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INTRODUCTION
Cost-Volume-Profit analysis is a planning tool which is extremely
useful in predicting sales and profit levels given a certain cost structure.
Traditional CVP analysis has been applied largely to manufacturing
enterprises which have a tangible product base (e.g., furniture). However,
the concept itself is applicable to service enterprises such as banking,
insurance and other financial service industries. This paper will outline the
basic CVP model and thereafter demonstrate its applicability and related
complexities to the banking sector.
CVP ANALYSIS
CVP stands for Cost-Volume-Profit. The CVP analysis is a financial
decision making aid used to determine the level of output used to achieve
any target profit level or the financial impact of basic business activities like
changes in costs or pricing.
Dutch- Rural Novo
Bangla Tabani- Electrification Pharmaceuticals, NCC Bank
Companies Name Bank, Palli Board Intra Ent.
Bidyut
Bevarage Ltd.
samity-1
Servic Non-Profit Merchandisin Financi
Nature MNC
e g al
Yes Yes
CVP Analysis No Yes No
Break even Yes Yes
No Yes No
quantity
No Yes Yes
Target Profit No Yes
3. All costs can be divided into their fixed and variable elements.
9. Revenue and costs are being compared over a single volume base (e.g.,
units).
Method Applied
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The contribution Margin Method:
Main tools
The main tools used for a CVP analysis are:
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YES
Break-even Quantity
Break Even
50% 50%
Quaqntity
45%
40% 2. Target Profit
40%
35%
30%
30%
20% CVP formulas can be used to
25%
20%
10% determine the sales volume needed
15%
10%
0% to achieve a target profit.
5%
0%
Equation:
YES NO
50% 50%
40% 40%
30% Target of 30% Target of
20% Profit 20% Profit
10% 10%
0% 0%
3. Margin of Safety
The margin of safety is the excess of budgeted sales dollars over break- even
volume of sales dollars. It states the amount by which sales can drop before
losses are incurred. The higher the margin of safety, the lower the risk of not
breaking even.
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The formula for calculation:
YES NO
50% 50%
40% 40%
30% Margin of 30% Margin of
20% safety 20% safety
10% 10%
0% 0%
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The Degree of Operating Leverage (DOL) can be computed in a number of
equivalent ways; one way it is defined as the ratio of the percentage change
in Operating Income for a given percentage change in Sales
YES
NO
70.00%
60.00%
40.00%
50.00%
40.00% Degree of
30.00%
operating
30.00%
Leverage 20.00% Degree of
20.00% operating
10.00% 10.00% Leverage
0.00%
0.00%
5. Sensitivity Analysis:
Sensitivity analysis (SA) is the study of how the variation (uncertainty) in
the output of a mathematical model can be apportioned, qualitatively or
quantitatively, to different sources of variation in the input of a model.[1]".
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1. The model resemblance with the process under study
2. The quality of model definition
3. Factors that mostly contribute to the output variability
4. The region in the space of input factors for which the model variation
is maximum
5. Optimal - or instability - regions within the space of factors for use in
a subsequent calibration study
6. Interactions between factors
YES NO
70.00%
35.00%
60.00% 30.00%
50.00% 25.00%
40.00% 20.00%
Sensitivity Sensitivity
Analysis 15.00% Analysis
30.00%
10.00%
20.00%
5.00%
10.00%
0.00%
0.00%
NATURE OF ORGANIZATION
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1. Service company:
Service (also known as Client Service) is the provision of service to
customers before, during and after a purchase. Service is a series of
activities designed to enhance the level of customer satisfaction. Its
importance varies by product, industry and customer. As an example,
an expert customer might require less pre-purchase service (i.e., advice)
than a novice. In many cases, service is more important if the purchase
relates to a “service” as opposed to a “product".
2. Financial company:
An entity whose income exceeds its expenditure can lend or invest the
excess income. On the other hand, an entity whose income is less than
its expenditure can raise capital by borrowing or selling equity claims,
decreasing its expenses, or increasing its income. The lender can find a
borrower, a financial intermediary such as a bank, or buy notes or
bonds in the bond maket. The lender receives interest, the borrower
pays a higher interest than the lender receives, and the financial
intermediary pockets the difference.
3. Multinational Company:
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Multinationals have played an important role in globaliztion. Countries
and sometimes subnational regions must compete against one another
for the establishment of MNC facilities, and the subsequent
tax,revenue, employment, and economic activity.
Non – Profit companies are that which dose not get any profit but hey
take off their expenses. Their cost and revenue re same. In case of
Bangldesh, in non – profit orgnization like NGO
5. Merchandising company:
Goods and commodities sold at the retail level. Merchandising is the
buying, presenting, and selling of merchandise. This includes all
the related activities of advertising, displaying, and promoting
merchandise to the retail customer
Limitations:
CVP is a short run, marginal analysis: it assumes that unit variable costs and
unit revenues are constant, which is appropriate for small deviations
from current production and sales, and assumes a neat division between
fixed costs and variable costs, though in the long run all costs are
variable. For longer-term analysis that considers the entire life-cycle of
a product, one therefore often prefers activity-based costing or
throughput accounting.[2]
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Limitation of companies CVP analysis:
1. Lack of technical knowledge.
2. Lack of enough staff.
3. In case of service provider all elements are not available for analyzing.
4. Lack of government rules and regulatory.
5. Lack of efficient manpower.
6. Leader conflict between accountant and leading department.
7. In case of inflation of economy.
8. In case of foreign exchange.
9. Lack of modern technology.
Summary:
Cost- Volume- Profit (CVP) analysis is one of the most powerful tools that managers
have at their command. It helps them understand the relationships among cost, volume,
and profit by focusing on interactions among the following five elements:
1.Prices of the product
2.volume or level of activity
3. Per unit variable cost
4.Total fixed cost
5.Mix of product sold.
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Bibliography
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