Cost Volume Profit (cvp) Analysis And Break Even Point Analysis 3u29r

Cost Volume Profit

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CVP Sales Less VC = Cont.Margin Less FC =Net Profit

Income Statement

Sales Less COGS = Gross Profit Less OperatingExpense = Net Profit Contribution margin is an amount to cover the fixed cost.

Break-even Point Total expense= Total revenues Profit is zero EXAMPLE : -VC 7,000 CM 3,000 -FC 3,000 Net income

Sales

0

10,000

3 methods for calculating Break-even Point 1. 2.

3.

Equation method BREAK-EVEN POINT IN UNITS Contribution Margin Method Contribution Margin ratio method DOLLARS

IN SALES

 Equation Approach Profit = SP(X) – VC(X) – FC In Break-even, the profit is zero SP : Selling Price per unit X : Sales units VC: Variable costs per unit FC : Fixed costs

 Contribution Margin Approach Break-even point in units = FixedExpense Contribution Margin

Unit Contribution Margin= SP – VC

Unit

 Contribution Margin Ratio Method CM Ratio = Contribution Margin Sales BEP in sales dollars : Fixed Expense CM Ratio

Example SUNmks sells its safety wear clothing for $80. The variable costs are $60 and fixed costs are $1,000. How many safety clothes that SUNmks Ltd needs to sell to break even? Calculate also the break-even point in sales dollars! BEP in units = $1,000 = 50 units $80- $60 BEP in sales dollars = $1,000 = $1,000 = $4,000 ($80-$60)/$80 25%

The Graph Sales $6,400

Profit area Break-even point

Total revenue Total Costs

$4,000 Variable cost Loss area Fixed Cost

$2,800 $1,000 35

50

80

Units sold

 The

lower the break-even point, the easier it is to achieve sales goals. Break-even point = from 50units to 40 units It can be done by :

Increase the sales price $85 40 = 1,000 SP= $85/unit -Reducing Fixed Cost SP-$60 40= FC  FC=$800 $80-$60 -Reducing the Variable cost to $55/unit 40 = 1,000  VC=$55/unit 80-VC



Target Net Income  How

much do u want to earn ?

For ex: SUNmks Ltd wants to earn $800 profit, ~how many safety clothes that they need to sell ? Sales Units = Fixed Cost +Target Profit Contribution margin = 1,000+800 = 90 units 20 ~ What dollar sales are needed to achieve its target profit? Sales Dollars = Fixed cost+Target Profit CM Ratio = $1,000+$800 = $7,200 25%

SENSITIVITY AND UNCERTAINTY ANALYSIS  Assumed

that SUNmks Ltd considered to reduce selling price of its surf clothes from $80 to $72 to encourage sales. It is expected that sales can increase from 90 units to $120 units. Variable cost per unit is $60 and fixed cost is $1,000  Should SUNmks Ltd decrease its selling price to $75? Current sales(90 units) Proposed Sales (120u)

Sales

$80x90 units= $7,200

$72x120units= $8,640

Less VC

$60x90 units= $5,400

$60x120units= $7,200

Cont.Margin

$1,800

$1,440

Less FC

$1,000

$1,000

Operating profit

$800

$440

Margin Of Safety The Margin of Safety refers to the difference between actual sales and break-even sales. The word “margin” refers to the amount in dollars or units above break-even point. In previous example, break-even sales is 50units or $4,000 while the actual sales is 90 units or $7,200. So, Safety margin in dollars=Sales Actual- Break-even Sales = $7,200-$4,000 = $3,200 Safety Margin in units = Unit Sales Actual- Unit Sales BE = 90-50 = 40 units

Operating Leverage  Measures

how a percentage change in sales will affect profit

 OPERATING

LEVERAGE= Contribution Margin Profit

SALES MIX( MULTIPLE PRODUCTS) Descri Sellin Unit Unit Numb ption g Variab Contri er of Price le bution clothe cost Margi s n SAFETY Clothing SAFETY SHOES

% of Total

$65

$48

$17

100

40%

$80

$60

$20

150

60%

250

100%

Total Sold

Descriptio Cont.Marg n in

%of total

Weighted Contributi on

SAFETY Clothing

$17

40%

6.8

SAFETY SHOES

$20

60%

12

100%

18.8

 BEP

=

Fixed Expense

Weighted average unit Contribution Margin = $1,000 = 54 COMBINED SALES UNITS 18.8

Break-even Point is 54 combined unit sales Descripti on

Breakeven sales

%of total Individu al sales

SAFETY clothing

54

40%

22

SAFETY SHOES Total Units

54

60%

32

100%

54

Tax AFTER TAX PROFIT= BEFORE TAX PROFIT X (1-TAX RATE) 

Adding Tax to profit can increase number of sales units required to achieve target profit.

Advantages of using CVP -Decision making -Price determination -Profit planning -Preparation of budgets -Cost control

Difficulties in applying CVP

A

company selling multi products, need so much detail ex: restaurants  Besides volume, other elements like inflation, efficiency, capacity and technology can affect costs.

Conclusion SUNmks Ltd can do the CVP analysis by finding its break-even point, targeted income, and considering either to increase/decrease its selling price, sales volume, costs to be more profitable. However, CVP analysis requires so much detailed to find the variable costs especially for a company with multi products, and it is also affected by inflation, efficiency.

Good and Bad About It”. Accessed May 15, http://oningmanagement.blogspot.sg/2013/03/cost-volume-profit-analysis-whats-good.html Explain what are the limitations of Cost Volume Profit (CVP) Analysis For Short Term Decision Making. 2006. College ing Coach. http://basiccollegeing.com/2006/08/explain-whatt-are-the-limitations-of-cost-volume-profit-cvp-analysis-for-short-term-decision-making/   Hilton, Ronald W and Platt, David E. 2014. Managerial ing: Creating Business Value in a Dynamic Business Environment. New York: McGraw-Hill Education.   Holtzman, Mark P. “Managerial ing: How to Determine Margin of Safety”. Accessed May 15, http://www.dummies.com/how-to/content/managerial ing-how-to-determine-margin-of-s.html   Lewis, Jared. “Advantages & Disadvantages of Cost-Volume-Profit Analysis.” Accessed May 15, http://smallbusiness.chron.com/advantages-disadvantages-costvolumeprofit-analysis-35135.html  

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