Chapter 1 Introduction

Costvolumeprofit (CVP), in managerial economics, is a form of cost accounting.

It is a simplified model, useful for elementary instruction and for short-run
decisions.

CVP analysis expands the use of information provided by break-even analysis. A

critical part of CVP analysis is the point where total revenues equal total costs
(both fixed and variable costs). At this break-even point, a company will
experience no income or loss. This break-even point can be an initial examination
that precedes more detailed CVP analysis.
CVP analysis employs the same basic assumptions as in breakeven analysis. The
assumptions underlying CVP analysis are:

The behavior of both costs and revenues is linear throughout the relevant
range of activity. (This assumption precludes the concept of volume discounts
on either purchased materials or sales.)

Costs can be classified accurately as either fixed or variable.

Changes in activity are the only factors that affect costs.

All units produced are sold (there is no ending finished goods inventory).

When a company sells more than one type of product, the product mix (the
ratio of each product to total sales) will remain constant.
To know the cost, volume and profit relationship, a study of the following is
essential :
(1) Marginal Cost Formula
(2) Break-Even Analysis Marginal Costing and Cost Volume Profit Analysis
(3) Profit Volume Ratio (or) PN Ratio
(4) Profit Graph
(5) Key Factors and
(6) Sales Mix
Objectives of Cost Volume Profit Analysis
The following are the important objectives of cost volume profit analysis:
(1) Cost volume is a powerful tool for decision making.
(2) It makes use of the principles of Marginal Costing.
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(3) It enables the management to establish what will happen to the financial
results if a specified level of activity or volume fluctuates.
(4) It helps in the determination of break-even point and the level of output
required to earn a desired profit.
(5) The PN ratio serves as a measure of efficiency of each product, factory,
sales area etc. and thus helps the management to choose a most profitable line
of business.
(6) It helps us to forecast the level of sales required to maintain a given amount
of profit at different levels of prices.
Marginal Cost Equation
The Following are the main important equations of Marginal Cost :
Sales = Variable Cost + Fixed Expenses Profit/Loss
Contribution = Fixed Cost + Profit
The above equation brings the fact that in order to earn profit the contribution
must be more than
fixed expenses. To avoid any loss, the contribution must be equal to fixed cost.
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Contribution
The term Contribution refers to the difference between Sales and Marginal Cost
of Sales. It also termed as "Gross Margin." Contribution enables to meet fixed
costs and profit. Thus, contribution will first covered fixed cost and then the
balance amount is added to Net profit. Contribution can be represented as:
Contribution = Sales - Marginal Cost
Contribution = Sales - Variable Cost
Contribution = Fixed Expenses + Profit
Contribution - Fixed Expenses = Profit
Sales - Variable Cost = Fixed Cost + Profit

The components of CVP analysis are:

Level or volume of activity

Unit selling prices

Variable cost per unit

Total fixed costs

CVP assumes the following

Constant sales price

Constant variable cost per unit

Constant total fixed cost

Constant sales mix

its sold equal units produced.

These are simplifying, largely linearizing assumptions, which are often implicitly
assumed in elementary discussions of costs and profits. In more advanced
treatments and practice, costs and revenue are nonlinear and the analysis is more
complicated, but the intuition afforded by linear CVP remains basic and useful.
One of the main methods of calculating CVP is profitvolume ratio which is
(contribution /sales)*100 = this gives us profitvolume ratio.

contribution stands for sales minus variable costs.

Therefore it gives us the profit added per unit of variable costs.

The assumptions of the CVP model yield the following linear equations for total
costs and total revenue (sales):

Total cost = fixed cost +( unit variable cost x number of unit)

Total revenue = sales price x number of unit

These are linear because of the assumptions of constant costs and prices,
and there is no distinction between units produced and units sold, as these
are assumed to be equal. Note that when such a chart is drawn, the linear
CVP model is assumed, often implicitly.

In symbols:

TC = TFC + V x X
TR = P x X
where
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 TC = Total costs
TFC = Total fixed costs
V = Unit variable cost (variable cost per unit)
X = Number of units
TR = S = Total revenue = Sales
P = (Unit) sales price
Profit is computed as TR-TC; it is a profit if positive, a loss if
negative.

These diagrams can be related by a rather busy diagram, which demonstrates how
if one subtracts variable costs, the sales and total costs lines shift down to become
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the contribution and fixed costs lines. Note that the profit and loss for any given
number of unit sales is the same, and in particular the break-even point is the same,
whether one computes by
sales = total costs or as contribution = fixed costs.

CVP simplifies the computation of breakeven in break-even analysis, and more

generally allows simple computation of target income sales. It simplifies analysis
of short run trade-offs in operational decisions

Cost-volume-profit analysis is a managerial accounting technique used to analyze

how changes in cost and sales volume affect changes in a company's profit. The
technique is widely used in business and has many advantages. However, there are
some drawbacks as well. Understanding the pros and cons to CVP analysis can
help you determine whether this technique should be implemented in your
company.

ADVANTAGES AND DISADVANTAGE

Ease of Calculation

One the biggest advantages to CVP analysis is that calculations are

incredibly simple. CVP analysis uses a standard set of formulas that
work for all of the analysis techniques. Anyone who can plug
numbers into the formulas is able to quickly determine the effects of
hypothetical changes in these variables. This makes CVP analysis a
useful technique for small-business owners who are new to business
or do not have a strong accounting background.

Understandability

For the most part, CVP analysis is free of accounting jargon and
complex terminology. This makes both the preparation and
interpretation of CVP analysis figures understandable. For example,
you might want to know how many individual units of your
company's product you would need to sell to break even for the year.
In order to make this calculation, you will need to know how much it
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costs to make your product and how the cost behaves -- that is,
whether the cost increases as production increases or whether it is a
constant. Unlike some accounting terminology, these cost concepts
are intuitive to many small-business owners.

Accuracy

One of the downfalls of CVP analysis is that it isn't always accurate.

CVP analysis techniques assume that all costs in the company are
completely fixed or completely variable. Fixed costs are costs that do
not change with changes in production, such as rent or insurance
costs. Variable costs change at a constant rate as you increase the
number of units produced. Common variable costs include materials
and labor costs. However, there are many costs that have a fixed and
variable component, known as mixed costs. For example, you may
pay a monthly charge for telephone service, but then pay a change
per minute of use. The monthly charge is a fixed cost, but the perminute charge is variable. CVP analysis does not have a way to deal

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with these costs unless they are split into their fixed and variable
components, which can be cumbersome.

Inflexibility

As part of it being quick and easy to use, CVP analysis has a built-in
set of assumptions that are fairly rigid. For example, CVP analysis
assumes that a company sells one product, or that if it sells multiple
products the proportion of how much of each product is sold remains
constant. This is known as a constant sales mix assumption, and
many businesses do not follow this sales pattern. For example, a
restaurant probably sells more hot drinks in the winter than it does in
the summer, and these drinks could have different cost assumptions.
If your company has a large variety of products or if your mixture of
products sold changes frequently, then CVP analysis may not work
for you.

Approximations

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Even though CVP analysis is based on specific data and requires

tremendous attention to detail, the best that it can do is provide
approximate answers to questions, rather than ones that are exact. It
answers hypothetical questions better than it provides actual answers
for solving problems. It leaves the business manager to decide how to
act on the CVP analysis data he has at hand. For this reason, the
manager has to exercise extreme caution when making decisions
about changes to business operations and finance. Judgments have to
be made after careful investigation and deliberation -- and not just be
based solely on statistics. Investigation may involve, for instance,
interviewing employees and carefully observing their daily activities,
as opposed to simply treating them as part of a statistical model.

Decision-Making
CVP analysis provides managers with the advantage of being able to
answer specific pragmatic questions needed in business analysis.
Questions such as what the company's breakeven point is help
managers project how future spending and production will contribute
to the success or failure of the company. For instance, when a
manager knows the breakeven point, he can tweak spending and
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increase production efforts to increase profitability. Because CVP

analysis is based on statistical models, decisions can be broken down
into probabilities that help with the decision-making process.

Limitations
The CVP approach to analysis is beneficial, but it is limited in the amount of
information it can provide in a multi-product operation. Much of the analysis that
is done by business managers who use this approach is done based on a single
product. Northern Arizona University notes that multi-product businesses, such as
restaurants, can have a difficult time with CVP analysis because menu items, for
instance, are likely to have many variable cost ratios. This makes the challenge of
CVP analysis all the more difficult because it must be done for each specific
product.

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Chapter 2

Brand History

Lays, the worlds largest and favourite snack food brand, has
steadily established itself as an indispensable part of Indias snacking
culture since its launch in 1995.

With its irresistible taste, international and Indian flavours and youthcentric imagery, Lays has established itself as a youth brand and
continues to grow in the hearts and mind of its consumers.

Over the years, Lays has become known for its engaging and
innovative promotions and campaigns. The brand known for its No
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one can eat just one campaign has moved its positioning to Whats
the programme? making Lays the main food of every programme!
Saif Ali Khan has been the face of the brand for over five years, and
has recently been joined by the captain of the Indian cricket team
M.S. Dhoni. Both embody the youthful energy and appeal of the
brand.

In 2008, Lays launched the never-before Fight for Your Flavour

allowing consumers to vote for the flavour of their choice. The
flavour with the maximum votes would continue in the market. The
flavours have been selected by the Lays brand ambassadors Saif Ali
Khan and M.S. Dhoni with each celebrity rooting for the flavour of
their choice.

In November 2008, Lays made yet another innovative breakthrough

the Chip-n-Sauce pack. This first-to-market pack has been launched
for cricket lovers as they settle in their seats to savour the best
sporting action of the season. The Lays Chip-n-Sauce large pack
comes in two unique flavours Chilli Chinese with a Schezwan

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Sauce sachet and Chatpata Indian with a Tamarind Sauce sachet

inside the pack.

In June 2009, Lays launched its new positioning platform: Lays

Be a Little Dillogical. The new Dillogical concept makes an instant
connect with youth caught between the desire to succeed and the
desire to remain engaged with certain moments that offer a deep
emotional fulfilment. This friction is like a game between the heart
and the head, a struggle between what you want to do and what you
have to do. Its all about making things that matter to the heart,
happen.

The new platform has been launched with a series of ads built around
the universal consumer struggle between what the mind asks one to
do and what the heart desires. A powerful 360 degree approach
supports the new TVC, and has indeed prompted consumers to be a
little Dillogical.

Brand Advantage
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Lays is 100 percent vegetarian

Quality Standards

HACCP(Hazard Analysis and Critical Control Point).

Certification by TQCSI (Australia), which confirms that products are
manufactured in a food safety environment and the manufacturing
process has adequate controls to track products.
American Institute of Baking (USA), one of the best auditing bodies
for confirming process and product safety.
Our Plants are ISO 14000 certified , which confirms that the
manufacturing process ensures environmental safety.
Our plants are also certified to ensure that the safety of products,
processes, environment and people is maintained at a very high level.
This certification is issued by OHSAS 18001 (Occupational Health
and Safety Assessment Series), USA.

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The production process begins on farms in select regions across India

where the best potatoes are grown specifically for Frito-Lay. Upon
the potatoes arrival at plants, it can take as little as 24 hours for the
chips to be made. Lays chips are made using the following simple
process:

Wash the potatoes are thoroughly bathed in water.

Peel next, we gently peel the skin off the potatoes, even as the
flavour remains intact.
Slice The potatoes are thinly sliced and rinsed again to remove any
remaining starch.
Cook - The slices are cooked to a crispy crunch in edible vegetable
oils.
Season Finally, the chips are topped off with a mouthwatering
sprinkle of salt or seasoning
The potatoes have now become delicious chips and are packed and
delivered to a store near you.

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