Cost Volume Profit Analysis (1).pptxxxxxxx

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1. Cost Volume Profit Analysis

2. CVP Analysis Cost Volume Profit Analysis is used to find answers to the following: 1) Number of units to be sold for Breakeven. 2) Number of units to be sold to achieve required target profit. 3) Amount of sales required for Breakeven / Target Profit. 4) Selling Price to achieve the Target Profit for a given Sales Volume. 5) If selling price is reduced by a specific amount, the additional sales required to maintain existing profit level.

3. Profit = Total Sales – Total Costs Profit = Total Sales –( Total Fixed Costs – Total Variable Costs) Profit = (Selling Price per Unit x No. of Units Sold) – (Fixed Costs +(Variable Cost per Unit x No. of Units Sold) Contribution = ( Total Sales – Total Variable Cost) ( Contribution is the amount that is available to cover fixed costs and profit .) Contribution to Sales Ratio = Contribution / Sales Total Sales Value for Break Even = ( Fixed Cost / Contribution per Unit) x Selling Price per Unit Total Sales for Breakeven = Fixed Costs/ Contribution to Sales Ratio Total Units to be Sold for Break Even = Fixed Cost /Contribution per Unit Margin of Safety Units = Budgeted Sales Units –Break Even Sales Units Margin of Safety = Budgeted Sales – Break Even Sales CVP Formulas

4. Example – Break Even The selling price per unit is Rs 12 and the sales volume is 20000 units. The Variable Cost per unit is Rs 4 and Fixed Costs are Rs 120000. Calculate the Break Even Sales in Units and Break Even Sales Revenue. Break Even Sales in Units = Fixed Cost/ Contribution per Unit Contribution per Unit = Unit Sale Price – Unit Variable Cost Contribution per Unit = 12 – 4 = Rs 8 Break Even Sales in Units = 120000/8 = 15000 Units Break Even Sales Value = (Fixed Cost/ Contribution per Unit) x Unit Selling Price Break Even Sales Value = (120000/8) x 12 = Rs 180000

5. Example – Target Profit Sales Units for a Targeted Profit = (Fixed Cost + Target Profit)/Contribution Per Unit The selling price per unit is Rs 12 and the sales volume is 20000 units. The Variable Cost per unit is Rs 4 and Fixed Costs are Rs 120000. The Targeted Profit is Rs 100000 Sales Units for a Targeted Profit of Rs 100000 = (120000 + 100000)/ 8 = 27500 Units

6. Practice Question A Company is forecasting a Sales of Rs 20 Lacs for the coming year with a contribution of Rs 8 lacs . The Fixed Costs are Rs 6 lacs . Using this information, find: a) Break Even Sales b) Sales Required to earn a Profit of Rs 5 lacs c) Margin of Safety Contribution to Sales Ratio = Rs 800000 / Rs 2000000 = 40% Break Even Sales Value = Rs 600000/.40 = Rs 15 Lacs Sales required for the Target Profit = ( Rs 6 Lacs + Rs 5 Lacs )/.40 = Rs 27.50 Lacs Margin of Safety = ( Rs 20 Lacs – Rs 15 Lacs ) = Rs 5 Lacs