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Cost-Volume-Profit

(CVP)

Analysis

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Cost-Volume-Profit Analysis

3 methods:

(i) Basic equation method

(ii) Contribution margin method

(iii) Graphical method

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Basic Equation Method

Profit = Total Sales – Variable Costs – Fixed Costs Example 1:

Syarikat Surjit Sdn Bhd is selling compact discs. Selling price for a piece of compact disc is RM4. Variable cost for a piece of compact disc is RM2.50 and its fixed costs is RM5000. Required: Calculate the profit if the company successfully sold some 8,000 units of compact discs in a particular period.

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Contribution Margin Method

Profit = Total Sales – Variable Costs – Fixed Costs Sales unit = ? Example 2:

Syarikat Ako Sdn Bhd is selling pen. Selling price for a pen is RM10. Variable cost for a pen is RM6 and its fixed costs is RM4000. Required: How much sales need to be achieved in order to have profit of RM5,000 ?

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Contribution Margin Ratio Method

Contribution Margin Ratio (CM Ratio) shows the percentage of contribution margin as a proportion of sales.

CM Ratio = ? Example: Refer to Example 2 and calculate

the revenue from pen sales in order to achieve profit of RM5,000, using CM ratio method.

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Graphical Sketch Method

Total costs line

Operating loss area

Breakeven point = 25 units

$10,000y

$8,000

$6,000

$5,000

$4,000

$2,000

Dol

lars

10 20 25 30 40 50

x

Units Sold

Total costs line

Operating loss area

Operating income area

Breakeven point = 25 units

Total revenues line

Operating income

Variable costs

Fixed costs

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Breakeven Point

Breakeven Point = a point where a firm has no profit or loss at a given sales level

Example 3:XYZ is in a business of selling plastic chair. The variable costs is RM9 and the sellling price is RM15 per unit. Fixed costs is at RM6,000.Required: Determine break-even point using the first 3 methods discussed earlier.

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Computing Break-Even Sales

ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be sold to break even?

a. 100,000 unitsb. 40,000 units c. 200,000 units d. 66,667 units

ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be sold to break even?

a. 100,000 unitsb. 40,000 units c. 200,000 units d. 66,667 units

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Use the contribution margin ratio formula to determine the amount of sales revenue ABC must have to break even. All information remains unchanged: fixed costs are $200,000; unit sales price is $5.00; and unit variable cost is $3.00.

a. $200,000

b. $300,000

c. $400,000

d. $500,000

Use the contribution margin ratio formula to determine the amount of sales revenue ABC must have to break even. All information remains unchanged: fixed costs are $200,000; unit sales price is $5.00; and unit variable cost is $3.00.

a. $200,000

b. $300,000

c. $400,000

d. $500,000

Computing Break-Even Sales

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Break-even formulas may be adjusted to show the sales volume needed to earn

any amount of operating income.

Break-even formulas may be adjusted to show the sales volume needed to earn

any amount of operating income.

Unit sales = Fixed costs + Target incomeContribution margin per unit

Dollar sales = Fixed costs + Target income

Contribution margin ratio

Computing Sales Needed to Achieve Target Operating Income

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ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be sold to earn operating income of $40,000?

a. 100,000 units

b. 120,000 units

c. 80,000 units

d. 200,000 units

ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be sold to earn operating income of $40,000?

a. 100,000 units

b. 120,000 units

c. 80,000 units

d. 200,000 units

Computing Sales Needed to Achieve Target Operating Income

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Breakeven Point, extended: Profit Planning (targeted)

With reference to Example 3, say XYZ targeted a profit of RM3,000.

Required: Using the first 3 methods discusses earlier, determine sales unit and sales revenue required to achieve such target.

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Margin of Safety

One indicator of risk, the Margin of Safety (MOS) measures the distance between budgeted sales and breakeven sales: MOS = Budgeted Sales – BE Sales

The MOS Ratio removes the firm’s size from the output, and expresses itself in the form of a percentage: MOS Ratio = MOS ÷ Budgeted Sales

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Margin of Safety

Example:

Perniagaan Rahmat is selling Product X. The selling price is RM2. Its break-even point is at 1,000 units. If sales for the month of June is RM5,000, determine the margin of safety in RM, percentage and sales unit.

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Learning Objective

LO8

To use CVP whena company sells

multiple products.

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Sales mix is the relative combination in whicha company’s different products are sold.

Different products have different selling prices, costs, and contribution margins.

If Speedo sells bikes and carts, howwill we deal with break-even analysis?

Sales mix is the relative combination in whicha company’s different products are sold.

Different products have different selling prices, costs, and contribution margins.

If Speedo sells bikes and carts, howwill we deal with break-even analysis?

CVP Analysis When a Company Sells Many Products

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Speedo provides us with the following information:

Bikes Carts TotalSales 250,000$ 100% 300,000$ 100% 550,000$ 100%Var. exp. 150,000 60% 135,000 45% 285,000 52%Contrib. margin 100,000$ 40% 165,000$ 55% 265,000$ 48%

Fixed exp. 170,000 Net income 95,000$

CVP Analysis When a Company Sells Many Products

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The overall contribution margin ratio is:

Bikes Carts TotalSales 250,000$ 100% 300,000$ 100% 550,000$ 100%Var. exp. 150,000 60% 135,000 45% 285,000 52%Contrib. margin 100,000$ 40% 165,000$ 55% 265,000$ 48%

Fixed exp. 170,000 Net income 95,000$

CVP Analysis When a Company Sells Many Products

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Break-even in sales dollars is:

Bikes Carts TotalSales 250,000$ 100% 300,000$ 100% 550,000$ 100%Var. exp. 150,000 60% 135,000 45% 285,000 52%Contrib. margin 100,000$ 40% 165,000$ 55% 265,000$ 48%

Fixed exp. 170,000 Operating income 95,000$

CVP Analysis When a Company Sells Many Products

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Effects of Sales-Mix on CVP

The formulae presented to this point have assumed a single product is produced and sold

A more realistic scenario involves multiple products sold, in different volumes, with different costs

For simplicity’s sake, only two products will be presented, but this could easily be extended to even more products

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Effects of Sales-Mix on CVP

Example 6:

Syarikat XYZ is selling 2 products, Product A and Product B. Relevant data for Product A and Product B are as follows:

Product A Product B

(RM) (RM)

Selling price per unit 8 12

Variable cost per unit 6 6

Contribution margin per unit 2 6

Fixed costs RM8,800

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Effects of Sales-Mix on CVP (cont’d)

Required:

Calculate sales unit at break-even point for Product A and Product B if:

(a) Product A and Product B is sold in equal units.

(b) Sales of Product A is 40% from total sales unit.

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Target Net Incomeand Income Taxes Example

Management would like to earnan after tax income of $35,711.

The tax rate is 30%.

What is the target operating income?

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Target Net Incomeand Income Taxes Example

How many units must be sold?

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Target Net Incomeand Income Taxes Example

Proof:Revenues: Variable costs: Contribution marginFixed costs Operating income Income taxes: Net income

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THE ENDTHE END

ADVISE & REMINDER: Now, your reading time….it’s your responsibility to read relevant chapter in the main text and related chapters in the additional recommended references !

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Exercise 1

Pekan Buku is in the business of selling books.

Variable costs for each book is RM15 and is

sold at RM20 per unit. The fixed costs is

RM5,000.

Required: Determine break-even point using:

(i) Basic equation method

(ii) Contribution margin method

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Exercise 2

With reference to Exercise 1, if the company is

targeting a profit of RM4,000, determine sales

unit and sales amount required to achieve the

targeted profit using:

(i) Basic equation method

(ii) Contribution margin method

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Exercise 3

Syarikat WWW is introducing new product into the market. The break-even for the product is RM100,000 with contribution margin ratio of 40%. Assuming Syarikat WWW is making a profit of RM50,000 during that particular period, calculate the amount of sales for the period.

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Exercise 4

Syarikat ABC is selling 2 products, Product X and Product Y. Relevant data for Product X and Product Y are as follows:

Product X Product Y (RM) (RM)

Selling price per unit 10 14Variable cost per unit 4 8Contribution margin per unit 6 6Fixed costs RM12,000

Required:Calculate sales unit at break-even point for Product A and Product B if:(a) Product A and Product B is sold in equal units.(b) Sales of Product A is 60% from total sales unit.

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Exercise 5

Perniagaan PQR is selling two products, Product P and Product R. Relevant data for Product X and Product Y are as follows:

Product X Product YSelling price per unit RM10 RM4Variable cost per unit RM6 RM3Estimated sales unit per month 30,000 20,000Fixed costs RM44,000Required:(a) Based on current sales mix, calculate break-even point in unit and RM.(b) If sales mix has changed to a new ratio of 4 Product Y to 1 Product X, calculate the new break-even point in unit and RM.