22-08-2012, 10:25 AM
Cost-Volume-Profit (CVP) Analysis
Cost-Volume-Profit (CVP) Analysis.ppt (Size: 165 KB / Downloads: 37)
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.
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
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.
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 ?
What sales volume is needed to achieve the budgeted profit?
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) .
The BEP can be determined by two methods :
I Algebraic Methods :
(a) Contribution margin Approach
(b) Equation Technique
II Graphic Presentation :
(a) Break Even Chart
(b) Profit Volume Graph
I Algebraic Methods :
Contribution margin Approach
ILLUSTRATION 1 :
How many ice-creams having a unit variable 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 .
BEP (units) = Fixed Cost / Contribution
Margin per unit
BEP (units) = (Entry Fee + Stall Expense) /
(Sales Price – Unit Variable Cost)
= (800 + 400) / ( 3 - 2)
= 1,200 units
BEP (amount) = Fixed Cost / Profit Volume
Ratio (P/V ratio)
= 1,200 / 0.3333 = Rs.3,600
P/V Ratio = Contribution Margin per unit / Selling
Price per unit
= Re.1 / Rs. 3 = O.3333 or 33.33 %
Variable Cost to Volume Ratio ( V/V ratio)
= 1- P/V 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 ratio (+) V/V ratio = 100% i.e. 1
Margin of Safety Ratio (M/S Ratio) = (ASR – BESR) / ASR
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 = (6,000 - 3,600) / 6,000
= 40 %
Profit = [ Margin of safety (amount)] * P/V ratio
= [ Rs.2,400 ] * 0.3333 = Rs.800
Profit = [ Margin of Safety (units) ] * Contribution Margin per unit
= [ 800 units ] * Re.1 = Rs.800