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- 1. Chapter Nine COST VOLUME PROFIT ANALYSIS (CVP)
- 2. Outline <ul><li>The usage of CVP analysis </li></ul><ul><li>The relationships between cost volume and profit </li></ul><ul><li>Concept of break-even point (BEP) </li></ul><ul><li>Techniques in CVP analysis </li></ul><ul><li>Application of CVP analysis </li></ul>
- 3. CVP Analysis 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. The usage of CVP analysis <ul><li>Setting the selling price. </li></ul><ul><li>Determining product mix. </li></ul><ul><li>Maximizing the use of production facilities. </li></ul><ul><li>Evaluating the impact of changes in costs. </li></ul>
- 5. 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>
- 6. Relationship between fixed costs and activity Costs Activity (unit) Total fixed cost 10 20 30 0
- 7. Relationship between variable costs and activity Costs Activity (unit) Total variable cost 10 20 30 0
- 8. Contribution Margin Concept 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. Contribution Margin Sales revenue RM 100,000 Variable cost 60,000 Contribution margin 40,000 Fixed Cost 25,000 Income from operation 15,000
- 10. Unit Contribution Margin Selling price per unit RM 10.00 Variable cost per unit 6.00 Contribution margin per unit 4.00
- 11. Contribution Margin Ratio Sales - Variable costs ----------------------------- Sales RM100,000 - RM60,000 -------------------------------- RM100,000 X 100 = 40%
- 12. Break-Even Point Concept(BEP) 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. 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. 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
- 15. RM’000 Unit 0 Fixed costs Total costs Sales revenue 1000 500 600 4,000 2,000 2,400 450
- 16. Techniques in CVP analysis <ul><li>Contribution margin approach </li></ul><ul><li>Mathematical Equation approach </li></ul><ul><li>Graphical approach </li></ul>
- 17. Contribution margin approach Break-Even Point Target profit In units In RM In units In RM
- 18. Calculating BEP: In Units 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
- 19. Calculating BEP: In Units 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
- 20. Calculating BEP: In RM BEP (RM) = 60,000 12.00 – 7.20 / 12.00 = 60,000 40% = RM150,000 BEP In RM = Total Fixed Costs ------------------------------- Contribution Margin Ratio
- 21. BEP Proof: 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
- 22. Calculating Target Income: In Units 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
- 23. Calculating Target Income: In Units 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 =
- 24. Calculating Target Income: In RM 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 =
- 25. Target Income Proof: 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
- 26. Mathematical equation approach: BEP in units BEP, when net income = 0 When sales = total costs (variable & fixed) Therefore, the equation: Sales = Variable costs + Fixed Costs
- 27. Mathematical equation approach: BEP in units 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
- 28. Mathematical equation approach: BEP in RM 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
- 29. BEP Proof: 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 Total fixed costs 20,000 Net income 0
- 30. Mathematical equation approach: Target income in units When sales = total costs (variable & fixed) + target income Therefore, the equation: Sales = Variable costs + Fixed Costs + Target Income
- 31. Mathematical equation approach: Target income in units 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
- 32. Mathematical equation approach: Target income in RM 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
- 33. Target Income Proof: 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 Total fixed costs 20,000 Net income 15,000
- 34. 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>
- 35. Margin of safety 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
- 36. Margin of safety: In units / RM 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
- 37. Changes in selling price 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
- 38. Changes in variable costs 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
- 39. Changes in fixed costs 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
- 40. Thank You

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