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    CVP Analysis

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    rangoli maheshwari
    CVP (cost-volume-profit) analysis examines the relationship between sales volume, costs, and profits. It distinguishes between fixed and variable costs. Variable costs change with activity level while fixed costs do not. CVP is used to calculate the break-even point, where revenues equal total costs and profits are zero. It can also be used to determine the sales volume needed to achieve a target profit level. Sales mix analysis examines how different product combinations can impact break-even levels.

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    CVP Analysis

    Uploaded by

    rangoli maheshwari
    22 views21 pages
    CVP (cost-volume-profit) analysis examines the relationship between sales volume, costs, and profits. It distinguishes between fixed and variable costs. Variable costs change with activity level while fixed costs do not. CVP is used to calculate the break-even point, where revenues equal total costs and profits are zero. It can also be used to determine the sales volume needed to achieve a target profit level. Sales mix analysis examines how different product combinations can impact break-even levels.

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    CVP_Analysis

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    CVP (cost-volume-profit) analysis examines the relationship between sales volume, costs, and profits. It distinguishes between fixed and variable costs. Variable costs change with activity level while fixed costs do not. CVP is used to calculate the break-even point, where revenues equal total costs and profits are zero. It can also be used to determine the sales volume needed to achieve a target profit level. Sales mix analysis examines how different product combinations can impact break-even levels.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    22 views21 pages

    CVP Analysis

    Uploaded by

    rangoli maheshwari
    CVP (cost-volume-profit) analysis examines the relationship between sales volume, costs, and profits. It distinguishes between fixed and variable costs. Variable costs change with activity level while fixed costs do not. CVP is used to calculate the break-even point, where revenues equal total costs and profits are zero. It can also be used to determine the sales volume needed to achieve a target profit level. Sales mix analysis examines how different product combinations can impact break-even levels.

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    © All Rights Reserved
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    Download as pptx, pdf, or txt
    of 21

    CVP ANALYSIS

    FORMAT OF COST SHEET


    VARIABLE AND FIXED COST BEHAVIOR
    AAvariable
    variablecost
    cost AAfixed
    fixedcost
    costisis
    changes
    changesinindirect
    direct not
    notimmediately
    immediately
    proportion
    proportiontotochanges
    changes affected
    affectedby
    bychanges
    changes
    in
    inthe
    thecost-driver
    cost-driverlevel.
    level. in
    inthe
    thecost-driver.
    cost-driver.

    Think
    Thinkof
    ofvariable
    variable Think
    Thinkofoffixed
    fixedcosts
    costs
    costs
    costson
    onaaper-unit
    per-unitbasis.
    basis. on
    onaatotal-cost
    total-costbasis.
    basis.

    The
    Theper-unit
    per-unitvariable
    variable Total
    Totalfixed
    fixedcosts
    costsremain
    remain
    cost
    costremains
    remainsunchanged
    unchanged unchanged
    unchangedregardless
    regardlessof
    of
    regardless
    regardlessof
    ofchanges
    changesinin changes
    changesin inthe
    thecost-driver.
    cost-driver.
    the
    thecost-driver.
    cost-driver.
    CVP Cost-volume-profit (CVP) analysis is the study of the effects of
    SCENAR output volume on revenue (sales), expenses (costs), and net
    income (net profit).
    IO Per Unit Percentage of
    Sales
    Selling price $1.50 100%
    Variable cost of each item 1.20 80
    Selling price less variable cost $ .30 20%

    Monthly fixed expenses:


    Rent $3,000
    Wages for replenishing and
    servicing 13,500
    Other fixed expenses 1,500
    Total fixed expenses per month $18,000
    BREAK-EVEN POINT
    The break-even point is the level of sales at which revenue equals expenses and net
    income is zero.

    Sales - Variable expenses - Fixed expenses = Zero net income (break-even point)
    CONTRIBUTION MARGIN
    METHOD
    Contribution margin Contribution margin ratio
    Per Unit Per Unit %
    Selling price $1.50 Selling price 100
    Variable costs 1.20 Variable costs 80
    Contribution margin $ .30 Contribution margin 20

    $18,000 fixed costs ÷ $.30


    = 60,000 units (break even)
    CONTRIBUTION MARGIN
    METHOD
    60,000 units × $1.50 (Sales Price) = $90,000
    in sales to break even
    Or

    $18,000 fixed costs


    ÷ 20% (contribution-margin percentage)
    = $90,000 of sales to break even
    EQUATION METHOD
    Let N = number of units to be sold to break even.

    Variable Fixed
    Sales – Expenses – Expenses = net income
    $1.50N – $1.20N – $18,000 = 0
    $.30N = $18,000
    N = $18,000 ÷ $.30
    N = 60,000 Units
    EQUATION METHOD
    Let S = sales in dollars
    needed to break even.

    S – .80S – $18,000 = 0
    .20S = $18,000
    S = $18,000 ÷ .20
    S = $90,000

    Shortcut formulas:
    Break-even = fixed expenses = $18,000 = 60,000
    volume in units unit contribution margin .30

    Break-even = fixed expenses = $18,000 = $90,000


    volume in sales contribution margin ratio .2
    COST-VOLUME-PROFIT GRAPH

    $150,000 A
    Net Income
    138,000 Sales C
    120,000 Net Income Area
    Dollars
    D
    90,000 Variable
    Total Break-Even Point Expenses
    60,000Expenses 60,000 units
    Net Loss
    30,000 or $90,000
    Area
    18,000 B

    0 10 20 30 40 50 60 70 80 90 100

    Units (thousands)
    TARGET NET PROFIT
    Managers use CVP analysis to determine the total sales, in
    units and dollars, needed to reach a target net profit.

    Target sales $1,440 per month


    – variable expenses is the minimum
    – fixed expenses acceptable net income.
    target net income
    TARGET NET PROFIT
    Target sales volume in units =
    (Fixed expenses + Target net income) ÷ Contribution
    margin per unit

    Selling price $1.50


    Variable costs 1.20
    Contribution margin per unit $ .30

    ($18,000 + $1,440) ÷ $.30 = 64,800 units

    Target sales dollars = sales price X sales volume in units


    Target sales dollars = $1.50 X 64,800 units = $97,200.
    TARGET NET PROFIT
    Contribution margin ratio
    Per Unit %
    Selling price 100
    Variable costs 80
    Contribution margin 20

    Target sales volume in dollars =


    Fixed expenses + target net income
    contribution margin ratio

    Sales volume in dollars =


    18,000 + $1,440 = $97,200
    .20
    CONTRIBUTION MARGIN
    AND GROSS MARGIN
    Sales price – Cost of goods sold = Gross margin

    Sales price - all variable expenses =


    Contribution margin

    Per Unit
    Selling price $1.50
    Variable costs (acquisition cost) 1.20
    Contribution margin and
    gross margin are equal $ .30
    CONTRIBUTION MARGIN AND
    GROSS MARGIN
    Suppose the firm paid a commission of $.12 per unit sold.

    Contribution Gross
    Margin Margin
    Per Unit Per Unit
    Sales $1.50 $1.50
    Acquisition cost of unit sold 1.20 1.20
    Variable commission .12
    Total variable expense $1.32
    Contribution margin .18
    Gross margin $.30
    SALES MIX ANALYSIS
    Sales mix is the relative proportions or combinations of
    quantities of products that comprise total sales.
    Ramos Company Example
    Wallets Key Cases
    (W) (K) Total

    Sales in units 300,000 75,000 375,000


    Sales @ $8 and $5 $2,400,000 $375,000 $2,775,000
    Variable expenses
    @ $7 and $3 2,100,000 225,000 2,325,000
    Contribution margins
    @ $1 and $2 $ 300,000 $150,000 $ 450,000
    Fixed expenses 180,000
    Net income $ 270,000
    SALES MIX ANALYSIS
    Let K = number of units of K to break even, and
    4K = number of units of W to break even.

    Break-even point for a constant sales mix


    of 4 units of W for every unit of K.
    sales – variable – fixed = zero net income
    expense expenses
    [$8(4K) + $5(K)] – [$7(4K) + $3(K)] – $180,000 = 0
    32K + 5K - 28K - 3K - 180,000 = 0
    6K = 180,000
    K = 30,000
    W = 4K = 120,000
    30,000K + 120,000W = 150,000 units.
    If the company sells only key cases:
    break-even point = fixed expenses
    contribution margin per unit
    = $180,000
    $2
    = 90,000 key cases

    If the company sells only wallets:


    break-even point = fixed expenses
    contribution margin per unit
    = $180,000
    $1
    = 180,000 wallets
    Suppose total sales were equal to the budget of 375,000 units. However, Ramos
    sold only 50,000 key cases and 325,000 wallets. What is net income?

    Ramos Company Example


    Wallets Key Cases
    (W) (K) Total

    Sales in units 325,000 50,000 375,000


    Sales @ $8 and $5 $2,600,000 $250,000 $2,850,000
    Variable expenses
    @ $7 and $3 2,275,000 150,000 2,425,000
    Contribution margins
    @ $1 and $2 $ 325,000 $100,000 $ 425,000
    Fixed expenses 180,000
    Net income $ 245,000
    NONPROFIT APPLICATION
    Suppose a city has a $100,000 lump-sum budget appropriation to conduct a
    counseling program. Variable costs per prescription are $400 per patient per day.
    Fixed costs are $60,000 in the relevant range of 50 to 150 patients.

    If the city spends the entire budget


    appropriation, how many patients
    can it serve in a year?

    Variable + Fixed
    Sales = expenses + expenses
    $100,000 = $400N + $60,000
    $400N = $100,000 – $60,000
    N = $40,000 ÷ $400
    N = 100 patients
    NONPROFIT APPLICATION
    If the city cuts the total budget appropriation by
    10%, how many Patients can it serve in a year?

    Budget after 10% Cut


    $100,000 X (1 - .1) = $90,000

    Variable + Fixed
    Sales = expenses + expenses
    $90,000 = $400N + $60,000
    $400N = $90,000 – $60,000
    N = $30,000 ÷ $400
    N = 75 patients

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