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Cost-Volume-Profit Analysis
Costs
Revenue
Presentation outline
Accounting Approach to Breakeven
Analysis. Single Product firm BEP Multi-product firm BEP Without constraint With many resource constraints Economic Approach to Breakeven Analysis. Cost Volume Profit Analysis under Uncertainty Discrete variable approach Continuous variable approach
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Concepts of CVP Cost-Volume-Profit Assumptions Concepts of BEP & CM CVP Equation Approach Contribution Margin Approach Graphical presentation Target profit Margin of Safety Limitations of CVP analysis
prices volumes fixed and variable costs contribution margins Profits Calculate the level of sales necessary to achieve a target profit Set sales price
is equal to sales i.e. inventory level do not changes. Costs are linear throughout the entire relevant range and they can accurately be divided into variable and fixed elements. In multi-product companies, the sales mix is constant.
Break-even point is the point in which the volume of activity where the organizations revenues and expenses are equal.BEP is the point where operating income equals zero.
Total revenues = Total costs
= CM Ratio
7-13
= Pq-(F+Vq)
where, = Profit before tax P = Unit selling price=$50 q = Sales volume in units=1000units V = Unit variable cost = $30 F = Total fixed costs=$10000 = 501000 (10000 +301000) =$ 10000
Where, q=Break even volume P-V=Contribution margin F=fixed cost Calculation of BEP sales in units : If , Sales price per unit=$ 50 Variable cost pr unit=$ 30 Fixed cost =$ 10000 Contribution margin per unit=$ (50-30) =$ 20 Break even sales in units, Y = 10000/20 = 500 units
BEP sales in dollar: y=F/ 1-P/V Where, y=Break even sales in dollar 1-P/V=Contribution margin ratio F=fixed cost Calculation of BEP sales in units : If , Sales price per unit=$ 50 Variable cost pr unit=$ 30 Fixed cost =$ 10000 Contribution margin ratio=1-30/50 =0.40 Break even sales in dollar , y = 10000 /0.40 = $25000
Breakeven Point
Sales Variable expenses = Fixed expenses
Proof
Sales Less : variable expense Contribution margin Less : fixed expense Net income $ 25000 $ 15000 $ 10000 $ 10000 ---
Cost-Volume-Profit Graph
450,000 400,000 350,000 300,000
Break-even point
Dollars
Fixed expenses
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400 Units
500
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7-21
Profit-Volume Graph
Break even point is the intersection between the total revenues line and the total cost line. The area between the total revenues line and the total cost line at a volume below the breakeven point represent the loss area. The corresponding area above the break even point represents the profit area.
Profit-Volume Graph
100,000 80,000 60,000 40,000
Break-even point
Profit
20,000 0 (20,000) (40,000) (60,000) ` 100 200 300 400 Units 500 600 700
7-23
=10000+(20000/1-.50) /(50-30) =2500 units After tax target sales in dollars , Y=F+Z/1-t /(1-V/P) =10000+(20000 /1-.50) /1- 30/50 =$125000 where , q=sales volume in units =1000 units P=selling price per unit= $50 V=variable cost per unit =$30 F=fixed cost =$10000 Z=desired profit after tax =$20000 T=tax rate=50%
equals zero .The operating profit for any given sales volume greater than the breakeven volume equals the profit realised by the additional volume beyond the breakeven volume .
and fixed costs and taken into account , the breakeven formula can be adapted to reflect the simultaneous changes in all relevant variables . Example: Assume that Smith is considering the impact of different changes on his original estimates . He believe that a decrease of 20% per unit in the selling price may lead to a 30% increase in the sales volume . An improvement of production techniques would lead to a decrease of 90% per unit variable cost and an increase of $46500 per year in the fixed costs . What level of sales dollar must Smith achieve to attain an after tax netincome of $18000 if the current tax rate is 50% .
break-even sales revenue. The amount by which sales can drop before losses begin to be incurred.
Margin of safety
END OF PRESENTATION
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