CVP analysis

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CVP analysis

  1. 1. 1
  2. 2. • Describe the importance of CVP analysis as a managerial accounting technique. • Classify cost by their behaviour: a.Variable cost b.Fixed cost c.Mixed cost • Explain how to compute the contribution margin, the contribution margin ratio, and the unit contribution margin, and explain how they maybe useful to managers. 2
  3. 3.  The usage of CVP analysis  The relationships between cost volume and profit  Concept of break-even point (BEP)  Techniques in CVP analysis  Application of CVP analysis 3
  4. 4. 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. 4
  5. 5.  Setting the selling price.  Determining product mix.  Maximizing the use of production facilities.  Evaluating the impact of changes in costs. 5
  6. 6.  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. 6
  7. 7. Relationship between fixed costs and activity Costs Total fixed cost 0 10 20 30 Activity (unit) 7
  8. 8. Relationship between variable costs and activity Total variable cost Costs 0 10 20 30 Activity (unit) 8
  9. 9.  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 = Contribution Margin 9
  10. 10. Sales revenue RM 100,000 Variable cost 60,000 Contribution margin 40,000 Fixed Cost 25,000 Income from operation 15,000 10
  11. 11. Selling price per unit RM 10.00 Variable cost per unit 6.00 Contribution margin per unit 4.00 11
  12. 12. Sales - Variable costs ----------------------------Sales RM100,000 - RM60,000 -------------------------------RM100,000 X 100 = 40% 12
  13. 13.  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. 13
  14. 14. 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. 14
  15. 15. 1,000 units 500 units 600 units Sales (RM4,000 x unit) 4,000,000 2,000,000 2,400,000 (-) Variable costs (RM3,250 x unit) 3,250,000 1,625,000 1,950,000 Contribution margin 750,000 375,000 450,000 (-) Fixed costs 450,000 450,000 300,000 (75,000) Net income / loss 450,000 0 15
  16. 16. RM’000 Sales revenue 4,000 Total costs 2,400 2,000 450 Fixed costs 0 500 600 1000 Unit 16
  17. 17.  Contribution margin approach  Mathematical Equation approach  Graphical approach 17
  18. 18. In units Break-Even Point In RM In units Target profit In RM 18
  19. 19. 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 BEP In units In units = Total Fixed Costs Total Fixed Costs ------------------------------------------------------------Contribution Margin Per unit Contribution Margin Per unit 19
  20. 20. Illustration 2: Selling price per unit Variable costs per unit Total fixed costs BEP (units) = = RM12.00 RM7.20 RM60,000 60,000 12.00 – 7.20 60,000 = 12,500 units 4.80 20
  21. 21. BEP BEP In RM In RM = BEP (RM) = = Total Fixed Costs Total Fixed Costs ------------------------------------------------------------Contribution Margin Ratio Contribution Margin Ratio 60,000 12.00 – 7.20 / 12.00 60,000 = RM150,000 40% 21
  22. 22. 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 60,000 Total fixed costs Net income 0 22
  23. 23. Net income = Contribution margin - Total Fixed Costs Therefore: Net income + Total Fixed Costs = Contribution margin Target Income Target Income In units In units = Total Fixed Costs + Target Income Total Fixed Costs + Target Income ------------------------------------------------------------------------------------------Contribution Margin Per unit Contribution Margin Per unit 23
  24. 24. Illustration 3: Target income (units) Selling price per unit Variable costs per unit Total fixed costs Target income = RM12.00 RM7.20 RM60,000 RM15,000 60,000 + 15,000 12.00 – 7.20 = 75,000 = 15,625 units 4.80 24
  25. 25. Target Income Target Income In RM In RM Target income (RM) = = = Total Fixed Costs + Target Income Total Fixed Costs + Target Income ------------------------------------------------------------Contribution Margin Ratio Contribution Margin Ratio 60,000 + 15,000 12.00 – 7.20 / 12.00 75,000 = RM187,500 40% 25
  26. 26. 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 60,000 Total fixed costs Net income 15,000 26
  27. 27. BEP, when net income = 0 When sales = total costs (variable & fixed) Therefore, the equation: Sales = Variable costs + Fixed Costs 27
  28. 28. Illustration 4: Selling price per unit Variable costs per unit Total fixed costs RM10.00 RM6.00 RM20,000 BEP (units): Sales = Variable Costs RM10 x X units = RM6.00 x X units RM4 x X units = RM20,000 X units = RM20,000 RM4.00 + Fixed Costs + RM20,000 = 5,000 units 28
  29. 29. BEP (RM): Sales = Variable Costs X = 0.6 X 0.4 X = RM20,000 X = + Fixed Costs + RM20,000 RM20,000 0.4 = RM50,000 29
  30. 30. Sales revenue (5,000 units x RM10.00) 50,000 Total variable costs (5,000 units x RM6.00) 30,000 Total contribution margin 20,000 20,000 Total fixed costs Net income 0 30
  31. 31. When sales = total costs (variable & fixed) + target income Therefore, the equation: Sales = Variable costs + Fixed Costs + Target Income 31
  32. 32. Illustration 5: Selling price per unit Variable costs per unit Total fixed costs Target income Target income (units): RM10.00 RM6.00 RM20,000 RM15,000 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 32
  33. 33. Target income (units): Sales = Variable Costs + Fixed Costs + Target Income X = 0.4 X = X = 0.6 x X + RM20,000 + RM15,000 RM35,000 RM35,000 0.4 = RM87,500 33
  34. 34. Sales revenue (8,750 units x RM10.00) 87,500 Total variable costs (8,750 units x RM6.00) 52,500 Total contribution margin 35,000 20,000 Total fixed costs Net income 15,000 34
  35. 35.       Margin of safety Changes in selling price Changes in variable costs Changes in fixed costs Profit forecasting Interdependent changes 35
  36. 36. It is the difference between actual or expected sales and sales at the break-even point.  Sales revenue RM Current sales revenue Total costs MOS BEP 0 Units 36
  37. 37. Margin of Safety Illustration 6: Margin of safety = Current / Expected - BEP Sales Current sales = 300,000 units BEP = 180,000 units 300,000 - 180,000 = = 120,000 units Or 40% of current sales 37
  38. 38. Selling price increased from RM12.00 to RM15.00. Assumed that there’s no changes in costs. Selling price per unit Variable costs per unit Contribution margin Total fixed costs BEP (units) BEP (RM) RM12.00 RM15.00 7.20 7.20 4.80 7.80 RM60,000 RM60,000 12,500 RM150,000 7,692 RM115,385 38
  39. 39. Variable costs per unit increased from RM7.20 to RM8.00. Assumed that there’s no changes selling price & fixed costs. Selling price per unit Variable costs per unit Contribution margin Total fixed costs BEP (units) BEP (RM) RM12.00 RM12.00 7.20 8.00 4.80 4.00 RM60,000 RM60,000 12,500 RM150,000 15,000 RM180,000 39
  40. 40. Total fixed costs increased from RM60,000 to RM65,000. Assumed that there’s no changes selling price & variable costs. Selling price per unit Variable costs per unit Contribution margin Total fixed costs BEP (units) BEP (RM) RM12.00 RM12.00 7.20 7.20 4.80 4.80 RM60,000 RM65,000 12,500 RM150,000 13,542 RM162,500 40
  41. 41. please send to my Mail ID Mail –id :13491e0037@gmail.com 41

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