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    Cost Volume Profit Analysis

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    xxpinkywitchxx
    CVP analysis is a short-run model that focuses on the relationships between selling price, variable costs, fixed costs, volume, and profit. It helps managers estimate production levels needed for a company to breakeven. Key assumptions include costs being variable or fixed, predictable revenues and costs, and constant unit prices and costs over the relevant range. CVP analysis examines contribution margin, breakeven point, and profit requirements to determine target sales levels.

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    Cost Volume Profit Analysis

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    xxpinkywitchxx
    690 views15 pages
    CVP analysis is a short-run model that focuses on the relationships between selling price, variable costs, fixed costs, volume, and profit. It helps managers estimate production levels needed for a company to breakeven. Key assumptions include costs being variable or fixed, predictable revenues and costs, and constant unit prices and costs over the relevant range. CVP analysis examines contribution margin, breakeven point, and profit requirements to determine target sales levels.

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    CVP analysis is a short-run model that focuses on the relationships between selling price, variable costs, fixed costs, volume, and profit. It helps managers estimate production levels needed for a company to breakeven. Key assumptions include costs being variable or fixed, predictable revenues and costs, and constant unit prices and costs over the relevant range. CVP analysis examines contribution margin, breakeven point, and profit requirements to determine target sales levels.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    690 views15 pages

    Cost Volume Profit Analysis

    Uploaded by

    xxpinkywitchxx
    CVP analysis is a short-run model that focuses on the relationships between selling price, variable costs, fixed costs, volume, and profit. It helps managers estimate production levels needed for a company to breakeven. Key assumptions include costs being variable or fixed, predictable revenues and costs, and constant unit prices and costs over the relevant range. CVP analysis examines contribution margin, breakeven point, and profit requirements to determine target sales levels.

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    The key takeaways are that CVP analysis focuses on the relationships between selling price, variable costs, fixed costs, volume and profit. It helps managers estimate break-even points. The assumptions are that costs are variable or fixed, costs and revenues change linearly, and inventories and time value are ignored.

    CVP analysis is a short-run model that focuses on the relationships among selling price, variable costs, fixed costs, volume and profit. It helps managers estimate the production/sales levels needed for the company to break-even. It is also known as break-even analysis.

    The underlying assumptions of CVP analysis are that all costs are either variable or fixed, total costs and revenues change predictably and linearly, fixed costs remain constant, variable costs per unit remain constant, selling price and sales mix stay the same, inventories do not change significantly, and the time value of money is ignored.

    COST-VOLUME-PROFIT ANALYSIS

    CVP ANALYSIS
    • SHORT RUN MODEL THAT FOCUSES ON THE RELATIONSHIPS AMONG
    SELLING PRICE, VARIABLE COSTS, FIXED COSTS, VOLUME AND PROFIT.
    • HELPS MANAGERS IN ITS PLANNING FUNCTION BY ESTIMATING THE
    LEVEL OF PRODUCTION AND SALES, BOTH IN UNITS AND IN
    AMOUNTS, REQUIRED FOR THE COMPANY TO BREAKEVEN
    • ALSO KNOWN AS BREAKEVEN ANALYSIS
    UNDERLYING ASSUMPTIONS
    • ALL COSTS ARE EITHER VARIABLE OR FIXED
    • TOTAL COSTS AND TOTAL REVENUE ARE PREDICTABLE AND LINEAR
    • FIXED COSTS REMAIN CONSTANT OVER THE RELEVANT RANGE
    • UNIT VARIABLE COSTS REMAIN CONSTANT OVER THE RELEVANT
    RANGE
    • UNIT SELLING PRICE AND SALES MIX REMAIN CONSTANT OVER THE
    RELEVANT RANGE
    • FINISHED GOODS AND IN PROCESS INVENTORIES DO NOT CHANGE
    SIGNIFICANTLY
    • THE TIME VALUE OF MONEY IS IGNORED
    CONTRIBUTION MARGIN
    • TOTAL CONTRIBUTION MARGIN
    • CONTRIBUTION MARGING PER UNIT
    • CONTRIBUTION MARGIN RATIO

    Example. Ray Company manufactures cell phones and sells them to


    wireless service providers for $60. Ray Company’s variable cost is $35
    per phone. Compute for the unit contribution margin, contribution
    margin ratio and total contribution margin if the total units to be sold is
    1,500.
    PROBLEM 1
    A retail company determines its selling price by marketing up variable
    costs 60%. In addition, the company uses frequent selling price
    markdowns to stimulate sales. If the markdown average 10%, what is
    the company’s contribution margin ratio?
    a. 27.5%
    b. 30.6%
    c. 37.5%
    d. 41.7%
    (CIA Adapted)
    BREAKEVEN POINT
    • The level of sales and production at which the company earns no
    profit neither incurs any loss
    • Breakeven Point in Units
    • Breakeven Point in Sales Revenue

    Example. Ray Company manufactures cell phones and sells them to


    wireless service providers for $60. Ray Company’s variable cost is $35
    per phone. The total amount of fixed costs amounted to $150,000.
    Determine the BEP in Units and in Sales Revenue.
    PROBLEM 2
    A company manufactures a single product. Estimated cost data regarding this
    product and other information for the product and the company are as follows:

    Sales per unit price $40


    Total variable production cost per unit $22
    Sales commission (on sales) 5%
    Fixed cost and expenses:
    Manufacturing overhead $5,598,720
    General and administrative $3,732,480
    Effective income tax rate 40%
    The number of units the company must sell in the coming year to breakeven is:
    a. 388,800 units
    b. 518,400 units
    c. 583,200 units
    d. 972,000 units CIA Adapted
    PROBLEM 3
    A company sells a single product at a price of $50 per unit. The company has budgeted to sell
    600,000 units in the coming year. The company’s budgeted income statement for the coming
    year is as follows:
    Sales ($50 x 600,000) $30,000,000
    Cost of sales 20,000,000
    Gross profit $10,000,000
    Sales, general and administrative expenses 7,500,000
    Operating income $2,500,000

    Cost of sales is 75% variable cost and 25% fixed cost. Sales, general and administrative expenses
    is 40% variable cost and 60% fixed cost. Management wants to know on how sales volume can
    go without the company suffering an operating loss.
    Based on the budgeted information, what is the company’s breakeven points units?
    a. 475,000 units
    b. 449,910 units
    c. 500,000 units
    d. 300,000 units HOCK
    PROBLEM 3 CONT.
    What is the company’s breakeven point in revenue?
    a. $25,000,000
    b. $22,500,000
    c. $28,500,000
    d. 23,750,000
    PROBLEM 4
    KJR Corp. has the following partial contribution income statement at a
    sales volume of 900,000 units for its single product:
    Sales revenue $81,000,000
    Variable cost 56,700,000
    Contribution margin $24,300,000

    KJR’s controller has calculated that the company’s break-even point is


    750,000 units. What are KJR’s total fixed costs?
    a. $24,300,000
    b. $4,050,000
    c. $20,250,000
    d. $18,225,000 HOCK
    PROFIT REQUIREMENT
    • TARGET PRE-TAX PROFIT
    • TARGET VOLUME
    • TARGET SALES REVENUE

    Example. Assume the following: The selling price of a product is $4.00,


    variable costs are $2.20, and fixed costs are $4,600, and the company
    must achieve a minimum pre-tax profit of $5,000. What is the required
    sales level to achieve the pre-tax profit?
    Profit requirement
    • Target pre-tax profit margin
    • Target volume
    • Target sales revenue

    Example. Assume the same facts in the previous exercise: selling price
    is $4.00, variable costs are $2.20, and the fixed costs are $4,600.
    However, we will change the profit requirement to 35% of sales.
    Same requirements.
    Profit requirement
    • Target after-tax profit
    • Target volume
    • Target sales revenue

    Example. Assume the following: The selling price of a product is $4.00,


    variable costs are $2.20, and fixed costs are $4,600, and the company
    must achieve a minimum after-tax profit of $5,000. What is the
    required sales level to achieve the target profit assuming there is 40%
    tax rate?
    Profit requirement
    • Target after-tax profit margin
    • Target volume
    • Target sales revenue

    Example. Assume the same facts in the previous exercise: selling price
    is $4.00, variable costs are $2.20, and the fixed costs are $4,600.
    However, we will change the profit requirement to 20% after-tax of
    sales revenue.
    Determine the required sales volume and sales revenue.

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