Managerial economics-CVP Analysis and AC, TC, MC cost curves- MBA

1. Managerial Economics
First semester --- 2nd Mid PPT
IMMANI CHANDRASHEKAR
REGD. NO. :19K61E0020
SUBJECTCODE:18MS01T2
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2. Mid Topic
C-V-P Analysis
and
AC, TC, MC Cost
curves
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3. Cost-Volume- Profit (CVP) Analysis :
• CVP analysis is a technique for studying the
relationship between cost, volume and profit .
• The three factors of CVP analysis, i.e., costs,
volume and profit are interconnected and
dependent on another.
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4. The Cost-Volume-Profit Relationship Is Of Immense Utility To
Management As It Assists In Profit Planning, Cost Control And
Decision Making.
Cost-Volume-Profit Analysis Can Be Used To Answer
Questions Such As:
1) How Much Sales Should Be Made To Avoid Losses?
2) How Much Should Be The Sales To Earn A Desired Profit?
3) What Will Be The Effect Of Change In Prices, Costs And
Volume On Profits?
4) Which Product Or Product Mix Is Most Profitable?
5) Should we manufacture Or Buy Some Product or
Component?
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5. C-V-P Analysis Is Based On The
Following Assumptions:
• Selling price, variable cost per unit, and total fixed costs are known
and constant.
• volume of production is equal to the sales volume, i.e., there
would be no opening or closing inventory during a period.
• Changes in the levels of revenues and costs arise only because of
changes in the number of units produced and sold.
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6. • Total costs can be separated into two components; a
fixed component that does not vary with output level
and a variable component that changes with respect
to output level.
• All Revenues And Costs Can Be Added, Subtracted,
And Compared Without Taking Into Account The Time
Value Of Money.
• The efficiency and productivity level is constant at
different levels of output.
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7. Techniques of CVP Analysis:
There are three basic techniques of CVP analysis.
These are: 1. Contribution,
2. Profit /Volume Ratio,
3. Break-even Analysis,
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8. 1. Contribution:
• Contribution is the difference between sales and variable cost or
marginal cost of sales.
• It may also be defined as the excess of selling price over variable
cost per unit.
• Contribution can be represented as:
• Contribution = Sales -Variable Cost.
• Or Contribution (per unit) = Selling Price -Variable cost per
unit.
• Or Contribution = Fixed Costs + Profit/-loss. 8

9. 2. Profit-volume Ratio (Pv Ratio or C/S Ratio):
The profit-volume ratio, which is also called the
'contribution ratio' or marginal ratio'.
P/V ratio can also be expressed as:
P/V Ratio = (ContributionSales)*100
P/V Ratio = (Sales -Variable Cost Ratio)Sales or
P/V Ratio = (Fixed Cost + Profit)Sales or
P/V Ratio =Change In Profit or ContributionChange in Sales.
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10. 3.Break-Even Analysis:
According To Matz, Curry and Frank, "A Break-Even Analysis Indicates At
What Level of Costs And Revenue Are In Equilibrium".
It means At this Point No Profit or No Loss.
Explained By The Following Equation:
• Break-Even Sales = Fixed Cost + Variable Cost
• Break-Even-Point in Units=Fixed Cost Contribution per
unit
• Break-Even-Point Rupees= Fixed Cost P/V ratio 10

11. Break-Even Chart
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12. Average Cost (Ac), Total Cost (Tc), and Marginal Cost
(Mc) Cost Curves:
• To Make good Decisions Concerning How Much to
Produce and What Prices to Charge, a Manager
Must Understand the Relationship between Firm’s
Output Rate and Its Costs.
• We Learn To Analyse In Detail The Nature Of This
Relationship, Both In Short Run And Long Run. 12

13. Short run cost -output relationship
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• In the short-run the firm cannot change or modify fixed
factors such as plant, equipment and scale of its organization.
• In the short-run output can be increased or decreased by
changing the variable inputs like labour, raw material, etc.
Total costs (TC) = TFC + TVC
Fixed Costs = Costs that do not vary with output
Variable Costs = Costs that vary with the rate of production
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Average total costs (ATC) =
Average fixed costs (AFC)=
Total costs (TC)
Output(Q)
Average variable costs (AVC)=
Total variable costs (TVC)
Output (Q)
Total fixed costs (TFC)
Output (Q)
Marginal Cost :
The change in total costs due to a the change in production
units .
Marginal costs (MC) =
Change in total cost ( TC)
Change in output( Q)

15. TFC
TVC
TC
SHORT- RUN- TOTAL COST CURVE
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16. SHORT- RUN- AVERAGE COST, MARGINAL COST CURVES
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The Relationship Between
Average and Marginal Costs
• When AC Falls MC also falls
but MC is lower then AC
• When AC increase MC also
increase but MC is higher
then AC
• MC will cut the AC from
below that is point of
equilibrium.
• Both AC Curve & MC Curve
U-Shaped

17. Long run cost -output relationship
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• Long run stands for the time period in which the entire
production factors of a firm become variable.
• Combination of many short-runs may be described as
long-run.
• In the long run there is no fixed factor of production &
hence there is no fixed cost.
• It can be defined as the minimum cost of producing
different level of output in a long run.
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18. Long Run total Cost Curves
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19. Long Run average Cost Curves
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LONG RUN MARGINAL COST CURVES
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22. Conclusion:
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C-V-P
ANALYSIS
AC
TC
MC

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