CHAPTER COST VOLUME-PROFIT ANALYSIS
1. CVP analysis
-is a short-term decision-making tool. It assists managers to evaluate the impact of changes in costs, selling price and sales volume on future profit.
2. Importance of CVP Analysis
A management tool for planning, setting prices, determining the best product mix, maximizing the use of production facilities and computing target cost by subtracting target profit from competitive market price.
3.Break-even point
At break-even point, total revenues equal to total costs. Since total revenues equal to total costs, there is zero profit or loss at break-even point. It can be expressed in terms of sales Ringgit Malaysia (RM) or sales units.
4.CVP Analysis and the break-even point
CVP analysis looks at the relationship between selling prices, sales volumes, costs and profits. The break even point (BEP) is where total revenue=total costs.
5.Methods in computing break-even point
- contribution margin method
-equation method
-cost-volume-profit graph method
6.Contribution margin method
TOTAL CM = TOTAL REVENUE – TOTAL VARIABLE COSTS
CM PER UNIT = SALES PRICE PER UNIT – VARIABLE COST PER UNIT
The concept of Contribution Margin implies the excess of total revenue over total variable costs contributes toward paying for the fixed costs.
7. Equation method
BEP
is the point at which sales revenue covers all costs so there is no profit or
loss.So,
to compute the BEP, profit is to be made EQUAL TO ZERO
BEP (sales value) = total revenue - total costs = 0
(selling price per unit X volume) - (variable cost per unit X volume) - total fixed cost = 0
8. CVP Graph method
CVP graph depicts relationship between cost, volume and profit by drawing the total revenue and total costs functions. CVP graph can be used to determine profit or losses at different volume of sales. The vertical distance between revenue line and total cost line is net income or net loss.
9. Safety Margin
The difference between budgeted sales revenue and break-even sales revenue. The amount by which sales can drop before losses begin to be incurred. The use of safety margin is useful to assess the risk of not achieving a profitable performance. Indicates the amount by which sales could be lowered before profits reach the break-even point.
10. Target profit
Sales revenue - variable expenses - fixed expenses = profit
2 Easy Steps: Break Even Analysis for Cost Volume Profit Analysis Tutorial
