cvp analysis by Iqbal jabed
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Cost Volume Profit Analysis
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Cost Volume Profit AnalysisCost Volume Profit Analysis
Introduction Introduction The Profit FunctionThe Profit FunctionBreakeven AnalysisBreakeven AnalysisDifferential Cost AnalysisDifferential Cost Analysis
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IntroductionIntroduction
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The Profit EquationThe Profit Equation
OperatingProfit
TotalRevenue
TotalCosts = –
Operating profit equals total revenue Operating profit equals total revenue less total costs.less total costs.
π = TR – TC
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The Profit EquationThe Profit Equation
TotalRevenue
Average SellingPrice Per Unit
Units ofOutput
= ×
TR = P × Q
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The Profit EquationThe Profit Equation
TotalCosts
Variable CostsPer Unit
Units ofOutput
= ×
TC = (V × Q) + F
FixedCosts+
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The Profit EquationThe Profit Equation
Now, we’ll expand our Now, we’ll expand our original equation for profits!original equation for profits!
(P × Q) - [(V × Q) + F]=π
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The Profit EquationThe Profit Equation
Now, we’ll expand our Now, we’ll expand our original equation for profits!original equation for profits!
(P × X) - [(V × X) + F]=
(P – V)Q – F=
ππ
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ExampleExample
Here is the information from the Mr. X Bikes:
Total Per Unit PercentSales (500 bikes) 250,000$ 500$ 100%Less: variable expenses 150,000 300 60%Contribution margin 100,000$ 200$ 40%
Less: fixed expenses 80,000 Net income 20,000$
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Finding Target VolumesFinding Target Volumes
The formula to find a volume expressed in units for a target profit is . . .
TargetVolume(units)
=Fixed costs + Target profit
Contribution margin per unit
How many bikes must Mr X sell to earn an annual profit of $100,000?
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Target Volume in Sales DollarsTarget Volume in Sales Dollars
The equation for finding the target volume in sales dollars is . . .
Fixed costs + Target profit Contribution margin ratioContribution margin ratio
TargetVolume(sales $)
=
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Finding the Break-Even PointFinding the Break-Even Point
The Break-Even Point Break-Even Point is the volume level where profits equal zero.
� To find the break-even point in unitsunits, we use the target volume in units target volume in units equation and set the profit to zero.
� To find the break-even point in sales dollarssales dollars, we use the target volume in sales dollars target volume in sales dollars equation and set the profit to zero.
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Break-Even in Units and dollarsBreak-Even in Units and dollars
Let’s use the Mr X Bikes information again.
Total Per Unit PercentSales (500 bikes) 250,000$ 500$ 100%Less: variable expenses 150,000 300 60%Contribution margin 100,000$ 200$ 40%
Less: fixed expenses 80,000 Net income 20,000$
Contribution margin ratio
Contribution margin per unit
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Break-Even in UnitsBreak-Even in Units
Break-EvenVolume(units)
=Fixed costs
Contribution margin per unit
= $80,000 200
= 400 units
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Break-Even in Sales DollarsBreak-Even in Sales Dollars
= $200000
$80,000 .40
Fixed costs Contribution margin ratio
Break-EvenVolume(sales $)
=
=
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Graphic PresentationGraphic PresentationConsider the following information for X Bikes:
Income 300 units
Income 400 units
Income 500 units
Sales 150,000$ 200,000$ 250,000$Less: variable expenses 90,000 120,000 150,000 Contribution margin 60,000$ 80,000$ 100,000$Less: fixed expenses 80,000 80,000 80,000 Net income (loss) (20,000)$ -$ 20,000$
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50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
- 100 200 300 400 500 600 700 800
Graphic PresentationGraphic Presentation
Volume per period (X)
Dol
lars
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50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
- 100 200 300 400 500 600 700 800
Graphic PresentationGraphic Presentation
Break-even point
Dol
lars
Volume per period (X)
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Using CVP to Analyze Different Using CVP to Analyze Different Cost StructuresCost Structures
Operating leverageOperating leverage
Margin of safety Margin of safety
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Operating leverageOperating leverage
Is a measure of how sensitive net operating income is to percentage change in sales.
Degree of Operating leverage Operating leverage = = Contribution margin
Net operating income
$100000 $20000
==
= 5= 5
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Margin of SafetyMargin of SafetyExcess of projected (or actual) sales over the break-
even volume.The amount by which sales can fall before the company
is in the loss area of the break-even graph.
Sales Volume - Break even sales volumeSales Volume - Break even sales volume Margin of Safety =Margin of Safety =
= = $250000 - 250000 - Fixed costs Fixed costs
CM ratioCM ratio= $250000 - = $250000 - $80000 $80000
.4.4
= $50000 = $50000
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Thanks