CVP Analysis 17th Edition By Azad and Mansoor.pptx

The 17th edition of CVP Analysis provides a concise overview of how costs, volume, and prices influence profitability, offering practical insights and real-world applications for students and professionals in managerial accounting. With updated content and examples, it serves as an essential resource for mastering cost-volume-profit analysis.

1. 17 th Edition Cost-Volume-Profit Relationships Presented By: Mansoor Ahmed Rahoojo & Azad Ali Sandano

2. Agenda The basics of cost-volume-profit Cost-volume-profit in equation Cost-volume-profit in graph CM ratio application of cost-volume-profit Target profit breakeven C ost-volume-profit consideration in choosing a cost structure 2

3. The Basics Of Cost Volume Profit Analysis It examines the relationship between sales volume, costs, and profit to determine breakeven points and profit targets. Its primary purpose is to estimate how profits are affected by the following five factors: Selling prices Sales Volume Unit variable costs Total fixed costs and Mix of products sold. 3

4. Contribution Margin It represents the incremental money generated for each product after deducting the variable portion of the firm's costs. Low contribution margins are present in labor-intensive companies with few fixed expenses, capital-intensive industrial companies have higher fixed costs and higher contribution margins. Formula and Calculation of Contribution Margin : ​C=R−V ( Where C is the contribution margin, R is the total revenue, and V represents variable costs. ) 4

5. Cost Volume Profit In Equation Profit = Sales- variable expenses - fixed expenses Sales = Selling price per unit x Quantity sold Variable expenses = variable expenses per unit x quantity sold Profit = (P x Q – V x Q) – fixed expenses Profit = Unit CM x Q – fixed expense Unit CM = selling price per unit – variable expenses per unit 5

6. Cost Volume Profit In Graph 6

7. CM ratio = contribution margin / Sales Variable expense ratio = variable expenses/sales Relationship between contribution margin ratio and variable expense ratio : CM ratio = sales – variable expense/sales CM ratio = 1 – variable expense ratio Change in contribution margin = Cm ratio x changes in sales Contribution Margin Ratio 7

8. Application of cost-volume-profit Analysis Cost-volume-profit (CVP) analysis is a way to find out how changes in variable and fixed costs affect a firm's profit. Companies can use CVP to see how many units they need to sell to break even (cover all costs).  Cost-volume-profit analysis is used to determine whether there is an economic justification for a product to be manufactured.  8

9. Application of cost-volume-profit Analysis Break-even analysis: The Equation Method : Profit = Unit CM x Q – fixed expense The Formula Method: Unit sales to break- even = Fixed expense / Unit CM Break-Even in Dollar Sales: Dollar sales to break-even = Fixed expenses / CM ratio 9

10. Target Profit Analysis Equation method : Profit = Unit CM x Q – fixed expense The Formula Method : Unit sales to attain the target profit = Target profit + Fixed expenses / Unit CM Target Profit Analysis in Terms of Dollar Sales : Dollar sales to attain the target profit = Total profit + Fixed expense / Unit CM 10

11. Cost-volume-profit consideration in choosing a cost structure Cost structure is an organization's relative proportion of fixed and variable costs. Operating Leverage : It is a measure of how sensitive net operating income is to a given percentage change in unit sales. If operating leverage is high, a small percentage increase in unit sales can produce a much larger percentage increase in net operating income. Degree of operating leverage = Contribution margin / Net operating income Percentage change in net operating income = Degree of operating leverage x Percentage change in sales 11

12. Sales Mix sales mix refers to the relative proportions in which a company’s products are sold. The idea is to achieve the combination, or mix, that will yield the greatest profits. 12

13. Margin Of Safety Margin of safety in dollars = Total sales − Break-even sales Margin of safety percentage = Margin of safety in dollars / Total sales 13

14. Operating leverage In business, operating leverage serves a similar purpose. Operating leverage is a measure of how sensitive net operating income is to a given percentage change in unit sales. Operating leverage acts as a multiplier. If operating leverage is high, a small percentage increase in unit sales can produce a much larger percentage increase in net operating income. Degree of operating leverage = Contribution margin Net operating income 14

15. ABOUT SUKKUR IBA UNIVERSITY KANDHKOT CAMPUS Sukkur IBA University – Kandhkot Campus has been established to offer access to quality education to the people of underprivileged areas of Pakistan. With its geographical importance in Kandhkot city, the campus provides easy access to students from south Punjab, northern Sindh, and southeast Baluchistan. The campus offers admission in various programs including undergraduate, foundation semester, summer program, and short courses. 15

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