02 CVP Analysis
02 CVP Analysis
02 CVP Analysis
CVP Analysis
What is CVP?
2
Foundational Assumptions in CVP
3
Profit Equation
4
CVP: Contribution Margin
5
Contribution Margin, continued
6
Basic Formula Derivations
7
Breakeven Point
8
Breakeven Point, extended:
Profit Planning
9
CVP Graphically
10
Profit Planning, Illustrated
11
CVP and Income Taxes
12
Segregation of Mixed Cost
13
Segregating semi variable overhead
14
Variable cost = 20 lac – 16 lacs = 4 lacs = Rs.20pu
40000 – 20000 20000
15
Margin of Safety
16
Bridal Shoppe sells wedding dresses. The cost of each dress is
comprised of the following: Selling price of Rs10,000 and variable
(flexible) costs of Rs.4,000. Total fixed (capacity-related) costs for Bridal
Shoppe are Rs.9,00,000.
17
What is the contribution margin per dress?
What is the Bridal Shoppe’s total profit when 200 dresses are sold?
How many dresses must Bridal Shoppe sell to yield a profit of Rs.
6,00,000?
Total Revenues – Total Costs = Total Profit
10,000X - 4000X – 9,00,000 = 6,00,000
6000X = 15,00,000
X = 15,00,000/6000
X = 250 dresses
19
A factory manufacturing sewing machines has the capacity to
produce 500 machines per annum. The variable cost of each
machine is Rs.200 and each machine is sold for Rs.250. Fixed
overhead are Rs.12,000 per annum.
20
Contribution = 250 – 200 = Rs.50
22
Present Proposed
Selling price 10 9
Variable cost 6 6
Contribution 4 3
P/V ratio 4/10 = 40% 3/9 = 33 1/3 %
Total contribution 200 * 4 = 800 800/3 = 267 units
Fixed cost 400 400
Profit 400 400
23
Merry Manufacturers Ltd has supplied you the following
information in respect of one of its products:
Find out:
a) Contribution per unit
b) Break even point
c) Margin of safety
d) Profit
e) Volume of sales to earn a profit of Rs.24,000
24
Total for Per unit
20,000 units
Sales 60,000 3.00
Variable cost 30,000 1.50
Contribution 30,000 1.50
Fixed cost 18,000
Profit 12,000
25
Ahmed Khan sells a popular brand of men’s shirt at an average
price of Rs.2800/- each. He purchases the shirts from a supplier at
a unit cost of Rs.1800/-. The costs of operating his shop are all
fixed costs and amount to Rs.54,00,000 a year. He pays
commission to his salesmen at the rate of Rs.100 for every shirt
sold through the particular salesman.
26
Selling price = Rs.2800
VC = 1800 + 100 = Rs.1900
Contribution = Rs.900
Fixed cost = Rs.54,00,000
27
From the following data, calculate:
i. Break-even point in amount of sales in rupees
ii. Number of units that must be sold to earn a profit of
Rs.60,000 per year
iii. How many units must be sold to earn a net income of 10% of
sales?
28
Selling price = Rs.20
Variable cost = Rs.11 + 3 = Rs.14
Contribution = Rs.20 – 14 = Rs.6
P/V ratio = 6/20 * 100 = 30%
Total fixed cost = Rs.540000 + 252000 = Rs.7,92,000
30
Calculate the contribution margin per unit.
31
The Wardlock Company sold 1,00,000 units of its products at
Rs.20 per unit. Variable costs are Rs.14 per unit. Fixed costs are
Rs.7,92,000.
Determine the following:
1. Breakeven point
2. Number of units to be sold to earn an income of Rs.60,000
before income taxes
3. Number of units to be sold to earn an income of Rs.90,000
after taxes, assuming 40% tax rate.
32
Breakeven point
Fixed cost / Cont. pu = 7,92,000 / 6 = 1,32,000 units
33
Operating Leverage
Required:
1. Compute the company's CM ratio and variable expense ratio.
2. Compute the company's break-even point in both units and sales dollars. Use the
equation method.
3. Assume that sales increase by $400,000 next year. If cost behavior patterns
remain unchanged, by how much will the company's net operating income
increase? Use the CM ratio to compute your answer.
4. Refer to the original data. Assume that next year management wants the
company to earn a profit of at least $90,000. How many units will have to be sold
to meet this target profit?
5. Refer to the original data. Compute the company's margin of safety in both dollar
and percentage form. 42
Solution
Compute the company's CM ratio and variable expense ratio.
CMR = 25%; VC ratio = 75%
Compute the company's break-even point in both units and sales dollars. Use the
equation method.
60 Q = 45Q + 240,000
15 Q = 240,000 -> Q = 16,000 units
16,000 * 60 = $960,000
Assume that sales increase by $400,000 next year. If cost behavior patterns
remain unchanged, by how much will the company's net operating income
increase? Use the CM ratio to compute your answer.
Increase in sales $400,000
CMR 25%
Increase in NOI $100,000
Refer to the original data. Assume that next year management wants the
company to earn a profit of at least $90,000. How many units will have to be
sold to meet this target profit?
(240,000 + 90,000)/15 = 22,000 units
Refer to the original data. Compute the company's margin of safety in both dollar
and percentage form.
Margin of safety = 1,200,000 – 960,000 = $240,000 or 20% 43
Numerical
You rent a kiosk in the mall for $300 a month and use it to sell
T-shirts with college logos from colleges and universities all over
the world. You sell each T-shirt for $25, and your cost for each
shirt is $15. You also pay your sales person a commission of
$0.50 per T-shirt sold in addition to a salary of $400 per month.
44
Solution
45
From the following data, you are required to calculate the break-even point and net
sales value at this point:
Rs.
Selling price per unit 25
Direct Material Cost per unit 8
Direct Labour cost per unit 5
Fixed overhead 24,000
If sales are 15% above the breakeven volume, determine the net profit.
End of Topic