Cost-volume-profit (cvp) analysis

Содержание

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COST-VOLUME-PROFIT (CVP) ANALYSIS CVP analysis examines the interaction of a firm’s

COST-VOLUME-PROFIT (CVP) ANALYSIS

CVP analysis examines the interaction of a firm’s sales

volume, selling price, cost structure, and profitability. It is a powerful tool in making managerial decisions including marketing, production, investment, and financing decisions.
How many units of its products must a firm sell to break even?
How many units of its products must a firm sell to earn a certain amount of profit?
Should a firm invest in highly automated machinery and reduce its labor force?
Should a firm advertise more to improve its sales?
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One Product Cost-Volume-Profit Model Net Income (NI) = Total Revenue –

One Product Cost-Volume-Profit Model

Net Income (NI) = Total Revenue – Total

Cost
Total Revenue = Selling Price Per Unit (P) * Number of Units Sold (X)
Total Cost = Total Variable Cost + Total Fixed Cost (F)
Total Variable Cost = Variable Cost Per Unit (V) * Number of Units Sold (X)
NI = P X – V X – F
NI = X (P – V) – F
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One Product Cost-Volume-Profit Model Net Income (NI) = Total Revenue –

One Product Cost-Volume-Profit Model

Net Income (NI) = Total Revenue – Total

Cost
Total Revenue = Selling Price Per Unit (P) * Number of Units Sold (X)
Total Cost = Total Variable Cost + Total Fixed Cost (F)
Total Variable Cost = Variable Cost Per Unit (V) * Number of Units Sold (X)
NI = P X – V X – F
NI = X (P – V) – F

This is an Income Statement
Sales Revenue (P X)
- Variable Costs (V X)
Contribution Margin
- Fixed Costs (F)
Net Income (NI)

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CVP Model – Assumptions Key assumptions of CVP model Selling price

CVP Model – 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.
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Contribution Margin Ratio Or, in terms of units, the contribution margin

Contribution Margin Ratio

Or, in terms of units, the contribution margin ratio

is:
For Racing Bicycle Company the ratio is:
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Changes in Fixed Costs and Sales Volume What is the profit

Changes in Fixed Costs and Sales Volume

What is the profit impact

if Chocolate Co. can increase unit sales from 12000 to 13000 by increasing the monthly advertising budget by 5,000?
(1000 x 4 CM) - $5,000 = -$1,000
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Change in Variable Costs and Sales Volume What is the profit

Change in Variable Costs and Sales Volume

What is the profit impact

if Chocolate Co. can use higher quality raw materials, thus, increasing variable costs per unit by $2, to generate an increase in unit sales from 12000 to 28000?
28000 x $2 CM/unit = $56000 – $40,000 = $16000 vs. $8000, increase of $8000
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Change in Fixed Cost, Sales Price and Volume What is the

Change in Fixed Cost, Sales Price and Volume

What is the profit

impact if Chocolate Co. (1) cuts its selling price $2 per unit, (2) increases its advertising budget by $4,000 per month, and (3) increases unit sales from 12000 to 40,000 units per month?
40,000 x $2 CM/unit = $80,000 - $40,000 - $4,000 = $36,000 , increase of $28000
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Break-Even Analysis Break-even analysis can be approached in two ways: Equation method Contribution margin method

Break-Even Analysis

Break-even analysis can be approached in two ways:
Equation method
Contribution

margin method
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Equation Method Profits = (Sales – Variable expenses) – Fixed expenses

Equation Method

Profits = (Sales – Variable expenses) – Fixed expenses

Sales =

Variable expenses + Fixed expenses + Profits

OR

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Equation Method $16Q = $12Q + $40,000 + $0 Where: Q

Equation Method

$16Q = $12Q + $40,000 + $0
Where:
Q = Number

of chocolates sold
$16 = Unit selling price
$12 = Unit variable expense
$40,000 = Total fixed expense

We calculate the break-even point as follows:

Sales = Variable expenses + Fixed expenses + Profits

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Equation Method We calculate the break-even point as follows: $500Q =

Equation Method

We calculate the break-even point as follows:

$500Q = $300Q +

$80,000 + $0
$200Q = $80,000
Q = $80,000 ÷ $200 per bike
Q = 400 bikes

Sales = Variable expenses + Fixed expenses + Profits

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Equation Method The equation can be modified to calculate the break-even

Equation Method

The equation can be modified to calculate the break-even point

in sales dollars.

Sales = Variable expenses + Fixed expenses + Profits

X = 0.75X + $40,000 + $0
Where:
X = Total sales dollars
0.75 = Variable expenses as a % of sales $40,000 = Total fixed expenses

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Equation Method X = 0.75X + $40,000 + $0 0.25X =

Equation Method

X = 0.75X + $40,000 + $0
0.25X =

$40,000
X = $40,000 ÷ 0.25
X = $160,000

Sales = Variable expenses + Fixed expenses + Profits

The equation can be modified to calculate the break-even point in sales dollars.

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Contribution Margin Method The contribution margin method has two key equations.

Contribution Margin Method

The contribution margin method has two key equations.

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Contribution Margin Method Let’s use the contribution margin method to calculate

Contribution Margin Method

Let’s use the contribution margin method to calculate the

break-even point in total sales dollars at Racing.
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Target Profit Analysis The equation and contribution margin methods can be

Target Profit Analysis

The equation and contribution margin methods can be

used to determine the sales volume needed to achieve a target profit.
Suppose Chocolate Co. wants to know how many bikes must be sold to earn a profit of $50,000.
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The CVP Equation Method Sales = Variable expenses + Fixed expenses

The CVP Equation Method

Sales = Variable expenses + Fixed expenses +

Profits

$16Q = $12Q + $40,000 + $50,000
$4Q = $90,000
Q = 22,500 chocolates

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The Contribution Margin Approach The contribution margin method can be used

The Contribution Margin Approach

The contribution margin method can be used

to determine that 900 bikes must be sold to earn the target profit of $100,000.
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The Margin of Safety The margin of safety is the excess

The 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 = Total sales - Break-even sales

Let’s look at Chocolate Co. and determine the margin of safety.

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Multi-Product CVP Model

Multi-Product CVP Model

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Multi-Product CVP Model - Example Example: Suppose FC = $200,000; P1

Multi-Product CVP Model - Example

Example: Suppose FC = $200,000; P1 =

$5; V1 = $2; P2 = $10; V2 = $6. Find all the breakeven points.
NI = (P1 – V1)X1 + (P2 – V2)X2 – FC
0 = (5 - 2)X1 + (10 - 6)X2 – 200,000
0 = 3X1 + 4X2 – 200,000
We get 1 equation and 2 unknowns
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Multi-Product CVP Model - Example Any point on the line is

Multi-Product CVP Model - Example

Any point on the line is a

possible combination of X1 and X2
We need more information to solve the BE point

X1

X2

200,000 / 3 =
66,667

200,000 / 4 =
50,000

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Multi-Product CVP Model - Example Suppose the firm produces and sells

Multi-Product CVP Model - Example

Suppose the firm produces and sells the

same number of the two products. Find the breakeven point.
Let X = X1 = X2
So 0=3X +4X - $200,000
0 = 7 X – $200,000
X = $200,000 / 7 ≈ 28,572 units
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Multi-Product CVP Model

Multi-Product CVP Model

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Multi-Product CVP Model - Example

Multi-Product CVP Model - Example

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Operating Leverage

Operating Leverage

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Operating Leverage - Example Calculate Extreme’s degree of operating leverage DOL

Operating Leverage - Example

Calculate Extreme’s degree of operating leverage
DOL = $200,000

/ $40,000 = 5
Calculate Extreme’s operating income, if Extreme achieves a 20% increase in its sales
20% * 5 = 100% increase in NI
$40,000 * 100% = $40,000
New NI = $40,000 + $40,000 = $80,000
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Operating Leverage - Example Sales $600,000 VC 360,000 CM 240,000 FC 160,000 NI $ 80,000

Operating Leverage - Example

Sales $600,000
VC 360,000
CM 240,000
FC 160,000
NI $ 80,000

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Operating Leverage - Example Calculate Extreme’s operating income, if Extreme experiences

Operating Leverage - Example

Calculate Extreme’s operating income, if Extreme experiences a

drop of 30% in its sales
-30% * 5 = -150%
$40,000 * -150% = -$60,000
New NI = $40,000 – $60,000 = -$20,000
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Operating Leverage - Example Sales $350,000 VC 210,000 CM 140,000 FC 160,000 NI $ (20,000)

Operating Leverage - Example

Sales $350,000
VC 210,000
CM 140,000
FC 160,000
NI $ (20,000)

Слайд 33

Review Problem: CVP Relationships Voltar Company manufactures and sells a specialized

Review Problem: CVP Relationships


Voltar Company manufactures and sells a specialized

cordless telephone for high electromagnetic radiation environments. The company's contribution format income statement for the most recent year is given below:
Required:
Compute the company's CM ratio and variable expense ratio.
Compute the company's break-even point in both units and sales dollars. Use the equation method.
Assume that sales increase by $400,000 next year. If cost behavior patterns remain unchanged, by how much will the company's net operating income increase? Use the CM ratio to compute your answer.
Refer to the original data. Assume that next year management wants the company to earn a profit of at least $90,000. How many units will have to be sold to meet this target profit?
Refer to the original data. Compute the company's margin of safety in both dollar and percentage form.
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Review Problem: CVP Relationships Voltar Company manufactures and sells a specialized

Review Problem: CVP Relationships


Voltar Company manufactures and sells a specialized

cordless telephone for high electromagnetic radiation environments. The company's contribution format income statement for the most recent year is given below:
Required:
Compute the company's CM ratio and variable expense ratio.
CMR = 25%; VC ratio = 75%
Compute the company's break-even point in both units and sales dollars. Use the equation method.
60 Q = 45Q + 240,000 - > 15 Q = 240,000 -> Q = 16,000 units
16,000 * 60 = $960,000
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Assume that sales increase by $400,000 next year. If cost behavior

Assume that sales increase by $400,000 next year. If cost behavior

patterns remain unchanged, by how much will the company's net operating income increase? Use the CM ratio to compute your answer.
Increase in sales $400,000
CMR 25%
Increase in NOI $100,000
Refer to the original data. Assume that next year management wants the company to earn a profit of at least $90,000. How many units will have to be sold to meet this target profit?
(240,000 + 90,000)/15 = 22,000 units
Refer to the original data. Compute the company's margin of safety in both dollar and percentage form.
Margin of safety = 1,200,000 – 960,000 = $240,000 or 20%
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Review Problem: CVP Relationships Voltar Company manufactures and sells a specialized

Review Problem: CVP Relationships


Voltar Company manufactures and sells a specialized

cordless telephone for high electromagnetic radiation environments. The company's contribution format income statement for the most recent year is given below:
Required:
Compute the company's degree of operating leverage at the present level of sales.
DOL = 300,000 / 60,000 = 5
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Assume that through a more intense effort by the sales staff,

Assume that through a more intense effort by the sales staff,

the company's sales increase by 8% next year. By what percentage would you expect net operating income to increase? Use the degree of operating leverage to obtain your answer.
5 * 8% = 40%
Verify your answer to (b) by preparing a new contribution format income statement showing an 8% increase in sales.
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Sales $1,296,000 VC 972,000 CM 324,000 FC 240,000 NOI $84,000 40% increase

Sales $1,296,000
VC 972,000
CM 324,000
FC 240,000
NOI $84,000
40% increase

Слайд 39

Review Problem: CVP Relationships Voltar Company manufactures and sells a specialized

Review Problem: CVP Relationships

Voltar Company manufactures and sells a specialized

cordless telephone for high electromagnetic radiation environments. The company's contribution format income statement for the most recent year is given below:
In an effort to increase sales and profits, management is considering the use of a higher-quality speaker. The higher-quality speaker would increase variable costs by $3 per unit, but management could eliminate one quality inspector who is paid a salary of $30,000 per year. The sales manager estimates that the higher-quality speaker would increase annual sales by at least 20%.
Assuming that changes are made as described above, prepare a projected contribution format income statement for next year. Show data on a total, per unit, and percentage basis.
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Снайпер Василий Зайцев

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