Cost-Volume Profit Analysis | My Assignment Tutor

LO1:UNDERSTAND THE DIFFERENT TYPESOF COSTS AND THEIR RELEVANCE TOPRICING DECISIONSCost-Volume Profit Analysis• The relevance of cost behavior in a decisionmaking situation• CVPA is a technique which uses cost behaviortheory to identify activity level at which theirneither profit nor loss (Break-even activity level)• CVPA is important for managers to knowminimum activity level to achieve in order for thebusiness not to incur a lossCVP Analysis cont.• How cost and profit change with the volumeof product and salesAssumptions• CVPA assumes that selling price andvariable cost are constant per unit at allvolume of sales• Fixed cost remain fixed at all level ofactivityImportance of contribution in CVPAnalysis• Contribution is the incremental moneygenerated for each product/unit sold afterdeducting variable cost• Contribution is the key to CVP analysisbecause it is assume that variable cost perunit is constant• Selling price remain the same• Contribution per unit is constant value ofsalesBreakeven Analysis• The volume of sales at which a business justbreakeven by making neither profit nor loss• At breakeven point total cost equal total revenue(BE(TC=TR)Usefulness of BEP for management• Helps to show what the minimum volume of salesmust be to avoid making a loss in a period• At BEP total contribution covers fixed costBreakeven ChartBreakeven Point• Breakeven Point= fixed cost/contribution per unit or• BEP = Fixed cost/selling price-variable costIllustration• A business makes and sells a single product whichsells for $20 per unit and which as a variable costper unit of $9. Fixed costs are expected to be$600,000 for the year• Calculate the breakeven point of sales• What would be the breakeven point if the fixed costwere up to $640,000?• What would be the breakeven point if the fixed costwere $600,000, but the variable cost went up to $11?Breakeven Point Solution• Contribution per unit= selling price –variable cost• Therefore contr/unit= 20-9• Contribution/unit =11• Breakeven point/unit = fixed cost/cm/unit• BEP/unit = 600,000/11• BEP/unit = 54, 545 unitsSolution 2• When fixed cost increased to $640,000• BEP/Unit = Fixed cost/cm/unit• BEP/unit = 640,000/11• BEP/unit = 58, 181 unitChange in variable cost to $11 and fixed cost at $600,000BEP/unit = Fixed cost/cm/unitBEP/unit = 600,000/9BEP/unit = 66,666 unitsClass work on BreakevenIllustration• •A business makes and sells a single productwhich sells for $35 per unit and which as avariable cost per unit of $12. Fixed costs areexpected to be $500,000 for the year• Calculate the breakeven point of sales• What would be the breakeven point if the fixedcost were up to $580,000?• What would be the breakeven point if the fixedcost were $500,000, but the variable cost went upto $15?Margin of Safety (MOS)• Actual sales volume will not be the same asbudgeted sales volume• Actual sales will probably either fall short ofbudgeted or exceed budgeted• A useful analysis of budgeted risk is to look atwhat might happen to profit if actual salesvolume is less than budgeted• The differences between budgeted sales volumeand Breakeven sales volume is margin of safety(MOS)Margin of safety Cont.• MOS may simply be a measurement ofhow far sales can fall short of budgetbefore business makes a loss• A large margin of safety indicates a low riskof making a loss• Whereas, a small margin of safety, mightindicate a fairly high risk of a loss• MOS is usually expressed as percentage ofbudgeted salesMargin of safety Illustration• A business makes and sells a single product with budgetedsales as 80,000 units, its selling price is $8, variable cost is $4and the fixed costs is $200,000/annum• BEP/unit = fixed cost/cm/unit• BEP/unit = 200,000/8-4• BEP/unit = 200,000/4• BEP /unit = 50,000 units• MOS= Budgeted sales –BEP/unit• MOS= 80,000-50,000• MOS = 30,000 units• MOS% = MOS/budgeted sales x100• MOS% = 30,000/80,000 x 100• MOS% = 0.375 x 100 = 37.5%Margin of safety (MOS) Cont.• The margin of safety is quite large, hence,actual sales will have to be almost 40 %less than budgeted sales before thebusiness makes a loss• Measures can be taken to increase costs ifthe variable and fixed costs are to beincreased.• Breakeven point may be increased andmargin of safety reducedClass work Illustration• A business makes and sells a single product withbudgeted sales as 200,000 units• Selling price is $18,• Variable cost is $9 and• Fixed costs is $650,000/annum• Calculate the margin of safety• What would be the margin of safety expressed inpercentage• Write a memo to your manager explaining themargin of safety• Suggest what this indicates about the businessrisk and margin of safety can be improved


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