2. Cost Volume Profit (CVP):- CVP analysis explores the
relationship between revenue, cost, and volume and their
effect on profits.
1. Introduction.
2. Fixed costs.
3. Variable costs.
4. Semi variable costs.
5. Contribution margin.
6. Break even point.
7. PV Ratio.
3. 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.
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12. Margin of Safety
Margin of Safety (MOS) is the difference between the
actual sales and the sales at the break-even level.
Margin of safety is a principle of investing in which an investor
only purchases securities when their market price is
significantly below their intrinsic value. In other words, when
the market price of a security is significantly below your
estimation of its intrinsic value, the difference is the margin of
safety.
13. •The margin of safety is a measure of the profitability risk of a
business. A business is profitable when revenue exceeds the costs. A
part of the revenue is used to cover the breakeven costs, while the
remaining part is profit. This remaining part is called the Margin of
Safety.
•The margin of safety is the difference between the amount of
expected profitability and the break-even point. The margin of
safety formula is equal to current sales minus the
breakeven point, divided by current sales.
14. P/V Ratio
The Profit Volume (P/V) Ratio is the measurement
of the rate of change of profit due to change in
volume of sales.
P/V Ratio = Sales – Variable cost/Sales i.e. S –
V/S. or, P/V Ratio = Fixed Cost + Profit/Sales i.e. F +
P/S. or, P/V Ratio = Change in profit or
Contribution/Change in Sales. This ratio can also be
shown in the form of percentage by multiplying by
100. Thus, if selling price of a product is Rs.
16. 1. Liquidity – the ability of the firm to pay its way
2. Investment/shareholders – information to
enable decisions to be made on the extent of the risk
and the earning potential of a business investment
3. Gearing – information on the relationship between
the exposure of the business to loans as opposed to
share capital
4. Profitability – how effective the firm is at
generating profits given sales and or its capital
assets
5. Financial – the rate at which the company sells its
stock and the efficiency with which it uses its assets
19. Profitability measures look at how much profit the firm generates from
sales or from its capital assets
Different measures of profit – gross and net
Gross profit – effectively total revenue (turnover) – variable costs (cost of sales)
Net Profit – effectively total revenue (turnover) – variable costs and fixed costs
(overheads)
Gross Profit Margin = Gross profit / turnover x 100
The higher the better
Enables the firm to assess the impact of its sales and how much it cost to
generate (produce) those sales
A gross profit margin of 45% means that for every £1 of sales, the firm
makes 45p in gross profit
20. Net Profit Margin = Net Profit / Turnover x 100
Net profit takes into account the fixed costs involved in production – the overheads
Keeping control over fixed costs is important – could be easy to overlook for example
the amount of waste - paper, stationery, lighting, heating, water, etc.
e.g. – leaving a photocopier on overnight uses enough electricity to make 5,300 A4
copies. (1,934,500 per year)
1 ream = 500 copies. 1 ream = £5.00 (on average)
Total cost therefore = £19,345 per year – or 1 person’s salary
Return on Capital Employed (ROCE) = Profit / capital employed x 100
The higher the better
Shows how effective the firm is in using its capital to generate profit
A ROCE of 25% means that it uses every £1 of capital to generate 25p in profit
Partly a measure of efficiency in organisation and use of capital
21.
22. A leverage ratio is any one of several financial measurements that assesses the
ability of a company to meet its financial obligations.
What does leverage mean in finance?
Leverage is the use of debt (borrowed capital) in order to undertake an
investment or project. ... Companies can use leverage to finance their assets. In
other words, instead of issuing stock to raise capital, companies can use debt
financing to invest in business operations in an attempt to increase shareholder
value.
In finance, leverage is a strategy that companies use to increase assets, cash
flows, and returns, though it can also magnify losses. There are two main
types of leverage: financial and operating. To increase financial leverage, a firm
may borrow capital through issuing fixed-income securities.
Activity:-Purchasing and selling assets or products, organizing accounts, and
maintaining accounts, for example, are financial activities. Arranging loans,
selling bonds or stocks are also financial activities.
23. Operating Financial and Combined Leverages
Operating leverage is an indication of how a
company's costs are structured and also is used
to determine its breakeven point. Financial leverage
refers to the amount of debt used to finance the
operations of a company.
