Cost and managerial

Accounting

SUBMITTED BY:

Sehba Usmani -SP16-EX-0163-

Mohammad Waleed -SP17-MBAP-0043-
Deepak Kumar Jewani -SP18-MBAG-0016-
Abdul Rehman -SP18-MBAP-0034-
Taha Samad -SP18-MBAP-0017-

SUBMITTED TO: Sir Muhammad Uzair

CHAPTER : 06

Cost Volume Profit

Relationship
 Content:
Cost Volume Profit (CVP)
Contribution margin
Contribution margin Ratio
Break Even Analysis

1.Equation Method
2.Contribution Margin Method

Margin of safety
budget line sale
Cost Volume Profit (CVP)
CVP relationship is an analysis which studies the relationship between
the following factors and its impact on the amount on profit .

Selling price per unit

Total sale amount

CVP analysis is used to determine how change in cost and volume affect
a company operating income and net income .
CVP Assumptions:

Key assumptions of CVP model

Selling price is constant

Costs are linear and can be divided into variable and fixed
elements.

In multi-product companies, sales mix is constant

In manufacturing companies, inventories do not change.

Structure of income Statement:

Sale *****
less: Variable Cost of good sold (****)
Manufacturing Margin

Less: Variable Selling & admin expense (****)

Contribution Margin

Less: Total Fixe Cost (******)

Net Income Profit\Loss
Contribution margin :

CM as selling price minus variable cost ,is the measure of the

ability of a company to cover variable cost with revenue .

Contribution margin Ratio:

The contribution margin ratios the difference between a company

sale and variable expenses express as a percentage .

Unit CM
CM Ratio =
Unit selling price
Break Even Analysis:

A break even analysis is a calculation of the point at which revenue

equal to expense .
Uses of Break even analysis:
1.help in determination of selling price which will give desired profit

2.help in fixation of sale volume to cover a given return on capital

employee.

3.Forecasting cost and profit as a result of change in volume

Break-even analysis can be approached in two ways:

1.Equation method
2.Contribution margin method
1.Equation method

Sales = Variable expenses + Fixed expenses + Profits

2.Contribution margin method

Break-even point Fixed expenses

=
in units sold Unit contribution margin

Break-even point in Fixed expenses

total sales dollars =
CM ratio
Margin of safety:

The margin of safety is the excess of budgeted (or actual) sales over
the
break-even volume of sales.
Margin of safety = Budgeted sale - Break even sale
Budgeted sale :

The amount of money that a company expect to receive the sale of

goods and services during a particular period of time.

Break even sale:

The amount of money that the sale of each unit will contribute to
covering total fixed cost .the break even level is the number of unit
required to be produces and sold to generate enough contribution
margin to cover fixed cost.
Practice Exercise:

6-1:
Contribution Margin and break even analysis?
Required :
A- Income statement with a CM format each of 3 companies.
B- Compute break Even point of each company.

6-5 :
A-Calculate CM per unit.
B-Calculate BEP in unit and sale dollar.
C-Calculate Marginal safety.

6-10.CVP Analysis with multiple product.

A-calculate income statement.
B-Calculate BEP in units & sale.
C-Calculate Marginal safety.
 Solut i on 6.1

A. Compaute Company Statement

Company X Y Z
Sales 408,000.00 200,000.00 140,000.00
Variable 40% (163,200.00) (120,000.00) (42,000.00)
CM 244,800.00 80,000.00 98,000.00
Less Fixed Cost (180,000.00) (50,000.00) (84,000.00)
64,800.00 30,000.00 14,000.00

B. Breakeven Analysis

Fixed Cost
= CM%

Co. X 180,000
0.6 = 300,000.00

Co. Y 50,000
0.4 = 125,000.00

Co. Z 84,000
0.7 = 120,000.00
 Solut i on 6.5

A. Calculation the conttribution Margin

per unit
Sales 1080000
Less Variable (720,000.00)
CM 360,000.00
B. Breakeven Point in Unit
CM/Unit Sale
360000/12000 = 3 Unit
Interm of Sale
Sale = 1,080,000 9
= Unit 120,000
Unit = 3 33%
= Sale 9
Fixed cost = 120,000 40,000
= CM 3
Interm of Amount Fixed Cost /CM = 300,000 900,090
33
C. Margin
Budget Sale-Breakeven Sale
1,080,000-900,90 179,910
 Solution 6.10
Analysis with Multiple Product
A. Compute Net Income of years
A B C Total
Sale 100,000 120,000 160,000 380,000
Less Variable Cost (60,000.00) (60,000.00) (64,000.00) -184,000
40,000.00 60,000.00 96,000.00 196,000.00
Less Fixed Cost -156,800
Net Income 39,200
B. Breakeven Point of Total Unit
CM A B C
40000/10 60000/6 96000/4
4000 10000 24000
Add 4(50%) 10(30%) 24(20%)
2 3 4.8 9.8
CM Fixed cost /CM % 156,800/9.8 16,000
Breakeven Point on Sale 16,000
Sale Volume x PU 10x8000=80,000 20x4800=96,000 40x3200=128,000
C. Margin
Budget Sale-Breakeven Sale
380,000-304,000 76,000
 Q/A
&
THANK YOU !!