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COST-VOLUME-PROFIT ANALYSIS

MEMBERS OF GROUP : G
Name
Safiqul Islam. Md. Robiul Islam. Mahedi Hasan. Kamrul Hasan Rasel. Abdullah Al Mahfuj.

ID
1447 1509 1507 1466 1461

What is CVP analysis?

Ans: CVP analysis is a system used for checking how changes in the volume of production affect the assets and thus the profits. It is an expanded from of breakeven analysis, which simply identifies the breakeven point.

Abbreviations
SP = Selling price VCU = Variable cost per unit CMU = Contribution margin per unit CM% = Contribution margin percentage FC = Fixed costs Q = Quantity of output units sold (and manufactured) OI = Operating income TOI = Target operating income TNI = Target net income

COST-VOLUME-PROFIT ASSUMPTIONS AND TERMINOLOGY

1. Changes in the level of revenues and costs arise only because of changes in the number of product (or service) units produced and sold. 2. Total costs can be divided into a fixed component and a component that is variable with respect to the level of output. 3. When graphed, the behavior of total revenues and total costs is linear (straight-line) in relation to output units within the relevant range (and time period).

COST-VOLUME-PROFIT ASSUMPTIONS AND TERMINOLOGY 4. The unit selling price, unit variable costs, and fixed costs are known and constant. 5. The analysis either covers a single product or assumes that the sales mix when multiple products are sold will remain constant as the level of total units sold changes. 6. All revenues and costs can be added and compared without taking into account the time value of money.

COST-VOLUME-PROFIT ASSUMPTIONS AND TERMINOLOGY

Operating income = Total revenues from operations Cost of goods sold and operating costs (excluding income taxes) Net income = Operating income Income taxes

TYPES OF COSTS

Variable Fixed

Mixed

TOTAL VARIABLE COST

Total variable costs change when activity changes.
Total Long Distance Telephone Bill

Your total long distance telephone bill is based on how many minutes you talk.

Minutes Talked

VARIABLE COSTS EXAMPLE

Consider Grand Canyon Railway. Assume that breakfast costs Grand Canyon Railway $3 per person. If the railroad carries 2,000 passengers, it will spend $6,000 for breakfast services.

VARIABLE COSTS EXAMPLE

Total Variable Costs (thousands)

$24
$18

$12
$6 0 1 2 3 4 5

Volume (Thousands of passengers)

TOTAL FIXED COST

Total fixed costs remain unchanged when activity changes.
Your monthly basic telephone bill probably does not change when you make more local calls.
Monthly Basic Telephone Bill
Number of Local Calls

MIXED COSTS
Contain fixed portion that is incurred even when facility is unused & variable portion that increases with usage. Example: monthly electric utility charge

Fixed

service fee Variable charge per kilowatt hour used

MIXED COSTS

Total Utility Cost

Variable
Utility Charge Fixed Monthly Utility Charge Activity (Kilowatt Hours)

CONTRIBUTION MARGIN INCOME STATEMENT

Sales - Variable Costs Contribution Margin - Fixed Costs Operating Income

CONTRIBUTION MARGIN EXAMPLE

Luis and Tom manufacture a device that allows users to take a closer look at icebergs from a ship. The usual price for the device is $100. Variable costs are $70 per unit. They receive a proposal from a company in Newfoundland to sell 20,000 units at a price of $85.

CONTRIBUTION MARGIN EXAMPLE

There is sufficient capacity to produce the order. How do we analyze this situation? $85 $70 = $15 contribution margin. $15 20,000 units = $300,000 (total increase in contribution margin)

CONTRIBUTION MARGIN INCOME STATEMENT

Sales (20,000 x $85) Variable costs (20,000 x $70) Contribution margin $1,700,000 (1,400,000) $300,000

GRAPH OF BREAKEVEN POINT

378 336 294 252 210 168 126 84 42 0 0
Breakeven point

$(000)

Fixed costs

1000

2000

3000

4000

5000

Units

PREPARING A CVP CHART

Plot total fixed costs on the vertical axis.
Costs and Revenue in Dollars

Total fixed costs

Total costs

Draw the total cost line with a slope equal to the unit variable cost.

Volume in Units

PREPARING A CVP CHART

Starting at the origin, draw the sales line with a slope equal to the unit sales price.

Sales

Costs and Revenue in Dollars

Total fixed costs

Total costs Breakeven Point

Volume in Units

TARGET OPERATING INCOME EXAMPLE

Suppose that our business would be content with operating income of _________________. How many units must be sold?

END OF PRESENTATION
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