Topic 9 (short)

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Topic 9 (short)

  1. 1. Chapter Nine COST VOLUME PROFIT ANALYSIS (CVP) KAL1013 Chapter Nine
  2. 2. Topic objectives: <ul><li>Classify the cost by behavior; fixed & variable </li></ul><ul><li>Explain the concept, computation and usage of Contribution Margin (CM) & CM Ratio </li></ul><ul><li>Explain the concept of Break Even Point (BEP) and its computation using: </li></ul><ul><ul><li>CM approach </li></ul></ul><ul><ul><li>Mathematical approach </li></ul></ul><ul><li>Apply the basic concept in BEP to determine sales in unit and RM($) for any desired profit </li></ul><ul><li>Explain how to determine the BEP under certain condition where selling price, variable and fixed costs experienced some changes </li></ul><ul><li>Explain the concept of operating leverage and how to calculate and apply it. </li></ul>KAL1013 Chapter Nine
  3. 3. CVP Analysis KAL1013 Chapter Nine  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. 4. Assumptions Underlie Each CVP Analysis <ul><li>All costs can be classified either fixed or variable costs. </li></ul><ul><li>Changes in activity are the only factors that affect cost. </li></ul><ul><li>All units produced are sold. </li></ul><ul><li>When more than one type of product is sold, the sales mix will remain constant. </li></ul>KAL1013 Chapter Nine
  5. 5. Contribution Margin Concept KAL1013 Chapter Nine  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
  6. 6. Contribution Margin KAL1013 Chapter Nine Sales revenue RM 100,000 Variable cost 60,000 Contribution margin 40,000 Fixed Cost 25,000 Income from operation 15,000
  7. 7. Unit Contribution Margin KAL1013 Chapter Nine Selling price per unit RM 10.00 Variable cost per unit 6.00 Contribution margin per unit 4.00
  8. 8. Contribution Margin Ratio KAL1013 Chapter Nine Sales - Variable costs ----------------------------- Sales RM100,000 - RM60,000 -------------------------------- RM100,000 X 100 = 40%
  9. 9. Break-Even Point Concept(BEP) KAL1013 Chapter Nine  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.
  10. 10. KAL1013 Chapter Nine 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.
  11. 11. KAL1013 Chapter Nine 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
  12. 12. Techniques in CVP analysis <ul><li>Contribution margin approach </li></ul><ul><li>Mathematical Equation approach </li></ul><ul><li>Graphical approach </li></ul>KAL1013 Chapter Nine
  13. 13. Contribution margin approach KAL1013 Chapter Nine Break-Even Point Target profit In units In RM In units In RM
  14. 14. Calculating BEP: In Units KAL1013 Chapter Nine 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 units = Total Fixed Costs ------------------------------- Contribution Margin Per unit
  15. 15. Calculating BEP: In Units KAL1013 Chapter Nine Illustration 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
  16. 16. Calculating BEP: In RM KAL1013 Chapter Nine BEP (RM) = 60,000 12.00 – 7.20 / 12.00 = 60,000 40% = RM150,000 BEP In RM = Total Fixed Costs ------------------------------- Contribution Margin Ratio
  17. 17. BEP Proof: KAL1013 Chapter Nine 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 costs 60,000 Net income 0
  18. 18. Calculating Target Income: In Units KAL1013 Chapter Nine Net income = Contribution margin - Total Fixed Costs Therefore: Net income + Total Fixed Costs = Contribution margin Target Income In units = Total Fixed Costs + Target Income ---------------------------------------------- Contribution Margin Per unit
  19. 19. Calculating Target Income: In Units KAL1013 Chapter Nine Illustration 3: Selling price per unit RM12.00 Variable 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 =
  20. 20. Calculating Target Income: In RM KAL1013 Chapter Nine Target income (RM) 60,000 + 15,000 12.00 – 7.20 / 12.00 = 75,000 40% = RM187,500 Target Income In RM = Total Fixed Costs + Target Income ------------------------------- Contribution Margin Ratio =
  21. 21. Target Income Proof: KAL1013 Chapter Nine 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 costs 60,000 Net income 15,000
  22. 22. Mathematical equation approach: BEP in units KAL1013 Chapter Nine BEP, when net income = 0 When sales = total costs (variable & fixed) Therefore, the equation: Sales = Variable costs + Fixed Costs
  23. 23. Mathematical equation approach: BEP in units KAL1013 Chapter Nine 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
  24. 24. Mathematical equation approach: BEP in RM KAL1013 Chapter Nine 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
  25. 25. Mathematical equation approach: Target income in units KAL1013 Chapter Nine When sales = total costs (variable & fixed) + target income Therefore, the equation: Sales = Variable costs + Fixed Costs + Target Income
  26. 26. Mathematical equation approach: Target income in units KAL1013 Chapter Nine Illustration 5: Selling price per unit RM10.00 Variable costs per unit RM6.00 Total 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
  27. 27. Mathematical equation approach: Target income in RM KAL1013 Chapter Nine 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
  28. 28. Application of CVP analysis <ul><li>Margin of safety </li></ul><ul><li>Changes in selling price </li></ul><ul><li>Changes in variable costs </li></ul><ul><li>Changes in fixed costs </li></ul><ul><li>Profit forecasting </li></ul><ul><li>Interdependent changes </li></ul>KAL1013 Chapter Nine
  29. 29. Margin of safety KAL1013 Chapter Nine  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
  30. 30. Margin of safety: In units / RM KAL1013 Chapter Nine Margin of Safety = Current / Expected - BEP Sales Illustration 6: Current sales = 300,000 units BEP = 180,000 units Margin of safety = 300,000 - 180,000 = 120,000 units Or 40% of current sales
  31. 31. Changes in selling price KAL1013 Chapter Nine Selling 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
  32. 32. Changes in variable costs KAL1013 Chapter Nine 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 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
  33. 33. Changes in fixed costs KAL1013 Chapter Nine Total 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
  34. 34. Operating leverage (OL) <ul><li>Measures the impact of changes in sales on income from operations. </li></ul><ul><li>Technically, it will determine how many % increment in operating profit if the company increase its sales at certain percentage OR vice-versa… </li></ul><ul><li>Calculation: </li></ul><ul><ul><li>OL = CM / Income form operation </li></ul></ul><ul><li>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%? </li></ul>KAL1013 Chapter Nine
  35. 35. KAL1013 Chapter Nine Thank You

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