CVP Analysis

1. Fundamental of
Management Accounting
CHAPTER4-CVP ANALYSIS

2. Topics Covered
Cost-Volume Profit Analysis
Contribution
Break even point
Margin of safety
Break even chart
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3. Cost Volume Profit Analysis-CVP
Effect on future profit due to changes in fixed cost, variable cost, sale
price , quantity and mix.
Assumptions:
Sales price per unit is constant.
Variable costs per unit are constant.
Total fixed costs are constant.
Everything produced is sold.
Costs are only affected because activity changes.
If a company sells more than one product, they are sold in the same mix.
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4. Contribution
Contribution =Sales value- variable cost
Contribution to sales ratio-C/S Ratio (P/V ratio)
=Contribution
Sales
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5. Break Even Point
The break-even point represents the level of sales where net income equals zero.
In other words, the point where sales revenue equals total variable costs plus
total fixed costs, and contribution margin equals fixed costs.
Break even point in units
= Fixed Cost
Contribution per unit
Break even point in sales value
= Fixed Cost
Contribution ratio
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6. Margin Of Safety
A point above which profit will be made.
Margin of safety:
=Budgeted sales-breakeven sales
Percentage Margin of safety:
= Budgeted sales-breakeven sales
Projected sales
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7. Calculation of sales to achieve
certain profit
Sales in units
=Fixed cost + Desired Profit
Contribution per unit
Sales in value
=Fixed cost + Desired Profit
C/S Ratio
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8. Example
The manufacturing company decided to proceed with the original budget and has
asked you to determine how many units must be sold to achieve a profit of
£45,500.
Solution
Required sales =Fixed costs + required profit
Contribution per unit
=42,000+ 36,000+ 45,500 = 9,500 Units
13
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9. Break Even Chart
Axis Y- Cost and revenue
Axis X-Level of activity
Break even point- where total cost and sales revenue meets.
Fixed cost will be shown as separate line.
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10. Break even chart
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11. Contribution Break Even
Chart
Axis Y- Cost and revenue
Axis X-Level of activity
Break even point- where total cost and sales revenue meets.
Variable cost will be shown as separate line.
Difference between sales line and variable cost line is contribution.
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12. Profit Volume Chart
Single line for profit and loss of each activity.
Axis Y-Profit and losses.
Axis X-Zero Profit or loss
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13. PV Chart
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14. Multi product Break Even
Analysis
Assumptions: sales mix remain constant.
Calculation of weighted average C/S ratio
=Total Contribution
Total Revenue
Calculation of Break even revenue:
=Fixed Cost
Weighted average C/S ratio
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15. Multi product PV Graph
Step1- Calculation of C/S ratio of each product.
Step2-Axis X- Cumulative Sales
Step3- Drawing of contribution per unit on product in order of
profitability.
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16. Sensitivity Analysis
It determines the effects of various changes in the CVP model.
The impact on revenue if variable cost changes, if product mix changes
etc.
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17. Advantages of break even
analysis
 It indicates the lowest amount of activity necessary to prevent loss.
Helps in decision making.
Explains the relationship between cost-production volume and returns.
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18. Limitation of break even
analysis
CVP analysis is based on assumptions about behavior of
Revenue, cost and volume. Change in behavior will later the break even
point.
CVP chart also get impacted by assumptions.
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19. Practice Questions
Q1-A Ltd has fixed costs of £60,000 per annum. It manufactures a single product which
it sells for £20 per unit. Its contribution to sales ratio is 40 per cent. A Ltd’s breakeven
point in units is:
(A) 1,200
(B) 3,000
(C) 5,000
(D) 7,500.
Q2-The P/V ratio is the ratio of profit generated to the volume of sales.
True
False
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20. Thanks
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