This document discusses concepts related to cost-volume-profit analysis and break-even analysis. It defines marginal costing, contribution margin, profit-volume ratio, break-even point, and margin of safety. It also includes examples showing how to calculate these metrics using cost and revenue data. The document is intended to help managers understand how costs, sales volume, and price affect profitability.
The document discusses calculating break-even points, operating leverage, and margin of safety for companies selling multiple products. It provides an example of a company, Cascade, which sells two products. It calculates the break-even point for Cascade by treating its products as a single "enterprise product". It also defines operating leverage as the ratio of contribution margin to income from operations and calculates it for two hypothetical companies. Finally, it defines margin of safety as the possible decrease in sales before an operating loss occurs.
The document discusses cost-volume-profit (CVP) analysis, which involves making assumptions about how costs and revenues change with production volume. The key assumptions are that costs can be separated into fixed and variable components, and that revenues and costs change linearly with volume. CVP analysis is used to determine the break-even point and output needed to achieve a target profit level. It can also incorporate the effects of income taxes and multiple products or cost drivers.
This document discusses break-even analysis, which accountants use to determine the sales volume needed for a business to break even or make a target profit. It defines break-even point as the sales level where revenue equals total costs. The document presents examples of how changes in factors like fixed costs, variable costs, or selling price impact the break-even point in units or dollars. It also explains how a target profit can be used to estimate the required sales volume.
Marginal costing is a technique that separates total costs into fixed and variable costs. It helps management make decisions by calculating indicators like profit volume ratio, break-even point, margin of safety, and indifference point. The document provides an example problem demonstrating how to use marginal costing to calculate these indicators and make decisions. It explains key concepts like contribution, variable costs, fixed costs, and how marginal costing varies from other costing techniques.
Marginal costing is a technique that separates total costs into fixed and variable costs. It helps management make decisions by calculating indicators like profit volume ratio, break-even point, margin of safety, and indifference point. The document provides an example problem demonstrating how to use marginal costing to calculate these indicators and make decisions. It also discusses how marginal costing varies from other costing techniques.
This document discusses cost-volume-profit (CVP) analysis, which estimates how changes in costs and sales volume affect profits. CVP analysis can determine the break-even point, or volume needed to cover total costs. It examines the relationship between a company's costs, sales volume, and profits. The document defines CVP analysis elements like price, volume, variable and fixed costs. It also discusses concepts like contribution margin, break-even analysis, and how CVP can be used to reach profit targets or analyze products.
The document discusses cost-volume-profit (CVP) analysis, which examines how sales volume, price, costs, and profitability interact. CVP analysis uses models to help managers make decisions about marketing, production, investment, and financing. The one-product CVP model calculates net income as the difference between total revenue and total costs. It can be used to determine the break-even point and target profits. For companies with multiple products, the CVP model is modified to account for different sales volumes and costs across products. Operating leverage measures how sensitive operating income is to changes in sales volume.
This document discusses concepts related to cost-volume-profit analysis and break-even analysis. It defines marginal costing, contribution margin, profit-volume ratio, break-even point, and margin of safety. It also includes examples showing how to calculate these metrics using cost and revenue data. The document is intended to help managers understand how costs, sales volume, and price affect profitability.
The document discusses calculating break-even points, operating leverage, and margin of safety for companies selling multiple products. It provides an example of a company, Cascade, which sells two products. It calculates the break-even point for Cascade by treating its products as a single "enterprise product". It also defines operating leverage as the ratio of contribution margin to income from operations and calculates it for two hypothetical companies. Finally, it defines margin of safety as the possible decrease in sales before an operating loss occurs.
The document discusses cost-volume-profit (CVP) analysis, which involves making assumptions about how costs and revenues change with production volume. The key assumptions are that costs can be separated into fixed and variable components, and that revenues and costs change linearly with volume. CVP analysis is used to determine the break-even point and output needed to achieve a target profit level. It can also incorporate the effects of income taxes and multiple products or cost drivers.
This document discusses break-even analysis, which accountants use to determine the sales volume needed for a business to break even or make a target profit. It defines break-even point as the sales level where revenue equals total costs. The document presents examples of how changes in factors like fixed costs, variable costs, or selling price impact the break-even point in units or dollars. It also explains how a target profit can be used to estimate the required sales volume.
Marginal costing is a technique that separates total costs into fixed and variable costs. It helps management make decisions by calculating indicators like profit volume ratio, break-even point, margin of safety, and indifference point. The document provides an example problem demonstrating how to use marginal costing to calculate these indicators and make decisions. It explains key concepts like contribution, variable costs, fixed costs, and how marginal costing varies from other costing techniques.
Marginal costing is a technique that separates total costs into fixed and variable costs. It helps management make decisions by calculating indicators like profit volume ratio, break-even point, margin of safety, and indifference point. The document provides an example problem demonstrating how to use marginal costing to calculate these indicators and make decisions. It also discusses how marginal costing varies from other costing techniques.
This document discusses cost-volume-profit (CVP) analysis, which estimates how changes in costs and sales volume affect profits. CVP analysis can determine the break-even point, or volume needed to cover total costs. It examines the relationship between a company's costs, sales volume, and profits. The document defines CVP analysis elements like price, volume, variable and fixed costs. It also discusses concepts like contribution margin, break-even analysis, and how CVP can be used to reach profit targets or analyze products.
The document discusses cost-volume-profit (CVP) analysis, which examines how sales volume, price, costs, and profitability interact. CVP analysis uses models to help managers make decisions about marketing, production, investment, and financing. The one-product CVP model calculates net income as the difference between total revenue and total costs. It can be used to determine the break-even point and target profits. For companies with multiple products, the CVP model is modified to account for different sales volumes and costs across products. Operating leverage measures how sensitive operating income is to changes in sales volume.
This document provides an overview of cost-volume-profit (CVP) analysis, which examines how a firm's sales volume, selling price, cost structure, and profitability interact. It presents the basic one-product CVP model using equations and contribution margin concepts. Key assumptions of the CVP model are discussed. The document also covers break-even analysis, target profit analysis, margin of safety, changes in variables, multi-product CVP models, operating leverage, and an example problem analyzing CVP relationships for a company.
1. Calculate contribution margin per customer as average revenue ($8) minus average variable cost ($3), which is $5.
2. Calculate break-even point in customers as fixed costs ($450,000) divided by contribution margin per customer ($5), which is 90,000 customers.
3. Calculate taxable income as contribution margin ($5 per customer) times number of customers minus fixed costs ($450,000).
4. Calculate income taxes as 30% of taxable income.
5. Calculate net income as taxable income minus income taxes.
Income statement Functional Format,Linear cost Function,Method of Analyzing cost,Comparison of variable costing , unit cost computation, Illustration of variable costing , evaluation of results. Managerial Accounting
This document provides an overview of cost-volume-profit (CVP) analysis concepts including contribution margin, break-even point, CVP graphs, contribution margin ratio, and how changes in variables like sales price, costs, and volume affect profits. It discusses the equation method and contribution margin method for calculating break-even point in units and dollars. Formulas and examples from a sample company called Racing Bicycle are provided to illustrate key CVP terms and calculations.
This document discusses key concepts in cost-volume-profit analysis using the example of a bicycle company. It explains the contribution format income statement and how it is used to determine the contribution margin, break-even point, margin of safety, and degree of operating leverage. The contribution margin is the amount of sales revenue left after deducting variable expenses and is used to cover fixed expenses and determine profits. The document provides examples of how profits are affected by changes in sales volume, variable costs, fixed costs, and selling price. It emphasizes the importance of understanding cost behavior and how operating leverage impacts the sensitivity of profits to changes in sales.
1. The document discusses the key differences between variable costing and full costing. Under variable costing, fixed manufacturing overhead is treated as a period cost rather than a product cost.
2. When production exceeds sales, variable costing expenses all fixed manufacturing overhead in the period rather than including some in inventory. This means income under variable costing will be lower than under full costing when production is greater than sales.
3. Variable costing facilitates contribution margin analysis and managers cannot artificially inflate profits by overproducing to bury fixed costs in inventory. Inventory balances are also always lower under variable costing compared to full costing.
The contribution margin format is used as an internal planning and decision making tool, including cost-volume-profit analysis, budgeting, and make-or-buy decisions. It emphasizes variable cost behavior and how contribution margin covers fixed costs and provides income. For Racing Bicycle Company, the contribution margin is $200 per unit and $80,000 are fixed costs. The break-even point is 400 units or $200,000 in sales. Operating leverage is a measure of how sensitive net income is to sales changes; for Racing it is 5.
This document provides information and examples about calculating break-even point for companies that produce multiple products. It defines weighted average selling price and variable expenses as the sales-weighted averages of individual product prices and expenses. Break-even point for multiple products is calculated as total fixed costs divided by weighted average contribution margin per unit. An example is provided to demonstrate calculating break-even point in both units and rupees for a company with three products. The document also discusses calculating an overall composite break-even point using total fixed costs divided by the composite profit/variable ratio.
This document discusses breakeven analysis and operating leverage. It defines breakeven analysis as a tool that uses fixed costs, variable costs, revenue and sales volume to determine the sales level needed for a business to break even. The document provides the breakeven formula and an example calculation. It then defines operating leverage as the ratio of a company's fixed costs to its variable costs, and provides an example calculation of operating leverage. Higher operating leverage means greater profits from increased sales but also greater risk from declining sales.
This document discusses cost-volume-profit (CVP) analysis and how it can be used to analyze the relationship between costs, sales, and profits. It provides formulas to calculate the breakeven point in units and sales dollars. An example is worked through for a company called Bill's Briefcases. The document also discusses how CVP analysis can be used to compare alternative cost structures, determine target costs or prices, and calculate the degree of operating leverage and margin of safety.
Marginal costing is a technique that uses the concept of marginal cost, which is the change in total cost from producing one additional unit. It involves separating total costs into fixed and variable costs. Contribution margin is the difference between selling price and variable cost per unit, and shows the amount available to cover fixed costs and generate profit. Cost-volume-profit (CVP) analysis examines how costs, revenue, and profit change with production volume. It can be used to determine the break-even point and plan production levels required to achieve profit targets. Managers use CVP to make decisions about pricing, production, investment, and financing.
Sales mix, or the proportions of different products sold, can impact profits even if total sales remain the same. Introducing a new low-profit product or dropping a high-profit one can decrease profits. Companies can improve profits in a slow-growth market by shifting sales mix toward higher-profit products. Sales managers must consider sales mix when setting commission plans to incentivize selling profitable items. A sales mix variance calculation measures differences between actual and planned sales mixes.
Contribution is revenue minus variable costs. It represents the amount available to cover fixed costs and generate profit. The contribution margin ratio is contribution divided by sales revenue and expresses what percentage of sales is available for fixed costs and profit. It is calculated by taking the difference between total sales and total variable costs, then dividing by total sales. Higher contribution margin ratios indicate more sales revenue available for covering fixed costs and generating profit.
This document contains an assignment submitted by Akershit Kumar Sharma to Professor Mushtaq Ahmed on April 7, 2013. It includes answers to various questions related to contribution format income statements segmented by territory and product line. The key details provided are contribution format income statements for a company's total sales, segmented by the northern and southern territories, and further segmented of the northern territory by its Paks and Tibs product lines. Analysis is also provided on performance of different territories and product lines.
This document provides an overview of cost-volume-profit (CVP) analysis, which is a tool used for planning and decision making. It examines an example of a business owner, Emma Frost, considering whether to rent a booth at a college fair to sell study packages. The document defines key CVP terms like contribution margin, break-even point, and how to use CVP analysis to determine the sales volume needed to achieve a target operating income or net income. It also discusses how CVP analysis can be used to evaluate decisions like whether to spend on advertising by analyzing the impact on sales and profits.
Total revenue cost volume and even break relationship.pptxMIANMNADEEM
This document summarizes a presentation on cost-volume-profit (CVP) analysis and project management. It defines key CVP terms like contribution margin, break-even point, target volume, and margin of safety. Formulas are given for calculating break-even volume and sales. The effects of different cost structures and product mixes on break-even are explored. Graphs and examples illustrate how to use CVP analysis to evaluate decisions. Limitations of CVP analysis and how modern software addresses them are also discussed.
1Break-Even AnalysisMarketers need to understand break.docxaulasnilda
1
Break-Even Analysis
Marketers need to understand break-even
analysis because it helps them choose the
best pricing strategy and make smart
decisions about the short- and long-term
profitability of the product.
This is an analysis that tells you how many
products you need to sell to cover your costs.
Profitability
Profitability Definitions
Revenue the money we take in from sales
Cost the money it costs us to make and sell our product
Profit the money we have left over from our revenue
after we pay all of our costs
Revenue - Costs = Profit
Price the money a consumer pays for one unit of product
the money we take in from one unit of product
Price x Units = Revenue
Revenue/Units = Price
2
Exercise 1
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
Exercise 1
1. What was Stick-It-Up’s total sales revenue in August?
2. What was Stick-It-Up’s total profit in August?
3. What product contributed the most to sales revenue in August?
What percentage of the sales revenue did it contribute?
4. What product contributed the most to profit in August? What
percentage of the profit did it contribute?
5. If sales of magnetic white boards went up by 20%, how much
more would it contribute to sales revenue? To profits?
6. Suppose that increasing sales of magnetic white boards by 20%
would cost the company $500 per month in advertising expenses.
Should they spend the $500 per month on additional advertising?
Exercise 1
What was Stick-It-Up’s total revenue in August?
Revenue from:
Bulletin Boards 400 x $3.00 $1,200.00
Magnetic White Boards 600 x $4.00 $2,400.00
Combination Boards 250 x $5.00 $1,250.00
Total Revenue $4,850.00
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
3
Exercise 1
What was Stick-It-Up’s total profit in August?
Cost of:
Bulletin Boards 400 x $1.00 $400.00
Magnetic White Boards 600 x $3.00 $1,800.00
Combination Boards 250 x $3.50 $875.00
Total Cost $3,075.00
Profit = Total Revenue - Total Cost = $4,850 - $3,075 = $1,775
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
Exercise 1
What was Stick-It-Up’s total profit in August?
Profit on:
Bulletin Boards 400 x ($3.00-$1.00) $800.00
Magnetic White Boards 600 x ($4.00-$3.00) $600.00
Combination Boards 250 x ($5.00-$3.50) $375.00
Total Profit $1,775.00
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
Exercise 1
What product contributed the most to revenue in August? What
percentage did it contribute?
Bulletin Boards $1,200.00
Magnetic White Boards $2,400 ...
This document provides an overview of cost-volume-profit (CVP) analysis, which examines how a firm's sales volume, selling price, cost structure, and profitability interact. It presents the basic one-product CVP model using equations and contribution margin concepts. Key assumptions of the CVP model are discussed. The document also covers break-even analysis, target profit analysis, margin of safety, changes in variables, multi-product CVP models, operating leverage, and an example problem analyzing CVP relationships for a company.
1. Calculate contribution margin per customer as average revenue ($8) minus average variable cost ($3), which is $5.
2. Calculate break-even point in customers as fixed costs ($450,000) divided by contribution margin per customer ($5), which is 90,000 customers.
3. Calculate taxable income as contribution margin ($5 per customer) times number of customers minus fixed costs ($450,000).
4. Calculate income taxes as 30% of taxable income.
5. Calculate net income as taxable income minus income taxes.
Income statement Functional Format,Linear cost Function,Method of Analyzing cost,Comparison of variable costing , unit cost computation, Illustration of variable costing , evaluation of results. Managerial Accounting
This document provides an overview of cost-volume-profit (CVP) analysis concepts including contribution margin, break-even point, CVP graphs, contribution margin ratio, and how changes in variables like sales price, costs, and volume affect profits. It discusses the equation method and contribution margin method for calculating break-even point in units and dollars. Formulas and examples from a sample company called Racing Bicycle are provided to illustrate key CVP terms and calculations.
This document discusses key concepts in cost-volume-profit analysis using the example of a bicycle company. It explains the contribution format income statement and how it is used to determine the contribution margin, break-even point, margin of safety, and degree of operating leverage. The contribution margin is the amount of sales revenue left after deducting variable expenses and is used to cover fixed expenses and determine profits. The document provides examples of how profits are affected by changes in sales volume, variable costs, fixed costs, and selling price. It emphasizes the importance of understanding cost behavior and how operating leverage impacts the sensitivity of profits to changes in sales.
1. The document discusses the key differences between variable costing and full costing. Under variable costing, fixed manufacturing overhead is treated as a period cost rather than a product cost.
2. When production exceeds sales, variable costing expenses all fixed manufacturing overhead in the period rather than including some in inventory. This means income under variable costing will be lower than under full costing when production is greater than sales.
3. Variable costing facilitates contribution margin analysis and managers cannot artificially inflate profits by overproducing to bury fixed costs in inventory. Inventory balances are also always lower under variable costing compared to full costing.
The contribution margin format is used as an internal planning and decision making tool, including cost-volume-profit analysis, budgeting, and make-or-buy decisions. It emphasizes variable cost behavior and how contribution margin covers fixed costs and provides income. For Racing Bicycle Company, the contribution margin is $200 per unit and $80,000 are fixed costs. The break-even point is 400 units or $200,000 in sales. Operating leverage is a measure of how sensitive net income is to sales changes; for Racing it is 5.
This document provides information and examples about calculating break-even point for companies that produce multiple products. It defines weighted average selling price and variable expenses as the sales-weighted averages of individual product prices and expenses. Break-even point for multiple products is calculated as total fixed costs divided by weighted average contribution margin per unit. An example is provided to demonstrate calculating break-even point in both units and rupees for a company with three products. The document also discusses calculating an overall composite break-even point using total fixed costs divided by the composite profit/variable ratio.
This document discusses breakeven analysis and operating leverage. It defines breakeven analysis as a tool that uses fixed costs, variable costs, revenue and sales volume to determine the sales level needed for a business to break even. The document provides the breakeven formula and an example calculation. It then defines operating leverage as the ratio of a company's fixed costs to its variable costs, and provides an example calculation of operating leverage. Higher operating leverage means greater profits from increased sales but also greater risk from declining sales.
This document discusses cost-volume-profit (CVP) analysis and how it can be used to analyze the relationship between costs, sales, and profits. It provides formulas to calculate the breakeven point in units and sales dollars. An example is worked through for a company called Bill's Briefcases. The document also discusses how CVP analysis can be used to compare alternative cost structures, determine target costs or prices, and calculate the degree of operating leverage and margin of safety.
Marginal costing is a technique that uses the concept of marginal cost, which is the change in total cost from producing one additional unit. It involves separating total costs into fixed and variable costs. Contribution margin is the difference between selling price and variable cost per unit, and shows the amount available to cover fixed costs and generate profit. Cost-volume-profit (CVP) analysis examines how costs, revenue, and profit change with production volume. It can be used to determine the break-even point and plan production levels required to achieve profit targets. Managers use CVP to make decisions about pricing, production, investment, and financing.
Sales mix, or the proportions of different products sold, can impact profits even if total sales remain the same. Introducing a new low-profit product or dropping a high-profit one can decrease profits. Companies can improve profits in a slow-growth market by shifting sales mix toward higher-profit products. Sales managers must consider sales mix when setting commission plans to incentivize selling profitable items. A sales mix variance calculation measures differences between actual and planned sales mixes.
Contribution is revenue minus variable costs. It represents the amount available to cover fixed costs and generate profit. The contribution margin ratio is contribution divided by sales revenue and expresses what percentage of sales is available for fixed costs and profit. It is calculated by taking the difference between total sales and total variable costs, then dividing by total sales. Higher contribution margin ratios indicate more sales revenue available for covering fixed costs and generating profit.
This document contains an assignment submitted by Akershit Kumar Sharma to Professor Mushtaq Ahmed on April 7, 2013. It includes answers to various questions related to contribution format income statements segmented by territory and product line. The key details provided are contribution format income statements for a company's total sales, segmented by the northern and southern territories, and further segmented of the northern territory by its Paks and Tibs product lines. Analysis is also provided on performance of different territories and product lines.
This document provides an overview of cost-volume-profit (CVP) analysis, which is a tool used for planning and decision making. It examines an example of a business owner, Emma Frost, considering whether to rent a booth at a college fair to sell study packages. The document defines key CVP terms like contribution margin, break-even point, and how to use CVP analysis to determine the sales volume needed to achieve a target operating income or net income. It also discusses how CVP analysis can be used to evaluate decisions like whether to spend on advertising by analyzing the impact on sales and profits.
Total revenue cost volume and even break relationship.pptxMIANMNADEEM
This document summarizes a presentation on cost-volume-profit (CVP) analysis and project management. It defines key CVP terms like contribution margin, break-even point, target volume, and margin of safety. Formulas are given for calculating break-even volume and sales. The effects of different cost structures and product mixes on break-even are explored. Graphs and examples illustrate how to use CVP analysis to evaluate decisions. Limitations of CVP analysis and how modern software addresses them are also discussed.
1Break-Even AnalysisMarketers need to understand break.docxaulasnilda
1
Break-Even Analysis
Marketers need to understand break-even
analysis because it helps them choose the
best pricing strategy and make smart
decisions about the short- and long-term
profitability of the product.
This is an analysis that tells you how many
products you need to sell to cover your costs.
Profitability
Profitability Definitions
Revenue the money we take in from sales
Cost the money it costs us to make and sell our product
Profit the money we have left over from our revenue
after we pay all of our costs
Revenue - Costs = Profit
Price the money a consumer pays for one unit of product
the money we take in from one unit of product
Price x Units = Revenue
Revenue/Units = Price
2
Exercise 1
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
Exercise 1
1. What was Stick-It-Up’s total sales revenue in August?
2. What was Stick-It-Up’s total profit in August?
3. What product contributed the most to sales revenue in August?
What percentage of the sales revenue did it contribute?
4. What product contributed the most to profit in August? What
percentage of the profit did it contribute?
5. If sales of magnetic white boards went up by 20%, how much
more would it contribute to sales revenue? To profits?
6. Suppose that increasing sales of magnetic white boards by 20%
would cost the company $500 per month in advertising expenses.
Should they spend the $500 per month on additional advertising?
Exercise 1
What was Stick-It-Up’s total revenue in August?
Revenue from:
Bulletin Boards 400 x $3.00 $1,200.00
Magnetic White Boards 600 x $4.00 $2,400.00
Combination Boards 250 x $5.00 $1,250.00
Total Revenue $4,850.00
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
3
Exercise 1
What was Stick-It-Up’s total profit in August?
Cost of:
Bulletin Boards 400 x $1.00 $400.00
Magnetic White Boards 600 x $3.00 $1,800.00
Combination Boards 250 x $3.50 $875.00
Total Cost $3,075.00
Profit = Total Revenue - Total Cost = $4,850 - $3,075 = $1,775
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
Exercise 1
What was Stick-It-Up’s total profit in August?
Profit on:
Bulletin Boards 400 x ($3.00-$1.00) $800.00
Magnetic White Boards 600 x ($4.00-$3.00) $600.00
Combination Boards 250 x ($5.00-$3.50) $375.00
Total Profit $1,775.00
Product
Units Sold in
August
Price per
Unit
Cost per Unit
Bulletin Board 400 $3.00 $1.00
Magnetic White Board 600 $4.00 $3.00
Combination Board 250 $5.00 $3.50
Exercise 1
What product contributed the most to revenue in August? What
percentage did it contribute?
Bulletin Boards $1,200.00
Magnetic White Boards $2,400 ...
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2. Profit planning is a function of :
• the selling price of a unit of product ,
• the variable cost of making and selling the
product ,
• the volume of product units sold , and
• in the case of multi-product companies , sales
mix and
• finally total product cost.
3. The cost-volume-profit (CVP) analysis is a :
• management accounting tool
• to show the relationship between these
ingredients of profit planning
• The entire gamut of profit planning is
associated with CVP inter-relationships.
• A widely – used technique to study CVP
relationships is break-even analysis
4. A break even analysis is concerned with :
• the study of revenues and
• costs
• in relation to sales volume and particularly ,
• the determination of that volume of sales at which the
firm`s revenues and total costs will be exactly equal (
or net income = zero) .
Thus, the Break-Even Point (BEP) may be defined as
a point at which the firm`s total revenues are
equal to total costs, yielding zero income .
This is a no-profit , no-loss point.
5. Break even analysis , as a technique ,seeks to provide
answers to the following questions:
• What sales volume is necessary to produce an X amount of
operating profit ?
• What will be the operating profit or loss at X sales volume?
• What profit will result from an X per cent increase in sales
volume?
• What additional sales volume is required to make good an
X percent reduction in selling prices so as to maintain the
current profit level?
• What will be the effect on operating profit if the company's
fixed cost have increased ?
6. BREAK EVEN ANALYSIS
A BEP analysis shows the relationship between the
costs and profits with sales volume.
The sales volume which equates total revenue with
related costs and results in neither profit or loss is
called Break Even Volume or Point (BEP) .
7. Illustration 1 :
How many ice-creams having a unit cost of Rs.2 and
a selling price of Rs.3, must a vendor sell in a fair to
recover the Rs.800 fees paid by him for getting the
stall and additional cost of Rs.400 to set up the stall .
8. BEP (units) = Fixed Cost ÷ Contribution
Margin per unit
BEP (units) = (Entry Fee + Stall Expense) ÷
(Sales Price – Unit Variable Cost)
= (Rs 800 + Rs 400) ÷ ( Rs 3 – Rs 2)
= 1,200 units
BEP (amount) = Fixed Cost ÷ Profit Volume
Ratio (P/V or C/S ratio)
P/V Ratio or C/S Ratio
= Contribution Margin per unit ÷ Selling Price per unit
= Re.1 ÷ Rs. 3 = O.3333 or 33.33 %
= Rs1,200 ÷ 0.3333 = Rs.3,600
9. Variable Cost to Volume Ratio ( V/V ratio)
= 1- C/S ratio
= 1- 0.3333
= 0.6667 or 66.67 %
V/V ratio = Variable Cost ÷ Sales Revenue
= Rs.2 ÷ Rs. 3
= 66.67%
Therefore
P/V or C/S ratio (+) V/V ratio = 100% i.e. 1
10. Margin of Safety Ratio (M/S Ratio)
=( (ASR – BESR) ÷ ASR ) x 100
where ,
ASR = actual sales revenue
BESR = break even sales revenue
If the actual sale in this case is 2,000 units (Rs 6,000)
then
M/S ratio = ((Rs 6,000 - Rs 3,600) ÷ Rs 6,000)*100
= 40 %
11. Profit = [ Margin of safety (amount)] * P/V or C/S ratio
= [ Rs.6,000- Rs 3,600 ] * 0.3333
= [ Rs.2,400 ] * 0.3333
= Rs.800
Profit = [ Margin of Safety (units) ] * Contribution
Margin per unit
= [ 2,000 units – 1,200 units ] * Re.1
= [ 800 units ] * Re.1
= Rs.800
12. Illustration 2:
Sales = 4,000 units @ Rs 10 per unit
Break-even point = 1,500 units
Fixed Cost = Rs 3,000
What is the amount of (a) variable cost (b) profit ?
13. Solution :
BEP (in units) = Fixed Cost ÷ Contribution per unit [C]
1,500 = 3,000 ÷ C
C = 3,000 ÷ 1,500
= Rs 2 per unit
(a) Variable Cost = Selling Price – Contribution
= Rs10 – Rs 2
= Rs 8 per unit
(b) Contribution at sales of 4,000 units is Rs 8,000
Profit = Contribution – Fixed Cost
= Rs 8,000 – Rs 3,000
= Rs 5,000
14. Illustration 3:
Selling Price = Rs 150 per unit
Variable cost = Rs 90 per unit
Fixed Cost = Rs 6,00,000
What is the break even point ?
What is the selling price per unit if break – even
point is 12,000 units ?
15. Solution :
Break even point = Fixed Cost ÷ Contribution per unit
= Rs 6,00,000 ÷ (Rs150- Rs 90)
= 10,000 units
When BEP is at 12,000 the contribution will be :
12,000 = 6,00,000 ÷ C
C = 6,00,000 ÷ 12,000 = Rs 50 per unit
Contribution = Selling Price –Variable Cost
Rs 50= Selling Price – Rs 90
Selling Price =Rs 90+ Rs 50
= Rs 140 per unit
16. Illustration 4:
During the current year, Superhouse Ltd. showed a
profit of Rs.1,80,000 on sale of Rs. 30,00,000. The
variable expenses were Rs. 21,00,000.
You are required to work out :
a) The break even sales at present
b) The break even sale if variable cost increases by
5 per cent.
c) The break even sale to maintain the profit as at
present , if the selling price is reduced by 5 per
cent.
18. a) BEP = FC ÷ PV or CS ratio
PV or CS ratio = Contribution ÷ Sales
= (Sales – Variable Cost) ÷ Sales
= [Rs 30,00,000 – Rs 21,00,000] ÷ Rs
30,00,000
= Rs 9,00,000 ÷ Rs 30,00,000
= 0.30
BEP = FC / PV or CS Ratio
= Rs 7,20,000 ÷ 0.30
= Rs. 24,00,000
19. b) Revised BEP = FC ÷ New PV ratio
New PV Ratio = [ Sales – (Variable Cost + 5 %) ] ÷
Sales
New PV Ratio = [Rs 30,00,000 – Rs 22,05,000 ] ÷
Rs 30,00,000
= Rs 7,95,000 ÷ Rs 30,00,000
= 0.265
Revised BEP = Rs 7,20,000 ÷ 0.265
= Rs. 27,16,981
20. c) If sale is reduced by 5 % = Rs 30,00,000 [ 1 - 0.05]
= Rs 30,00,000 [ 0.95 ]
= Rs. 28,50,000
New PV ratio = [ Rs 28,50,000 – Rs 21,00,000 ] ÷
Rs 28,50,000
= Rs 7,50,000 ÷ Rs 28,50,000
= 0.26316
Desired Volume of Sales
= [FC + Desired Profit] ÷ New PV or New CS ratio
= [Rs 7,20,000 + Rs 1,80,000 ] ÷ 0.26316
= Rs. 34,19,973
21.
22. Garden
Tools
Outdoor
Furniture
Barbecues Outdoor
Lighting
Total
Sales $ 950,000 $ 2,500,000 $ 1,400,000 $ 1,600,000 $ 6,450,000
Less Variable Cost:
Cost of Goods Sold $ 665,000 $ 1,800,000 $ 910,000 $ 640,000 $ 4,015,000
Incentive
Compensation to the
Sales team
$ 95,000 $ 250,000 $ 140,000 $ 160,000 $ 645,000
Miscellaneous
Variable
$ 12,000 $ 13,000 $ 11,000 $ 10,000 $ 46,000
Total VC $ 772,000 $2,063,000 $ 1,061,000 $ 810,000 $ 4,706,000
Less Direct Fixed
Cost:
Sales and Staff
Salaries
$ 75,000 $ 120,000 $ 96,000 $ 103,000 $ 394,000
Product-line Specific
Advertising
$ 20,000 $ 35,000 $ 25,000 $ 10,000 $ 90,000
Total Direct FC $ 95,000 $ 155,000 $ 121,000 $ 113,000 $ 484,000
Illustration 5:
Gilbert and Gibbs, a store sells outdoor products and is interested in using CVP
analysis to analyze its four product lines which include garden tools, outdoor
furniture barbecues and outdoor lightings. The company has done the following
profitability analysis:
23. Product Line Profit $ 83,000 $ 282,000 $ 218,000 $ 677,000 $ 1,260,000
Less Common
Fixed Cost:
Advertising $ 220,000
Utilities $ 35,000
Rent $ 185,000
Management
Salaries
$ 625,000
Other Fixed Costs $ 55,000
Total Common FC $ 1,120,000
Profit $ 140,000
a) What sales should Gilbert and Gibbs attain to reach the break even?
b) Suppose in the coming year management believes that the total sales will increase by 20% ,
what will the impact on over all profitability of the company?
c) Suppose the company believes sales will increase by $ 1,290,000 but expects the increase in
garden tools by $ 258,000, outdoor furniture $ 387,000 , barbecues by $ 516,000 and outdoor
lighting by $ 129,000.Will there be any change in the impact on the company`s over all profitability?
Incase there is a change in the over all profitability of the company give reasons for the same.
d) Suppose Sarah Williams , the store manager , is considering ways to increase profits in the coming
year. Which product-line do you think she should emphasize?
25. Garden
Tools
Outdoor
Furniture
Barbecues Outdoor
Lighting
Total
Sales $ 950,000 $ 2,500,000 $ 1,400,000 $ 1,600,000 $ 6,450,000
P/V Ratio or C/S Ratio = Contribution÷ Sales
= ($ 1,744,000 ÷ $ 6,450,000) = $ 0.2704
BEP Sales = TFC ÷ Contribution Margin
= [$ 484,000+$ 1,120,000]÷ 0.2704
=$ 1,604,000 ÷ 0.2704 = $ 5,931,953
a)
Less Total VC $ 772,000 $2,063,000 $ 1,061,000 $ 810,000 $ 4,706,000
Contribution $ 178,000 $ 437,000 $ 339,000 $ 790,000 $ 1,744,000
26. Suppose in the coming year management believes that the total sales
will increase by 20% , what will the impact on over all profitability of
the company?
Expected Increase in Sales = Current Sales x % Increase in Sales
Expected Increase in Profits =Increase in Sales x C/S Ratio
b)
27. Suppose in the coming year management believes that the total sales
will increase by 20% , what will the impact on over all profitability of
the company?
Expected Increase in Sales = $ 6,450,000 x 0.20 = $ 1,290,000
Expected Increase in Profits =$ 1,290,000 x 0.2704 = $ 348,816
b)
28. Garden
Tools
Outdoor
Furniture
Barbecues Outdoor
Lighting
Total
Expected
Increase in
Sales
Contribution
Margin
Ratio
Increase in
Profit
c) Suppose the company believes sales will increase by $ 1,290,000 but expects
the increase in garden tools by $ 258,000, outdoor furniture $ 387,000 , barbecues
by $ 516,000 and outdoor lighting by $ 129,000.Will there be any change in the
impact on the company`s over all profitability? Incase there is a change in the over
all profitability of the company give reasons for the same.
29. Garden
Tools
Outdoor
Furniture
Barbecues Outdoor
Lighting
Total
Expected
Increase in
Sales
$ 258,000 $ 387,000 $ 516,000 $ 129,000 $ 1,290,000
c) Suppose the company believes sales will increase by $ 1,290,000 but expects
the increase in garden tools by $ 258,000, outdoor furniture $ 387,000 , barbecues
by $ 516,000 and outdoor lighting by $ 129,000.Will there be any change in the
impact on the company`s over all profitability? Incase there is a change in the over
all profitability of the company give reasons for the same.
Contribution
Margin
Ratio
0.1874 0.1748 0.2421 0.4938 -
Increase in
Profit
$ 48,349 $ 67,648 $ 124,924 $ 63,700 $ 304,621
30. OPERATING LEVERAGE AND RISK
Operating Leverage is a relative change in profits due to a change in sales.
A high degree of leverage implies that a large change in profits occurs due
to a relatively small change in sales.
Two types :
Financial Leverage : borrowed funds
Operating Leverage : use of fixed cost in
operation of business
31. • A firm will have no operating leverage if its ratio of fixed cost to total
cost is nil.
• For such a firm , a given change in sales would produce same percentage
change in the operating profit or EBIT.
• If a firm which has fixed costs ,would have operating leverage :
A) higher operating leverage if the total cost have higher percentage of fixed
costs.
B) operating leverage increases with fixed cost.
C) operating profit of a highly leveraged (operating) firm would increase at a
faster rate for any given increase in sales .
D) if sales fall , the firm with a high operating leverage would suffer more loss
than the firm with no or low operating leverage.
32. • Airline Industry: high fixed cost – profit is highly sensitive to the number
of passengers carried.
• Retail Firm: very high variable cost and negligible fixed cost.
• Profit fluctuation occurring due to high fixed costs are referred to as
operating risk.
33. • Degree of Operating Leverage is the % change in operating profits
resulting from a % change in sales.
• DOL= % change in operating profit ÷ % change in sales
• DOL= ∆EBIT/ EBIT ÷ ∆Sales/ Sales
here EBIT = operating profit
