Basics of CVP Analysis in Financial Analysis

BASICS OF CVP ANALYSIS IN
FINANCIAL ANALYSIS
by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
www.afterschoool.tk
mobile : 91+9414430763
5 DECEMBER 09 www.afterschoool.tk 1
WHAT IS CVP??
C=COST,V=VOLUME,P=PROFIT
THERE IS RELATION BETWEEN THESE,
THIS RELATION IS IDENTIFIED IN CVP
ANALYSIS
WHAT IS BEP?
B=BREAK
E=EVEN
P=PROFIT
the point where there is no profit no loss
WHAT IS BEP?
There are two formula :

BEP (in units) = fixed cost / contribution per
unit
BEP (in value) = fixed cost / PV ratio
What is fixed cost?
The cost which will remain same whether
production is 0 unit or 100 units or 10000
units. Thus this cost has no relation to
production volume.
Example : if you produce 100 units, your cost
of material consumption is Rs. 1000, if you
make 1000 units it is 10000, but the rent paid
for the office remains the same, Rs. 3000 thus
rent is fixed but material is variable cost.
What is variable cost?
As we discussed earlier : the cost which varies

directly with volume is called variable cost.
Material cost, labour cost, power cost, etc. Are
variable cost. If production will increase, these
costs will also increase
Examples of fixed cost...
Rent, salary, office expenses, interest on loan,

etc.
Examples of variable expenditure
Raw material
wages
power
carriage inward / outward
sales commission
What is CONTRIBUTION?
Difference of sales price per unit and variable

cost per unit is called contribution per unit.
Suppose sales price per unit is 10, variable cost
per unit is 6, contribution per unit is 4.
thus contribution has two components in it =
fixed cost + profit
What is PV ratio
Contribution as % of sales is called PV ratio

contribution is 4, sales price is 10, thus PV
ratio is 40%
What is target profit pricing?
Here you keep the target profit in mind and

price the goods accordingly, so you have to
keep the target profit along with fixed cost in
all your calculations
What is target profit volume?
It's formula is : (fixed cost + targe profit ) /

contribution per unit
What is margin of safety?
How safe you are ?

It is the difference of your present sales to the
BEP level. If you are well above BEP level,
you are safe. Thus it is measured by
comparison to BEP level.
Its formula : (sales – BEP) / sales * 100
Example of margin of safety :
Your BEP sales is 40000, your present sales is

100000
margin of safety = 60000
margin of safety in % = 60%
Find BEP ?
Depreciation = 200,material cost = 500,labour
cost = 100, rent = 200, interest = 200, other
expenses = 100, sales = 2000, no. Of units =
100
here fixed cost = (rent 200, interest 200, other
exp. 100) = 500
variable cost per unit = (500+100)/100 =6
contribution = 20-6, BEP = 500/14=35.7
What is sunk cost?
The cost which has already been incurred is

ignored in all such calculations, it is called
sunk cost. (past cost – cost related to previous
years)
What is opportunity cost?
It is the best opportunity forgone. It is not

taken into account in financial analysis.
However, it is taken into account in economic
analysis.
Example
A toy manufacturer makes an average net profit of Rs. 2.50 per
piece on a selling price of Rs. 14.30 by producing and selling 60,000
pieces or 60% of the potential capacity. His cost of sales is: Direct
material Rs. 3.50 Direct wages Rs. 1.25
Works overhead Rs. 6.25 (50% fixed) Sales overhead Rs. 0.80
(25% variable) During the current year, he anticipates that his
works overhead will go up by 10%, while rates of direct material and
direct labour will increase by 6% and 8% respectively. But he has no
option of increasing the selling price. Under this situation he obtains
an offer for an order equal to 20% of his capacity. The concerned
customer is a special customer. What minimum price will you
recommend for acceptance to ensure the manufacturer an overall
profit of Rs. 1,67,300?
solution
Sales (60000 * 14.5) =870000

material (60000*3.5*1.06)=222600
labour (60000*1.25*1.08)=81000
overheads (60000*6.25*1.1=412500
sales (60000*.8) = 48000
profit = 105900
profit left = 61400
Target profit pricing
New variables costs : (3.5*1.06) = 3.71, labour
(1.25*1.08) = 1.35, overhead = (6.25*1.1*.5)=
3.43, sales overhead=.2
total variable cost =8.69
+ target profit 61400/20000 = 3.07
thus target price = 11.76
we have ignored other fixed cost, as it has
already been recovered in sale of 60000 routine
sales.
THANKS....
JOIN & SPREAD AFTERSCHOOOL

NETWORK
AFTERSCHOOOL@IN.COM

Basics of CVP Analysis in Financial Analysis

Diunggah oleh

Informasi Dokumen

Judul Asli

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Basics of CVP Analysis in Financial Analysis

Diunggah oleh

Hak Cipta:

Format Tersedia

BASICS OF CVP ANALYSIS IN

There are two formula :

As we discussed earlier : the cost which varies

Rent, salary, office expenses, interest on loan,

Difference of sales price per unit and variable

Contribution as % of sales is called PV ratio

Here you keep the target profit in mind and

It's formula is : (fixed cost + targe profit ) /

How safe you are ?

Your BEP sales is 40000, your present sales is

The cost which has already been incurred is

It is the best opportunity forgone. It is not

Sales (60000 * 14.5) =870000

JOIN & SPREAD AFTERSCHOOOL

Anda mungkin juga menyukai