Cost Volume Profit
Your future,your effort
CVP SalesLess VC = Cont.MarginLess FC =Net Profit
SalesLess COGS= Gross ProfitLess OperatingExpense= Net Profit
Income Statement
Contribution margin is an amount to cover the fixed cost.
Break-even Point
EXAMPLE : Sales 10,000-VC 7,000CM 3,000-FC 3,000Net income 0
Total expense= Total revenues
Profit is zero
3 methods for calculating Break-even Point
1. Equation method BREAK-EVEN POINT IN UNITS
2. Contribution Margin Method
3. Contribution Margin ratio method IN SALES DOLLARS
Equation Approach
Profit = SP(X) – VC(X) – FC
In Break-even, the profit is zero
SP : Selling Price per unitX : Sales unitsVC: Variable costs per unitFC : Fixed costs
Contribution Margin Approach
Break-even point in units = FixedExpense Unit Contribution
Margin
Unit Contribution Margin= SP – VC
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- $60BEP in sales dollars = $1,000 = $1,000 =
$4,000 ($80-$60)/$80 25%
The Graph
Sales
$6,400 Profit areaBreak-even point
$4,000 Variable cost
$2,800 Loss area$1,000 Fixed Cost
35 50 80 Units sold
Total Costs
Total revenue
The lower the break-even point, the easier it is to achieve sales
goals. Break-even point = from 50units to 40 unitsIt can be done by :- Increase the sales price $85 40 = 1,000 SP= $85/unit SP-$60
-Reducing Fixed Cost 40= FC FC=$800 $80-$60-Reducing the Variable cost to
$55/unit 40 = 1,000 VC=$55/unit 80-VC
Target Net IncomeHow 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 ProfitCM Ratio
= $1,000+$800 = $7,20025%
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)Description
Selling
Price
Unit Variab
le cost
Unit Contribution Margi
n
Number of
clothes
SAFETY Clothing
$65 $48
$17
100
SAFETY SHOES
$80 $60
$20
150
Total Sold 250
% of Total
40%
60%
100%
BEP = Fixed Expense Weighted average unit Contribution Margin = $1,000 = 54 COMBINED SALES
UNITS 18.8
Description
Cont.Margin
%of total Weighted Contributi
on
SAFETY Clothing
$17 40% 6.8
SAFETY SHOES
$20 60% 12
100% 18.8
Break-even Point is 54 combined unit salesDescripti
onBreak-even sales
%of total Individual sales
SAFETY clothing
54 40% 22
SAFETY SHOES
54 60% 32
Total Units
100% 54
TaxAFTER 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 controlDifficulties 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.
ConclusionSUNmks 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.
Adiwirya, Muhammad Sulaiman Kusumah. “Cost-Volume-Profit Analysis: What’s Good and Bad About It”. Accessed May 15, http://onaccountingmanagement.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 Accounting Coach. http://basiccollegeaccounting.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
Accounting: Creating Business Value in a Dynamic Business Environment. New York: McGraw-Hill Education. Holtzman, Mark P. “Managerial Accounting: How to Determine Margin of
Safety”. Accessed May 15, http://www.dummies.com/how-to/content/managerial
accounting-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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