Managerial economics-CVP Analysis and AC,TC, MC cost curves

Managerial economics-CVP Analysis and AC, TC, MC cost curves- MBA

1. Managerial Economics First semester --- 2 nd Mid PPT IMMANI CHANDRA SHEKAR REGD . NO. :19K61E0020 SUBJECT CODE :18MS01T2 1

2. Mid Topic C-V-P Analysis and AC , TC, MC Cost curves 2

3. Cost-Volume- Profit (CVP) Analysis : CVP analysis is a technique for studying the relationship between cost, volume and profit . The three factors of CVP analysis, i.e., costs, volume and profit are interconnected and dependent on another. 3

4. The Cost-Volume-Profit Relationship Is Of Immense Utility To Management As It Assists In Profit Planning, Cost Control And Decision Making. Cost-Volume-Profit Analysis Can Be Used To Answer Questions Such As: 1) How Much Sales Should Be Made To Avoid Losses? 2) How Much Should Be The Sales To Earn A Desired Profit? 3) What Will Be The Effect Of Change In Prices, Costs And Volume On Profits? 4) Which Product Or Product Mix Is Most Profitable? 5) Should we manufacture Or Buy Some Product or Component? 4

5. C-V-P Analysis Is Based On The Following Assumptions: Selling price, variable cost per unit, and total fixed costs are known and constant. volume of production is equal to the sales volume, i.e., there would be no opening or closing inventory during a period. Changes in the levels of revenues and costs arise only because of changes in the number of units produced and sold. 5

6. Total costs can be separated into two components ; a fixed component that does not vary with output level and a variable component that changes with respect to output level. All Revenues And Costs Can Be Added, Subtracted, And Compared Without Taking Into Account The Time Value Of Money . The efficiency and productivity level is constant at different levels of output. 6

7. Techniques of CVP Analysis: There are three basic techniques of CVP analysis. These are: 1. Contribution, 2 . Profit /Volume Ratio, 3 . Break-even Analysis, 7

8. 1. Contribution: Contribution is the difference between sales and variable cost or marginal cost of sales. It may also be defined as the excess of selling price over variable cost per unit. Contribution can be represented as: Contribution = Sales -Variable Cost. Or Contribution (per unit) = Selling Price -Variable cost per unit. Or Contribution = Fixed Costs + Profit /-loss . 8

9. 2. Profit-volume Ratio ( P\v Ratio or C/S Ratio): The profit-volume ratio, which is also called the 'contribution ratio' or marginal ratio'. P/V ratio can also be expressed as: P/V Ratio = (Contribution\Sales)*100 P/V Ratio = (Sales -Variable Cost Ratio)\Sales or P/V Ratio = (Fixed Cost + Profit)\Sales or P/V Ratio =Change In Profit or Contribution\Change in Sales . 9

10. 3.Break-Even Analysis: According To Matz, Curry and Frank, "A Break-Even Analysis Indicates At What Level of Costs And Revenue Are In Equilibrium ". It means At this Point No Profit or No Loss. Explained By The Following Equation: Break-Even Sales = Fixed Cost + Variable Cost Break-Even-Point in Units=Fixed Cost \ Contribution per unit Break-Even-Point Rupees= Fixed Cost \P/V ratio 10

11. Break-Even Chart 11

12. Average Cost (Ac), Total Cost (Tc), and Marginal Cost (Mc) Cost Curves: To Make good Decisions Concerning How Much to Produce and What Prices to Charge, a Manager Must Understand the Relationship between Firm’s Output Rate and Its Costs . We Learn To Analyse In Detail The Nature Of This Relationship, Both In Short Run And Long Run . 12

13. Short run cost -output relationship 13 In the short-run the firm cannot change or modify fixed factors such as plant, equipment and scale of its organization . In the short-run output can be increased or decreased by changing the variable inputs like labour, raw material, etc. Total costs (TC) = TFC + TVC Fixed Costs = Costs that do not vary with output Variable Costs = Costs that vary with the rate of production 13

14. 14 Average total costs (ATC) = Average fixed costs (AFC )= Total costs ( TC) Output(Q ) Average variable costs (AVC )= Total variable costs (TVC ) Output (Q) Total fixed costs (TFC) Output (Q) Marginal Cost : The change in total costs due to a the change in production units . Marginal costs (MC) = Change in total cost ( TC) Change in output( Q)

15. TFC TVC TC SHORT- RUN- TOTAL COST CURVE 15

16. SHORT- RUN- AVERAGE COST, MARGINAL COST CURVES 16 The Relationship Between Average and Marginal Costs When AC Falls MC also falls but MC is lower then AC When AC increase MC also increase but MC is higher then AC MC will cut the AC from below that is point of equilibrium . Both AC Curve & MC Curve U-Shaped

17. L ong run cost -output relationship 17 Long run stands for the time period in which the entire production factors of a firm become variable. Combination of many short-runs may be described as long-run. In the long run there is no fixed factor of production & hence there is no fixed cost. It can be defined as the minimum cost of producing different level of output in a long run. 17

18. Long Run total Cost Curves 18

19. Long Run average Cost Curves 19

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21. 21 LONG RUN MARGINAL COST CURVES 21

22. Conclusion: 22 C-V-P ANALYSIS AC TC MC

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