Report Writing

BASICS OF CVP ANALYSIS IN FINANCIAL ANALYSIS

by : DR. T.K. JAINAFTERSCHOOL centre for social entrepreneurship sivakamu veterinary hospital roadbikaner 334001 rajasthan, indiawww.afterschoool.tkmobile : 91+9414430763

WHAT IS CVP??

C=COST,V=VOLUME,P=PROFITTHERE IS RELATION BETWEEN THESE, THIS RELATION IS IDENTIFIED IN CVP ANALYSIS

WHAT IS BEP?

B=BREAKE=EVENP=PROFITthe point where there is no profit no loss

WHAT IS BEP?

There are two formula : BEP (in units) = fixed cost / contribution per unitBEP (in value) = fixed cost / PV ratio

What is fixed cost?

The cost which will remain same whether production is 0 unit or 100 units or 10000 units. Thus this cost has no relation to production volume. Example : if you produce 100 units, your cost of material consumption is Rs. 1000, if you make 1000 units it is 10000, but the rent paid for the office remains the same, Rs. 3000 thus rent is fixed but material is variable cost.

What is variable cost?

As we discussed earlier : the cost which varies directly with volume is called variable cost. Material cost, labour cost, power cost, etc. Are variable cost. If production will increase, these costs will also increase

Examples of fixed cost...

Rent, salary, office expenses, interest on loan, etc.

Examples of variable expenditure

Raw materialwagespowercarriage inward / outwardsales commission

What is CONTRIBUTION?

Difference of sales price per unit and variable cost per unit is called contribution per unit. Suppose sales price per unit is 10, variable cost per unit is 6, contribution per unit is 4. thus contribution has two components in it = fixed cost + profit

What is PV ratio

Contribution as % of sales is called PV ratio contribution is 4, sales price is 10, thus PV ratio is 40%

What is target profit pricing?

Here you keep the target profit in mind and price the goods accordingly, so you have to keep the target profit along with fixed cost in all your calculations

What is target profit volume?

It's formula is : (fixed cost + targe profit ) / contribution per unit

What is margin of safety?

How safe you are ? It is the difference of your present sales to the BEP level. If you are well above BEP level, you are safe. Thus it is measured by comparison to BEP level. Its formula : (sales BEP) / sales * 100

Example of margin of safety :

Your BEP sales is 40000, your present sales is 100000margin of safety = 60000margin of safety in % = 60%

Find BEP ?

Depreciation = 200,material cost = 500,labour cost = 100, rent = 200, interest = 200, other expenses = 100, sales = 2000, no. Of units = 100here fixed cost = (rent 200, interest 200, other exp. 100) = 500variable cost per unit = (500+100)/100 =6contribution = 20-6, BEP = 500/14=35.7

What is sunk cost?

The cost which has already been incurred is ignored in all such calculations, it is called sunk cost. (past cost cost related to previous years)

What is opportunity cost?

It is the best opportunity forgone. It is not taken into account in financial analysis. However, it is taken into account in economic analysis.

Example

A toy manufacturer makes an average net profit of Rs. 2.50 per piece on a selling price of Rs. 14.30 by producing and selling 60,000 pieces or 60% of the potential capacity. His cost of sales is: Direct material Rs. 3.50 Direct wages Rs. 1.25Works overhead Rs. 6.25 (50% fixed) Sales overhead Rs. 0.80 (25% variable) During the current year, he anticipates that his works overhead will go up by 10%, while rates of direct material and direct labour will increase by 6% and 8% respectively. But he has no option of increasing the selling price. Under this situation he obtains an offer for an order equal to 20% of his capacity. The concerned customer is a special customer. What minimum price will you recommend for acceptance to ensure the manufacturer an overall profit of Rs. 1,67,300?

solution

Sales (60000 * 14.5) =870000material (60000*3.5*1.06)=222600labour (60000*1.25*1.08)=81000overheads (60000*6.25*1.1=412500sales (60000*.8) = 48000profit = 105900profit left = 61400

Target profit pricing

New variables costs : (3.5*1.06) = 3.71, labour (1.25*1.08) = 1.35, overhead = (6.25*1.1*.5)= 3.43, sales overhead=.2total variable cost =8.69+ target profit 61400/20000 = 3.07thus target price = 11.76we have ignored other fixed cost, as it has already been recovered in sale of 60000 routine sales.

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5 DECEMBER 09

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