Session 10-11, CVP Analysis.pptx [Repaired]

7/29/2019 Session 10-11, CVP Analysis.pptx [Repaired]

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Cost-Volume-Profit Analysis

Anupam MitraACMA

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METHODS OF COSTING

Two methods generally used in practice1. Absorption costing

2. Marginal costing

Absorption costing is a principle whereby fixed as well as variable costs are allocatedto cost units.

Marginal costing is a principle whereby variable costs are charged to cost units andfixed costs attributable to the relevant period is written off in full againstContribution for that period.

In marginal costing costs are classified into fixed and variable costs.

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FORMULA USED IN MARGINAL COSTING

SALES= VARIABLE COST + FIXED COST + PROFIT

SALES VARIABLE COST= CONTRIBUTION

SALES VARIABLE COST= FIXED COST + PROFIT

CONTRIBUTION= FIXED COST + PROFIT

CONTRIBUTION FIXED COST= PROFIT

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Statement of Profit under different methods

Under Marginal costing

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Sales 250000Less: variable expensesVariable production cost -100000Variable selling cost -50000Contribution margin 100000Less: Fixed expensesFixed production cost -50000Fixed selling cost -50000Net income 0


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Statement of Profit under different methods

Under Absorption costing

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Sales 250000Less: Production expensesVariable production cost -100000Fixed production cost -50000Gross profit 100000Less: Selling expensesVariable selling cost -50000Fixed selling cost -50000Net income 0


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The Break-Even PointThe break-even point is the point in the volume of activity

where the organizations revenues and expenses are equal.

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Sales 350000

Less: variable expenses 200000Contribution margin 150000Less: fixed expenses 150000

Net income 0


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b h


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Contribution-Margin ApproachConsider the following information developed by the

accountant for Cross Pens

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Total Per Unit Percent

Sales (500 cross pens) 500000 1000 100%Less: variable expenses 400000 800 80%Contribution margin 100000 200 20%Less: fixed expenses 80000Net income 20000

C ib i i A h


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Total Per Unit Percent

Sales (500 cross pens) 500000 1000 100%Less: variable expenses 400000 800 80%Contribution margin 100000 200 20%Less: fixed expenses 80000Net income 20000

Contribution-Margin ApproachFor each additional cross pen sold, company generatesRs 200 in contribution margin.

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Contribution-Margin Approach

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Fixed expensesUnit contribution margin =

Break-even point(in units)

Rs 80,000Rs 200

= 400 cross pens

Total Per Unit PercentSales (500 cross pens) 500000 1000 100%Less: variable expenses 400000 800 80%Contribution margin 100000 200 20%Less: fixed expenses 80000Net income 20000


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Contribution-Margin ApproachHere is the proof!

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Total Per Unit PercentSales ( 400 cross pens) 400000 1000 100%Less: variable expenses 320000 800 80%Contribution margin 80000 200 20%Less: fixed expenses 80000Net income 0

400 1000 = 400,000 400 800 = 320,000


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Contribution Margin RatioCalculate the break-even point in Rupees rather than units by using the

contribution margin ratio.

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Contribution marginSales = CM Ratio

Fixed expenseCM Ratio

Break-even point(in sales rupees)=

b


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Contribution Margin Ratio

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Total Per Unit PercentSales (400 cross pens) 400000 1000 100%Less: variable expenses 320000 800 80%Contribution margin 80000 200 20%

Less: fixed expenses 80000Net income 0

Rs 80,00020% 400,000 sales=


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Equation Approach

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Sales revenue Variable expenses Fixed expenses = Profit

Unitsalesprice

Salesvolumein units

Unit

variableexpense

Salesvolumein units

(1000 X) (800 X) 80,000 = 0

(200X) 80,000 = 0

X = 400 cross pens

C l C


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Conceptual Cases1. Avon company manufacturers nylon purses. VC is Rs 37 per purse, Selling Price Rs 55,

Fixed Cost Rs 41,400.(a) What is the P/V Ratio

(b) How many purse the company sell to break even(c) If the company sales 6,000 purse what is the amount of profit.

2. Super Toys Ltd. Manufacturers mechanical Toys. Fixed cost Rs 2,70,000 per year. Variablecost per toy Rs 23 & Selling Price per Toy is Rs 50.

(a) How many Toys must be sold to reach break even.

(b) If 16,000 toys are sold in a year how much profit will be earned.(c) If variable cost decrease to Rs 20 per toy, Fixed cost & Selling Price remains same, what

will be new BEP Units.

3. Suraj Mehta sells pottery items at a regional craft fair. His Fixed Cost is Rs 4,325. SellingPrice Rs 6.50 p.u and Variable Cost is Rs 4.00 p.u

(a) How many pieces of pottery must he sells to cover his expenses(b) If he wants to earn Rs 7,000 profits, how many pottery must he sells?

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Target Net ProfitWe can determine the number of cross pens that

Company must sell to earn a profit of Rs 100,000 usingthe contribution margin approach.

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Fixed expenses + Target profitUnit contribution margin =

Units sold to earnthe target profit


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Equation Approach

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Sales revenue Variable expenses Fixed expenses = Profit

(Rs 1000 X) (Rs 800 X)

(Rs 200 X)

X = 900 Cross pens

Rs 80,000 = Rs 1,00,000

= Rs 1,80,000


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Applying CVP Analysis

Safety Margin

The difference between budgeted sales revenue and breakeven sales revenue.

The amount by which sales can drop before losses begin tbe incurred.

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Safety MarginCompany has a break-even point of Rs 400,000. If actual sales are Rs 5,00,000, the safety

margin is Rs 1,00,000 or 100 cross pens.

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Break-even

sales400 units

Actual sales500 units

Sales 400000 500000Less: variable expenses 320000 400000Contribution margin 80000 100000

Less: fixed expenses 80000 80000Net income 0 20000

Changes in Fixed Costs


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Changes in Fixed Costs Company is currently selling 500 cross pens per month. The owner believes that an increase of Rs 10,000 in the

monthly advertising budget, would increase pen sales to 5units.

Should we authorize the requested increase in the advertisbudget?

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Current Sales(500 Pens)

Proposed Sales(540 Pens)

Sales 500000 540000Less: variable expenses 400000 432000Contribution margin 100000 108000Less: fixed expenses 80000 90000Net income 20000 18000


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80,000 + 10,000 advertising = 90,000

540 units 1000 per unit = 540000



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Current Sales

(500 Pens)

Proposed Sales

(540 Pens)Sales 500000 540000Less: variable expenses 400000 432000Contribution margin 100000 108000

Less: fixed expenses 80000 90000Net income 20000 18000

Ch i U it C t ib ti M i


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Changes in Unit Contribution MarginBecause of increases in cost of raw materials, Companys variable cost

per unit has increased from Rs 800 to Rs 810 per surf board. With no

change in selling price per unit, what will be the new break-evenpoint?

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($1000 X) ($810 X) $80,000 = $0

X = 422 units(rounded)

Predicting Profit Given Expected Volume


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Predicting Profit Given Expected Volume

In the coming year, companys owner expects to sell 525 pens. The unitcontribution margin is expected to be Rs 190, and fixed costs ar

expected to increase to Rs 90,000.

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($190 525) $90,000 = X

X = $9,750 profit

X = $99,750 $90,000

Total contribution - Fixed cost = Profit


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CVP Analysis with Multiple ProductsFor a company with more than one product, sales mix is the relativ

combination in which a companys products are sold. Different products have different selling prices, cost structures, an

contribution margins.

Lets assume Company sells cross pens and parker pens andsee how we deal with break-even analysis.

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CVP Analysis with Multiple Products


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CVP Analysis with Multiple ProductsCompany provides us with the following information:

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Description Selling Price

UnitVariable

Cost

UnitContribution

MarginNumber of Pens

Cross 1000 800 200 500

Parker 800 250 550 300Total sold 800

DescriptionNumber of

pens % of Total

Cross 500 62.5% (500 800)Parker 300 37.5% (300 800)Total sold 800 100.0%

CVP A l i ith M lti l P d t


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Weighted-average unit contribution margin

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DescriptionContribution

Margin % of TotalWeighted

Contribution

Cross 200 62.5% 125.00 Parker 550 37.5% 206.25 Weighted-average contribution margin 331.25

200 62.5%



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Break-even point

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Break-evenpoint =

Fixed expensesWeighted-average unit contribution margin

Break-evenpoint =

Rs 170,000Rs 331.25

Break-even

point= 513 combined unit sales

CVP A l i i h M l i l P d


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Break-even point

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Break-evenpoint =

513 combined unit sales

DescriptionBreakeven

Sales % of TotalIndividual

SalesCross 513 62.5% 321

Parker 513 37.5% 192 Total units 513

C t St t d O ti L


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Cost Structure and Operating Leverage

The cost structure of an organization is the relativeproportion of its fixed and variable costs.

Operating leverage is . . .

the extent to which an organization uses fixed costs in its coststructure. greatest in companies that have a high proportion of fixed

costs in relation to variable costs.

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Measuring Operating Leverage

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Contribution marginNet income

Operating leveragefactor =

Actual sales

500 PensSales 250000Less: variable expenses 150000Contribution margin 100000Less: fixed expenses 80000Net income 20000

Rs100,000Rs20,000 = 5

Measuring Operating Leverage


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Measuring Operating Leverage A measure of how a percentage change in sales will affect

profits. If Company increases its sales by 10%, what wibe the percentage increase in net income?

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Percent increase in sales 10%Operating leverage factor 5

Percent increase in profits 50%

Formulas at a Glance :


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1. SALES= VARIABLE COST + FIXED COST + PROFITSALES VARIABLE COST= FIXED COST + PROFIT= CONTRIBUTIONS VC = FC + P = C

2. Profit / Volume Ratio = Contribution/Sales= FC + P/ S = S-VC/S

= Difference in Profits/ Difference in Sales

3. Break Even PointUnits = FC/Contribution p.uSales (Rs) = FC/ P.V Ratio = BEP (Units) X Selling Price p.u

4. Margin of Safety = Actual Sales- Break Even Sales= A.S B.E.S/ A.S= Profit/ PV Ratio

= C- FC/PV Ratio= Sales (FC/PV Ratio)

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5. If Target Profit is given, Find Sales

Required Sales = FC + Required ProfitPV Ratio

Required Selling Units = FC + Required Profit

Contribution p.u6. If Target Sales is given, Find Profit.Contribution = Given Sales X PV Ratio = xxxx

FC + P = xxxxP = xxxx - FC

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Thank you

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Session 10-11, CVP Analysis.pptx [Repaired]

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Transcript of Session 10-11, CVP Analysis.pptx [Repaired]