The document discusses cost volume profit (CVP) analysis, which involves separating costs into fixed and variable categories. It defines concepts like contribution, profit volume ratio, and break-even analysis to determine the output level where total revenue equals total costs. Examples are provided to illustrate how to use CVP analysis to make managerial decisions around pricing, production levels, product mix, and whether to accept or drop product lines.

1. COST VOLUME PROFIT
ANALYSIS
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2. Assumptions of CVP
1. All costs is bifurcated into Fixed & Variable
2. Fixed costs remain constant with output
changes
3. Variable cost fluctuates directly with output
4. Production d l
4 P d ti and sales remains identical.
i id ti l
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3. Contribution
Contribution is defined as the difference
between Sales Revenue and Variable Cost of
this sale i.e.
Contribution = Sales – Variable cost
= Fixed cost + Profit
C o n tri b u ti o n
C o n tri b u ti o n p e r u nit / f a ct o r 
N o . o f U nit s / F a ct o r
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4. Profit Volume Ratio
 P r o fit Contribution
P / V Ratio  
Sales Sales
Contribution S  V
P / V Ratio  
Sales S
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5. Break Even Analysis
• Break even point is that level of output at
p p
which sales are exactly equal to meet the total
cost ( Fixed & Variable).
)
Fixed Cost
Break Even Output 
Contribution Per Unit
Fixed Cost
Break Even Sales 
P / V Ratio
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6. Illustration 1
• Sales@ Rs. 100 per unit : Rs. 200,000
• Variable Cost : Rs. 120,000
• Fixed Cost : Rs. 40,000
Compute
• Contribution
• Profit
P fit
• Break Even Point
• Margin f S f
M i of Safety
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7. Other Break Even Points
• Cost Break Even Point
• Where two Plant Costs are breaking even
• Cash Cost Break Even Point
• Where only Cash Cost is met by the sales
• Composite Break Even Point
• Where a Product Mix can get the break even
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8. Illustration 2
Product A Product B
Selling Price (Rs. Per unit) 200/‐ 500/‐
Material ( Rs. 20 per litre) 40/‐ 160/‐
Labour (Rs. 10 per hour) 50/‐ 100/‐
Variable Overheads 20/‐ 40/‐
Sales (Rs.) 60,000
25,000
Fixed Cost (Rs.)
( ) 15000
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9. Application of Marginal Costing
1. Fixation of selling p
g price
2. Maintaining desired profit level
• Absolute level
• Percent margin
3.
3 Accepting price less than total cost
4. Decision making choices
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10. Illustration 3
From th available i f
F the il bl information, i di t th no. of
ti indicate the f
units to be sold if stiff competition warrants 10%
reduction i selling price maintaining th current
d ti in lli i i t i i the t
profit level.
Present sales turnover (30,000 units) 3,00,000
Variable Cost (30,000 units)
(30 000 1,80,000
1 80 000
Fixed Cost 70,000 2,50,000
Net Profit 50,000
50 000
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11. Managerial Decision Analysis
1. Determination of Sales mix
2. Exploring New markets
3.
3 Discontinuation of product line
4. Make or buy decision
5. Shut down or continue
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12. Sales Mix determination
Product A
Product A Product B
Product B Product C
Product C
Selling Price (Rs. Per unit) 30.00
40.00 50.00
Material ( Rs. 8 per kg.)
Material ( Rs 8 per kg ) 5 60
5.60 3 20
3.20 12 00
12.00
Labour (Rs. 8 per hour)
8.00
16.00 12.00
Variable Overheads
Variable Overheads 8 60
8.60 15 20
15.20 13 40
13.40
Fixed Cost (Rs.) 50,000
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13. Sales Mix determination
• Only 10,400 Kg. of Raw Material is available
y , g
for the production of all the Products
• The market demand is 8000 units of Product
A, 6000 units of Product B and 5000 units of
Product C.
Compute the suitable product mix and maximum
possible profit
profit.
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14. Exploring new market
A firm sells its product at Rs. 40/- at 80% capacity
of 5,000 units per month. It has fixed cost of Rs.
80,000 per month. The variable cost of its product
is Rs. 15/-.
It has got an export order from a Japanese firm to
purchase 1,250 units at a special price of Rs. 30/-.
However, it will lead to an increase in fixed costs
by Rs. 10,000. Should the export order be
accepted? narain@fms.edu

15. Dropping a Product Line
Marginal Cost Statement
Product A Product B Total
Sales 30,000 60,000 90,000
g
Less: Marginal cost of sale
Direct material 12000 25000 37000
Direct labour 8000 10000 18000
Variable factory overheads
Variable factory overheads 2000 3000 5000
variable selling overheads 1000 3000 4000
Total 23000 41000 64000
Contribution 7 000 19 000 26 000
7,000 19,000 26,000
Less: Fixed costs
Factory+Admn.+Selling 9000 12000 21000
Profit ‐ 2,000 7,000 5,000
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Should Product A be dropped due to its losses?

16. Sourcing & Continuation
The manufacturing cost associated with the
product based on an annual production of 5,000
units is as follows:
Particulars Rs.
Direct Materials 15,000
Direct Labour 11,500
Variable Overheads 9,500
Fixed Overheads 14,000
Total cost of manufacturing 50,000
Should the firm source this component form outside at Rs. 9/-. When should this
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firm shut down its operations?