cost 25,350 25,350 25,350
Contribution Margin 58,650 58,650 58,650
Total Fixed Cost 31,500 35,000 38,500
Net Income / (Loss) 27,150 23,650 20,150
Changes in net income 14.8% -14.8%
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
10% decrease Total 10% increase
Variable costchanges
Sales Total Variable Cost Contribution Margin
Total Fixed Cost Net Income / (Loss)

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By increasing the Fixed cost 10%, the net income of the business decreases to 20,150, which is a
14.8% reduction than the actual income of the company.
Conclusion and Recommendations
The most noticeable aspect the business is that fact that they are a fixed cost intensive
company with low variable cost. So, it will be easier for the business owner to control the
income level of the company. By manipulating the sell price, sell unit or variable cost of the
company, the owner can easily workout a way to maximize the profitability of the business. He
is already selling at higher level than the break-even point, which is a good sign and has a great
buffer for safety giving him more opportunity to explore new ways to get the most out of his
business. However, he must focus on the fact the, selling more units will increase his profit
much more than reducing the cost of the raw materials. It is best if he identifies ways to
increase the sale of the product to gain a significant profit boost for the company.
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
10% decrease Total 10% increase
Changes in Fixed cost
Sales Total Variable Cost Contribution Margin
Total Fixed Cost Net Income / (Loss)