1 / 14

COST-VOLUME-PROFIT ANALYSIS A Managerial Planning Tool

COST-VOLUME-PROFIT ANALYSIS A Managerial Planning Tool. CVP ANALYSIS Advantages. Assists in establishing prices of products. Assists in analyzing the impact that volume has on short-term profits. Assists in focusing on the impact that changes in costs (variable and fixed) have on profits.

ossie
Download Presentation

COST-VOLUME-PROFIT ANALYSIS A Managerial Planning Tool

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. COST-VOLUME-PROFIT ANALYSISA Managerial Planning Tool

  2. CVP ANALYSISAdvantages • Assists in establishing prices of products. • Assists in analyzing the impact that volume has on short-term profits. • Assists in focusing on the impact that changes in costs (variable and fixed) have on profits. • Assists in analyzing how the mix of products affects profits.

  3. CVP ANALYSISAdditional Items • Breakeven considerations • Target income goals

  4. LIMITATIONS OF CVP ANALYSIS • Requires accurate knowledge of revenue and cost amounts and behavior patterns • Identification of fixed and variable components • Linear revenue and cost functions • Integration of concept of “relevant range” • No change in inventories • Constant sales mix

  5. Three Methods of Using the CVP Model • Operating Income Approach • Contribution Approach • Graphical Approach

  6. A CVP Example Assume the following: Total Per unit %of Sales Sales (400 Microwaves) $200,000 $500 100% Less: Variable Expenses 120,000300 60 Contribution Margin $ 80,000 $200 40% Less Fixed Expenses 70,000 Net Income $10,000 1. What is the break-even point? 2. How much sales-revenue must be generated to earn a before-tax profit $30,000? 3. How much sales-revenue must be generated to earn an after-tax profit of $30,000 and a 40% marginal tax rate?

  7. The Operating Income Approach for Breakeven Point Sales - Variable costs - Fixed Costs = Net Income Sales-Revenue Method: 100%(Sales)- 60%(Sales) - $70,000 =0 (at BEP) .4 (Sales) = $70,000 Sales = $175,000 Units-Sold Method: Let x = Number of microwaves at the break-even point $500(x) - $300(x) - $70,000 = 0 (at BEP) $200 (x) = $70,000 x = 350 microwaves

  8. The Contribution Approach for Breakeven Point Sales-Revenue Method: BEP (Revenue $) = (Fixed Costs + Net Income)/Contribution Ratio = $70,000 + 0/.40 = $175,000 Units-Sold Method: BEP (Revenue Units) = (Fixed Costs + Net Income)/Contribution per microwave = $70,000 + 0/$200 per microwave = 350 units

  9. The Operating Income Approach for Targeted Revenue Sales - Variable costs - Fixed Costs = Net Income Sales-Revenue Method: 100%(Sales)- 60%(Sales) - $70,000 = $30,000 .4 (Sales) = $100,000 Sales = $250,000 Units-Sold Method: Let x = Number of microwaves at the break-even point $500(x) - $300(x) - $70,000 = $30,000 $200 (x) = $100,000 x = 500 microwaves

  10. C-V-P and After-Tax Target Profits Sales - Variable costs - Fixed Costs = Net Income/ (1-tax rate) Sales-Revenue Method: 100%(Sales)- 60%(Sales) - $70,000 = $30,000/(1-.4) .4 (Sales) = $120,000 Sales = $300,000 Units-Sold Method: Let x = Number of microwaves at the break-even point $500(x) - $300(x) - $70,000 = $30,000/(1-.4) $200 (x) = $120,000 x = 600 microwaves

  11. The Contribution Approach for Targeted Revenue Sales-Revenue Method for Targeted Revenue: Targeted(Revenue $) = (Fixed Costs + Net Income)/Contribution Ratio = ($70,000 + $30,000)/.40 = $250,000 Units-Sold Method for Targeted Units Sold: BEP (Revenue Units) = Fixed Costs + Net Income/Contribution per microwave = ($70,000 + $30,000)/$200 per microwave = 500 units

  12. COST-VOLUME-PROFITTraditional Format Total Revenue Total Costs Total $ Breakeven Point Total Variable Costs Total Fixed Costs Level of Activity

  13. COST-PROFIT-VOLUMEContribution Margin Format Total Revenue Total Costs Total $ Breakeven Point Total Fixed Costs Total Variable Costs Contribution Margin Level of Activity

  14. A Multiple-Product Example Assume the following: Regular Deluxe Total Percent Unit of Sales 400 200 600 ---- Sales Price per Unit $500 $750 ---- ---- Sales Revenue $200,000 $150,000 $350,000 100.0% Less: Variable Expenses 120,00060,000180,000 51.4 Contribution Margin $ 80,000 $ 90,000 $170,000 48.6% Less Fixed Expenses 130,000 Net Income $ 40,000 1. What is the break-even point? 2. How much sales-revenue of each product must be generated to earn a before-tax profit $50,000?

More Related