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    CVP Analysis

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    This document provides an overview of cost-volume-profit (CVP) analysis, including: 1) It defines fixed, variable, and semi-variable costs, and explains how they relate to production volume. 2) CVP analysis examines the relationship between costs, revenue, production volume, and resulting profit. It is used for budget planning, pricing decisions, and other purposes. 3) Key CVP calculations include determining break-even point, profit-volume ratio, and margin of safety based on sales price, variable costs, fixed costs, and production/sales volume.

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    CVP Analysis

    Uploaded by

    Anonymous Zx7EG1Pa
    43 views5 pages
    This document provides an overview of cost-volume-profit (CVP) analysis, including: 1) It defines fixed, variable, and semi-variable costs, and explains how they relate to production volume. 2) CVP analysis examines the relationship between costs, revenue, production volume, and resulting profit. It is used for budget planning, pricing decisions, and other purposes. 3) Key CVP calculations include determining break-even point, profit-volume ratio, and margin of safety based on sales price, variable costs, fixed costs, and production/sales volume.

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    Cvp Analysis

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    This document provides an overview of cost-volume-profit (CVP) analysis, including: 1) It defines fixed, variable, and semi-variable costs, and explains how they relate to production volume. 2) CVP analysis examines the relationship between costs, revenue, production volume, and resulting profit. It is used for budget planning, pricing decisions, and other purposes. 3) Key CVP calculations include determining break-even point, profit-volume ratio, and margin of safety based on sales price, variable costs, fixed costs, and production/sales volume.

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    © All Rights Reserved
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    Download as pdf or txt
    43 views5 pages

    CVP Analysis

    Uploaded by

    Anonymous Zx7EG1Pa
    This document provides an overview of cost-volume-profit (CVP) analysis, including: 1) It defines fixed, variable, and semi-variable costs, and explains how they relate to production volume. 2) CVP analysis examines the relationship between costs, revenue, production volume, and resulting profit. It is used for budget planning, pricing decisions, and other purposes. 3) Key CVP calculations include determining break-even point, profit-volume ratio, and margin of safety based on sales price, variable costs, fixed costs, and production/sales volume.

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    Module 12 : Cost Volume Profit Analysis

    Lecture 1 : Cost Volume Profit Analysis

    Objectives
    In this lecture you will learn the following
    Cost Volume Profit (CVP)
    Introduction.
    Fixed costs.
    Variable costs.
    Semi variable costs.
    Contribution margin.
    Break even point.
    PV Ratio.

    CVP Analysis
    CVP analysis is the analysis of three variable viz. cost, volume and profit. Such analysis explores the
    relationship existing amongst costs, revenue, activity level and resulting profit. It aims at measuring
    variation of cost with profit.

    Fixed Cost
    These are the costs which incurred for a period and which within certain output and turnover limits, tend
    to be unaffected by fluctuations in the levels of activity (Output or turnover).
    For example: Rent, insurance of factory building etc. remain the same for different levels of production.

    Fixed Cost Graph

    Variable Cost
    These costs tend to very with the volume of activity. Any increase in activity results in an increase in the
    variable cost and vice versa.
    For example: Cost of direct labour, direct material, etc.
    Variable Cost Graph


    Semi-Variable Cost
    These costs contain both fixed and variable components and thus partly affected by fluctuation in the
    level of activity.
    Examples of semi variable costs are telephone bill, gas and electricity etc.
    Semi-Variable Cost Graph

    Cost-Volume-Profit Analysis
    CVP analysis:
    Takes into account
    - the total costs (fixed and variable)
    - the total sales revenues
    - desired profits vis-a-vis the sales volume
    It is used for forecasting or predicting how the changes in costs and sales volume affect profit. It is also
    known as 'Break-Even Analysis'.
    CVP analysis could be helpful in the following situations:
    Budget planning: for forecasting profit by considering cost and profit relation, and volume of production
    volume. This will help in determining the sales volume required to make a profit.

    - To make decisions regarding pricing and sales volume.


    Determining the sales mix of different products, in what proportions each of the products can be sold.
    - Preparing flexible budget considering costs at different levels of production.

    Objectives of CVP Analysis


    - Understand the interaction among
    Prices of products.
    Volume or level of activity.
    Per unit variable cost.
    Total fixed cost.
    Mix of product sold.
    Assumptions of CVP Analysis
    Expenses can be classified as either variable or fixed.
    CVP relationships are linear over a wide range of production and sales.
    Sales prices, unit variable cost, and total fixed expenses will not vary within the relevant range.
    Volume is the only cost driver.
    The relevant range of volume is specified.
    Inventory levels will be unchanged.
    The sales mix remains unchanged during the period.

    Calculations
    Profit Equation and Contribution Margin
    1. Profit = Sales -Total costs
    2. Profit = Sales -Total variable costs - Total Fixed costs
    3. Contribution margin = Total revenue Total variable costs
    Sales
    -Variable Cost

    XX
    (XX)

    Contribution
    -Fixed Cost
    Profit

    XX
    (XX)
    XX

    Profit = (S-V)*Q FC
    Q = (FC + Expected Profit)
    (S - VC)
    Q is the no. of units required to be sold to obtain target profit.
    S = Selling Price p.u.
    VC = Variable cost p.u.
    FC = Fixed Cost.

    Example:
    Suppose that Super Bikes wants to produce a new mountain bike called Hero1 and has forecast the
    following information.
    Price per bike = 800
    Variable cost per bike = 300
    Fixed costs related to bike production =
    Target profit = 2,00,000
    Estimated sales = 12,000 bikes

    55,00,000

    We determine the quantity of bikes needed for the target profit as follows:
    Quantity = ( 55,00,000 +

    2,00,000) / ( 800 -

    300) = 11,400 bikes

    Profit Volume Ratio (PV)


    The contribution margin ratio (CMR) i.e. PV ratio is the percentage by which the selling price (or
    revenue) per unit exceeds the variable cost per unit, or contribution margin as a percentage of revenue.
    Example
    For Hero1, we could use the forecast information about volume (12,000 bikes) to determine the
    contribution margin ratio.
    Total revenue = 800 * 12,000
    = 96,00,000
    Total variable cost = 300* 12,000
    = 36,00,000
    Total contribution margin = 9,600,000 - 3,600,000
    = 6,000,000
    Contribution margin ratio = 6,000,000 / 9,600,000
    = 0.625

    BEP analysis
    Breakeven analysis is used to find the minimum level of production required.
    Evaluates both fixed and variable costs.
    Uses:
    1. To find a suitable product mix.
    2. To find the sales required to reach a desired revenue.
    3. The profits at certain price level and sales.
    Break even Point (BEP)
    A CVP analysis can be used to determine the BEP, or level of operating activity at which revenues
    cover all fixed and variable costs, resulting in zero profit.
    In other words this is the point where no profit or losses have been made.

    Cost-Volume-Profit Graph

    Break even Applications


    New Product decisions :Enables to determine the sale volume required for a firm (or an individual product) to
    breakeven, given expected sales price and expected costs.
    Pricing decisions:-

    Enables to study the effect of changing price and volume relationship on total profits.
    Modernizations or automation decisions:Analysis the profit in implication of a modernization or automation programme.
    Expansion Decisions :studies the aggregate effect of a general expansion in production and sales.
    Formulae
    BEP in units = Total fixed costs
    (Sales price variable cost p.u.)
    = Fixed cost
    Contribution per unit
    BEP in sales value = Fixed cost
    PV Ratio

    Example
    Sales 5000 units.
    Sales price per unit Rs. 50.
    Variable cost per unit Rs. 30.
    Fixed cost Rs. 35000.
    Therefore, contribution per unit = 50 - 30 = Rs. 20
    BEP in units = 35000/20
    = 1750 units
    1750 * 50 = Rs. 87500
    BEP in sales value = 35000 * 250000 / 87500
    = Rs. 100000

    Margin of safety
    Represents the strength of the business.
    Margin of Safety = Actual Sale BEP Sale
    Margin of safety % = (Sales - BEP) / Sales x 100
    Margin of safety = (5000 - 1750)
    5000
    = 65 %
    Hence even if the sales decrease by 65%, the business wont face any loss.

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