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7/31/2019 CVP ANAL.ppt
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CHAPTER 12
Cost-Volume-Profit and
Break-Even Analysis
Copyright 2009 Macmillan Publishers India Ltd, All rights reserved.
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CHAPTER12
Cost-Volume-Profit Analysis
CVP analysis is a study of the relationships between a businesss costs,
volume and their impact on profit.
Analyses the interplay of various factors that affect profits.
An important part of the budgeting activities. Assists management in effectively utilising the fixed resources in the short run.
Is a tool used in both the planning and control functions.
Used to measure the performance of the different departments in a company.
Is static as it is based on a given set of factors.
Basic application of CVP analysis is the break-even analysis.
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CHAPTER12
CVP Analysis helps the manager to solve
following Questions :-
Q 1: How many units must be sold to break-even?
Q 2: How will the break-even point change if additional fixed
costs are incurred?
Q 3: How will profits be impacted if price changes?
Q 4: What is the break-even point for a desired level of profit?
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CHAPTER12
Importance of CVP Analysis
CVP Analysis is useful to find :-
Sales volume required to produce desired profits
Minimum level of sales needed to avoid losses
Effect on profits of changes in fixed costs and variable costs
Change in sales mix and its effect on profits
The most profitable product
Effect of a simulation change in prices, costs and volume on profits
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CHAPTER12
Break-even Analysis
The break-even analysis is conducted by organisations to identify the
level of operations at which the entity has covered all costs but has not
earned any profits.
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CHAPTER12
Break-even Point
The break-even point is that volume of activity at which total revenue
equals the sum of all variable and fixed costs.
It can be computed both algebraically and graphically.
It is expressed in either units of output or sales rupees.
Charts can also be used to illustrate the break-even point.Fixed Costs
Unit Contribution Margin
AND
Fixed Costs
Contribution Margin Expressed as a
percentage of Sales Revenue
B.E. Point (in Sales Rs) =
B.E. Point (in Units) =
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CHAPTER12
Contribution Margin
Contribution margin (CM) is the amount of revenue in excess of variable costsand contributes towards the fixed cost and profit of the company.
It is the difference between selling price per unit and the variable cost per unit
CM provides the operating profit for the company
Contribution Margin Ratio (CM)
Sales- Variable Costs
Sales
CM (in units) = SP- VC
Where ,SP = Sales Price per Unit
VC = Variable Cost per Unit
SalesVC x 100
Sales
CM =
CM (In Percentage) =
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CHAPTER12
Example
Online Company manufactures and sells a single product called SPARK.
The following financial projections have been made for the product:
Unit SP = Rs 25
Unit VC = Rs 15Unit Contribution Margin = Rs 10
The total fixed costs for the company are Rs 30,000. Presently, the sales of
the company are Rs 1,00,000. How many units must be sold by the
company to break-even? Also calculate the break-even point for the
company in rupees.
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CHAPTER12Solution:
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CHAPTER12
Assumptions underlying CVP Analysis
All costs can be classified into two types: fixed costs and variable costs.
The total fixed cost remains constant with changes in sales volume for the time
period being examined.
The total variable cost per unit is constant for the time period being examined
but the total variable cost changes in direct proportion to sales volume.
Selling price per unit remains constant, i.e. it does not change with volume or
because of other factors for the time period being examined.
Sales mix does not change if there are multiple products or the firm
manufactures only one product.
The productivity remains constant.
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CHAPTER12
Profit Planning
Profit planning is an extension of B.E Analysis
This technique helps to find the sales (in units/ in Rs) to achieve a target
profit
Fixed Costs+ Desired Profits
Contribution Margin Per Unit
Fixed Costs + Desired Profit
CM Expressed as a Percentage of Sales Revenue
BE Point ( in Sales Units)=
BE Point ( in Sales Rs) =
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CHAPTER12
Example:-
Fixed cost = Rs. 30,000/-
Contribution Margin = Rs.10/unit
Contribution Margin as % of sales = 40%
Desired profit = Rs. 10,000Find out the BEP in units and in sales Rs.
30,000 + 10,000
= 4000 units10
30,000 + 10,000
= 1, 00,000
0.4
Solution:-
Profit Planning
BE Point ( in Sales Units)=
BE Point ( in Sales Rs) =
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CHAPTER12
Tabular data to be presented in the form of Graphs
The Break-Even Graph and
The Profit-Volume Graph
Units Sold (in thousands) Loss (Rs) Thousands omitted
2Th B k E G h
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CHAPTER12The Break-Even Graph
Units Sold (in Thousands)
CostandReven
ue(Rsthousandso
mitted)
25
50
75
100
125
1 2 3 4 5 6
Break-even Point
Fixed Cost Line
Total Revenue Line
Profit
Total
Variable
Cost
Total
Fixed
Cost
Total Cost Line
Loss
2
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CHAPTER12
The Profit-Volume Graph (P/V Graph)
The profit-volume graph shows a direct relationship
between sales and profits and is easy to understand.
30 __
20 __
10 __
0 __
10 __
20 __
30 __
Profit AreaBreak-even Point
Loss Area
Fixed Cost Point
1 2 3 4 5 6
Loss(Rs)Profit(Rs)Thousandsom
itted
Units Sold (in thousands)
2
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CHAPTER12
P/V Ratio
When contribution margin expressed as a percentage of sales, it is called
Profit Volume Ratio.
The P/V Ratio is calculated as :
P/V Ratio =
B.E.P through P/V Ratio =
SP per Unit VC per Unit
SP per Unit
Fixed Expenses
P/V Ratio
2
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CHAPTER12
Example:Online Company manufactures and sells a single product called SPARK. The following financial
projections have been made for the product:
Unit SP = Rs 25
Unit VC = Rs 15
Unit Contribution Margin = Rs 10
The total fixed costs for the company are Rs 30,000. Presently, the sales of the company are Rs 1,00,000.
How many units must be sold by the company to break-even? Also calculate the break-even point for the
company in rupees.
P/V Ratio
P/V Ratio = 25- 15/25 = 40% = 0.4Solution:
2
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CHAPTER12
Margin of Safety (M/S)
The difference between the actual sales volume and the break-even sales
volume is called the margin of safety (M/S).
It represents that proportion of the current sale which determines the profit of
the firm.
The M/S ratio is calculated as:
=Sales- B E Sales
Sales
M/S Ratio =
1,00,00075,000
1,00,000= 25%
= 2.5
2
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CHAPTER12
Limitations of CVP Analysis
The assumptions imposed by accountants in calculating the CVP ratios also
serve as the possible limitations of the technique. Most CVP analyses are based
on the concept of static or fixed cost.
Semi-variable costs also affect the cost composition.
Fixed costs will not change at all levels of sales within the assumed relevant range at
activity.
Selling price per unit remains constant.
Variable costs vary in direct proportion to changes in activity, i.e. as a percentage of
sales revenue they remain constant.
The sales mix is assumed to remain constant if more than one product is sold.
The projections are over a short period of time only.
2
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CHAPTER12
Problem and Solution of Cost-Volume-
Profit and Break-Even Analysis :
12P bl I
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CHAPTER12Problem I:
The following information pertains to the half year ending 30 June 2006 of a
company:
Fixed Expenses 30,000Sales Value 1,20,000
Profit 30,000
The company has projected a loss of Rs 6,000 for the second half of the same year
ending 31 December 2006.
(a) Calculate the break-even point, P/V ratio and margin of safety for six months ending
30th June 2006.
(b) If the selling price and fixed expenses remain unchanged in the second half of the
year, what is the expected sales volume for the second half?
(c) Calculate the break-even point and margin of safety for the whole year.
12S l i I
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CHAPTER12
(a) P/V Ratio = (Contribution / Sales) X 100
= (Fixed Expenses + Profit) 100/ Sales Value = (60 000/ 1,20,000) 100 = 50%
BE Point = Fixed Expenses / P/V Ratio = 30 000 / 50% = Rs 60,000
Margin of Safety = SalesBEP = 1,20,00060,000 = Rs 60,000
(b) Contribution = Fixed ExpensesLoss = 30,0006,000 = Rs 24,000
Contribution= Sales x P/V Ratio
= 24,000 = Sales 50%or Sales = Rs 48,000 for second half year.
(c) For Full Year :
Sales = 1,20,000 + 48,000 = Rs 1,68,000
Fixed Expenses = 30,000 + 30,000 = Rs. 60,000
P/V Ratio = 50%
Profit = 30,000-6,000 = Rs 24,000
Break-Even Point = 60,000 / 50% = Rs. 1,20,000
Margin of Safety = 1,68,0001,20,000 = Rs 48,000
Solution I:
12P bl II
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CHAPTER12Problem II:
Following is the data for a company for the year 2007.
Variable Costs per Unit:
Particulars Rs.
Direct Materials
Direct Labour
Factory Overhead
Total Fixed Costs:
Factory Overhead
Other Fixed Costs
Selling Price per Unit
2,000
800
1,400
1,95,000
1,23,000
9,500
(a) Compute the break-even point in units.
(b) If the company sold 70 units in 2007, how much profit did the firm realise?
(c) How many units should the company sell to generate a profit of Rs 84,800?
(d) Calculate net income if the company increases the number of units sold by 20
percent and reduces the selling price by Rs 500 per unit.
12S l ti II
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CHAPTER12Solution II:
12P bl III
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CHAPTER12Problem III:
The Panasonic Company produces and sells a single product with the following
costs and revenues for the year:
Particulars Rs.
Total Revenues
Total Fixed Costs
Total Variable Costs
Units Produced and Sold Units
5,00,000
1,00,000
2,00,000
1,00,000
(a) What is the selling price per unit?
(b) What is the variable cost per unit?
(c) What is the contribution margin per unit?(d) What is the break-even point?
(e) How many units should be produced by the company to produce a profit of Rs 2,50,000
for the year?
12S l ti III
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CHAPTER12Solution III: