The document discusses cost-volume-profit (CVP) analysis, which examines how changes in volume, costs, prices, and sales mix affect profits. It outlines assumptions of CVP, describes techniques like break-even analysis, and provides examples of using CVP to determine sales volume needed to achieve a profit target or how profits would change with cost/price increases. The document also includes a case study on a tea company analyzing how much variable costs must decrease to maintain profits as sales drop 40% due to eliminating a middleman.

1. Era Business School, New
AJ/ Ajay K Raina; PGDM

2. SCOPE
• A brief introduction to the topic.
• Case study narration.
• Problem solving.
Era Business School, New
AJ/ Ajay K Raina; PGDM

3. COST-VOLUME-PROFIT ANALYSIS
• COST-VOLUME-PROFIT (CVP) analysis is a systematic
method of examining the effects of changes in an
organization’s volume of activity on its costs,
revenue and profit .
• In other words, CVP analysis helps in analysing the
effects of change in SP or sales volume or sales mix
or fixed costs on the profits of the firm.
Era Business School, New
AJ/ Ajay K Raina; PGDM

4. USAGE OF CVP ANALYSIS IN
MANAGERIAL DECISIONS
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Product pricing.
Accepting / rejecting sales orders.
What product lines to promote?
What level of output is required to achieve a set
level of net profit?
• Feasibility of profit plan.
• Technology usage.
Era Business School, New
AJ/ Ajay K Raina; PGDM

5. CVP ANALYSIS : TYPICAL QUESTIONS
• How many photocopiers must ABC produce to earn a
profit of, say ₹ 800,000?
• At what sales volume will XYZ’s total revenues and
total costs be equal?
• What profit will PQR earn at an annual sales volume
of, say ₹ 30 million?
• What will happen to the profit of JKL if there is a 20%
increase in the cost of food and a 10%increase in the
selling price of meals?
Era Business School, New
AJ/ Ajay K Raina; PGDM

6. TECHNIQUES OF CVP
• Profit-volume (P/V) or Contribution Margin
analysis; and
• Break-even analysis.
Era Business School, New
AJ/ Ajay K Raina; PGDM

7. ASSUMPTIONS UNDERLYING CVP
ANALYSIS
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1. The behavior of total revenue is linear (straight line). This implies that the price of the
product or service will not change as sales volume varies within the relative range.
2.
The behavior of total expenses is linear (straight line) over the relevant range.
Expenses can be categorized as fixed, variable, or semi variable. Total fixed expenses
remain unchanged as activity varies.- The efficiency and productivity of the production
process and workers remain constant
3.
In multi-product organizations, the sales mix remains constant over the relevant range.
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. In manufacturing firms, the inventory levels at the beginning and end of the period are the
same. This implies that the number of units produced during the period equals the number
of units sold.
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Era Business School, New
AJ/ Ajay K Raina; PGDM

8. BREAK-EVEN ANALYSIS
• A break-even analysis indicates at what level cost
and revenue areequal and there is no profit and no
loss.BEP: Total costs = Total revenue
• At BEP, Contribution = Fixed costs
• BES (units) = FC / CMPU
• Cash BEP(units) = Cash fixed costCash contribution per
unit
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Era Business School, New
AJ/ Ajay K Raina; PGDM

9. BREAK-EVEN ANALYSIS
• Total contribution margin available to contribute to cover
fixedexpenses after all variable expenses
• • Unit contribution margin
• • Total contribution margin
• • Weighted contribution margin
• • Contribution-margin ratio
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Era Business School, New
AJ/ Ajay K Raina; PGDM

10. Era Business School, New
AJ/ Ajay K Raina; PGDM

11. CHANE IN UNIT VARIABLE EXPENSES
• Capacity 9000
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• Old BEP - 8,000 units
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• New BEP - 9,600 units
• CVP analysis in such case would not solve this problem, but
itwill direct the management ‘s attention to potentially
seriousdifficulties
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Era Business School, New
AJ/ Ajay K Raina; PGDM

12. LIMITATIONS OF CVP ANALYSIS
• CVP analysis suffers from a limitation that it does
notinclude adjustments for risk and uncertainty.
• Contribution itself is not a guide if there is some key
or limitingfactor.
• Decisions by sales staff and marketing personnel may
lead tolow profits or loss.
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Era Business School, New
AJ/ Ajay K Raina; PGDM

13. AREAS OF APPLICATION IN INDUSTRY
• Banking
• Hotel
• Software
• Non-Profit-Organistions
• Newspaper Industry
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Era Business School, New
AJ/ Ajay K Raina; PGDM

14. CASE STUDY: AMRITA TEA
• By Prof. K Balakrishnan (C) 1977 by the Indian Institute of
Management, Ahmadabad.
• Amrita tea of Darjeeling had always sold its
products through a sole selling agency. The government
started devising schemes to eliminate middlemen and
Amrita wanted to respond to the new public policy towards
private distribution . This year, Amrita had made a net
profit before tax (NPBT) of 10percent on sale of Rs 20 lakhs.
It is feared that elimination of the sole selling agency and
selling directly to retailers would result in a 40percent drop
in sales next year. Fixed expenses would increase from the
present figure of Rs 2.0 lakhs to 3.0 lakhs owing to the
additional warehousing, distribution, and other marketing
efforts.
Era Business School, New
AJ/ Ajay K Raina; PGDM

15. CASE STUDY: AMRITA TEA
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• Elimination of middlemen would, of course, save Amrita a
substantial chunk of variable costs. They were not willing to give the
details of the sole selling agency agreement and how much variable
cost they would eliminate by the switch-over. Instead, they wanted
advice on the following:
• How much the variable costs need to be reduced next year in order
to make the same NPBT (not in terms of percentage, but in absolute
amount), under the new scheme as they made this year.
• 2. If they are likely to make a NPBT of Rs 1.8 lakh next year under
the new arrangement, what do you think is happening to
their break-even? Would they have a larger or smaller “margin of
safety,” and by how much?
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Era Business School, New
AJ/ Ajay K Raina; PGDM

16. Question 1
• How much of the variable costs needs to be
reduced next year in order to make the same
NPBT (not in terms of percentage, but in
absolute amount), under the new scheme as
they made this year?
Era Business School, New
AJ/ Ajay K Raina; PGDM

17. Solution
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Sales = Rs 20,00,000
Profit = 10% Rs 20,00,000
Fixed Cost = Rs 2,00,000
Variable Cost = Sales – (F+P)
= 20,00,000 – (2,00,000+2,00,000)=16,00,000
Era Business School, New
AJ/ Ajay K Raina; PGDM

18. Contd..
• Contribution = sales –variable cost
• = 20,00,000 - 16,00,000= 4,00,000
• P/V Ratio = C/S × 100
• = 4,00,000/20,00,000 × 100= 20%
• B.E.P to earn a profit of Rs 2,00,000
• = fixed cost + desired profit/ P/V Ratio
• = 2,00,000+2,00,000/ 20 × 20,00,000= 20,00,000
Era Business School, New
AJ/ Ajay K Raina; PGDM

19. Contd..
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II. Margin of Safety = Actual Sales –BES
= 20,00,000-10,00,000
= 10,00,000
i.e., (M/S)/AS × 100 = 50%
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V.C. to be reduced to make a profit of Rs 2,00,000
= 16,00,000 – 40%
= 16,00,000 – 6,40,000
= 9,60,000
Era Business School, New
AJ/ Ajay K Raina; PGDM

20. Contd..
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Variable cost = Sales-(FC+Profit)
=12,00,000-(3,00,000+2,00,000)
= 7,00,000
Reduction in Variable Cost
=9,60,000-7,00,000
=2,60,000
Contribution : 12,00,000-7,00,000
=5,00,000
P/V ratio= 5,00,000/12,00,000*100
= 41.67%
Era Business School, New
AJ/ Ajay K Raina; PGDM

21. Contd..
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BEP= 3,00,000/.4167
= 7,19,942
M/S = 12,00,000-7,19,942
= 4,80,058
M/S in % = 4,80,058/12,00,000*100
= 40%
Era Business School, New
AJ/ Ajay K Raina; PGDM

22. Question 2
• If they are likely to make a NPBT of Rs 1.8
lakh next year under the new arrangement,
what do you think is happening to their breakeven? Would they have a larger or smaller
“margin of safety,” and by how much?
Era Business School, New
AJ/ Ajay K Raina; PGDM

23. Solution
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Sales to make a profit of Rs 1,80,000
VC + Profit + FC
Therefore; 7,00,000+1,80,000+3,00,000
= Rs 11,80,000
• Contribution = S – V.C.
• = 11,80,000-7,00,000= 4,80,000
• P/V Ratio = C/S × 100=
• 4,80,000/11,80,000 × 100=
• 40.68%
Era Business School, New
AJ/ Ajay K Raina; PGDM

24. Contd..
• BEP = 3,00,000/40.68 × 100
• = 7,37,463
• M/S = 11,80,000 – 7,37,463
• = 4,42,537
• M/S in % = MS/AS ×100
• = 4,42,537/11,80,000 × 100
• = 37.5%
• V.C. Reduction: from 80% to 59.32%
• i.e., 20.68%
Era Business School, New
AJ/ Ajay K Raina; PGDM

25. THANK YOU!!
Era Business School, New
AJ/ Ajay K Raina; PGDM