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Cost-Volume-Profit Analysis
Examines the behaviour of total revenues, total costs, and operating income as changes occur in the output level, selling price, variable costs or fixed costs Assumptions of CVP Analysis 1. Revenues change in relation to production and sales 2. Costs can be divided in variable and fixed categories 3. Revenues and costs behave in a linear fashion 4. Costs and prices are known 5. If more than one product exists, the sales mix is constant 6. We can ignore the time value of money
THE BREAK-EVEN POINT BREAKThe break-even point is the point in the volume of activity where the organizations revenues and expenses are equal. Sales (Rs.) Less: Variable expenses Contribution margin Less: fixed expenses Net income 2,50,000 1,50,000 1,00,000 1,00,000 0
EQUATION APPROACH
Sales revenue Variable expenses Fixed expenses = Profit
(Rs. 500 X)
CONTRIBUTION-MARGIN APPROACH CONTRIBUTIONConsider the following information developed by the accountant at Curl, Inc.:
For each additional surf board sold, Curl generates Rs.200 in contribution margin.
Total
Per Unit
Percent
Rs. 250,000
Rs.
500
100%
300 200
60% 40%
80,000
Net income
Rs. 20,000
CONTRIBUTION-MARGIN APPROACH CONTRIBUTIONFixed expenses BreakBreak-even point = Unit contribution margin (in units)
Total Sales (500 surf boards) Less: variable expenses Contribution margin Less: fixed expenses Net income Rs. 250,000 150,000 Rs. 100,000 80,000 Rs. 20,000 Rs. Rs. Per Unit 500 300 200 Percent 100% 60% 40%
Calculate the break-even point in Rs. sales rather than units by using the contribution margin ratio.
= CM Ratio
Total Sales (400 surf boards) Less: variable expenses Contribution margin Less: fixed expenses Net income Rs. 2,00,000 1,20,000 Rs. 80,000 80,000 Rs. 0
Rs.80,000 = 40%
Rs.200,000 sales
COST-VOLUMECOST-VOLUME-PROFIT GRAPH
450,000 400,000 350,000 300,000 Do ars 250,000 200,000 150,000 100,000 50,000
Fixed expenses
100
200
300
400 Un ts
500
600
700
800
COST-VOLUMECOST-VOLUME-PROFIT GRAPH
450,000 400,000 350,000 300,000 Do ars 250,000 200,000 150,000 100,000 50,000
Fixed expenses
100
200
300
400 Un ts
500
600
700
800
COST-VOLUMECOST-VOLUME-PROFIT GRAPH
450,000 400,000 350,000 300,000 Do ars 250,000 200,000 150,000 100,000 50,000
Fixed expenses
100
200
300
400 Un ts
500
600
700
800
COST-VOLUMECOST-VOLUME-PROFIT GRAPH
450,000 400,000 350,000 300,000 Do ars 250,000 200,000 150,000 100,000 50,000
Fixed expenses
100
200
300
400 Un ts
500
600
700
800
COST-VOLUMECOST-VOLUME-PROFIT GRAPH
450,000 400,000 350,000 300,000 Do ars 250,000 200,000 150,000 100,000 50,000
Break-even point
Fixed expenses
100
200
300
400 Un ts
500
600
700
800
PROFITPROFIT-VOLUME GRAPH
Some managers like the profit-volume graph because it focuses on profits and volume.
100,000 80,000 60,000 40,000 it 20,000 0 (20,000) (40,000) (60,000) ` 100 200 300 400 Units 500 600 700
Break-even point
EQUATION APPROACH
Sales revenue Variable expenses Fixed expenses = Profit (Rs.500 X) (Rs.300 X) Rs.80,000 = Rs.100,00 (Rs.200X)= Rs.180,000 X)= X = 900 surf boards
Safety Margin
The difference between budgeted sales revenue and break-even sales revenue. The amount by which sales can drop before losses begin to be incurred.
SAFETY MARGIN
Curl, Inc. has a break-even point of Rs.200,000. actual sales are Rs.250,000, the safety margin is Rs.50,000 or 100 surf boards. If
540 units Rs.500 per unit = Rs.270,000 Rs.80,000 + Rs.10,000 advertising = Rs.90,00
Because of increases in cost of raw materials, Curls variable cost per unit has increased from Rs.300 to Rs.310 per surfboard. With no change in selling price per unit, what will be the new break-even point?
(Rs.500 X)
Suppose Curl, Inc. increases the price of each surfboard to Rs.550. With no change in variable cost per unit, what will be the new break-even point?
(Rs.550 X) (Rs.300 X) Rs.80,000 = Rs.0 X = 320 units
Given:
Given:
Lets assume Curl sells surfboards and sail boards and see how we deal with break-even analysis.
Number Description of Boards Surfboards 500 Sailboards 300 Total sold 800
Break-even point
Break-even point Break-even point Break-even point Fixed expenses = Weighted-average unit contribution margin = Rs.170,000 Rs.331.25
Break-even point
Break-even point = 514 combined unit sales
2.
3.
4.
Selling price is constant throughout the entire relevant range. Costs are linear over the relevant range. In multi-product companies, the sales mix is constant. In manufacturing firms, inventories do not change (units produced = units sold).
x $ $
$ $
:V b b b b : x x d x d x d d
b g d
x g v g : g
d x g v
the
greatest
in companies that have a high proportion of fixed costs in relation to variable costs.
Rs.100,000 = 5 Rs.20,000
A firm with proportionately high fixed costs has relatively high operating leverage On the other hand, a firm with high operating leverage has a relatively high break-even point.
END OF UNIT 1
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