Description
study of the interrelationships between costs and volume and how they impact profit.
Cost-Volume-Profit (CVP) Analysis - the study of the interrelationships between costs and volume and how they impact profit.
I can’t make a good marketing decision without understanding the CVP relationships.
The Road Map
• • The CVP Equation Glossary
1. 2. 3. 4. 5. Contribution BEP PVR MOS OL
• •
Assumptions?? How realistic ?? ST view vs. LT view
The CVP Equation
Q = units sold v = unit variable cost f = total fixed cost p = unit selling price N = operating profit
The CVP Model:
(p × Q) = f + (v × Q) + N
Glossary
• • • • • • Contribution Break Even Point [BEP] Profit Volume Ratio [PVR] Margin of Safety [MOS] Profit Operating Leverage
Contribution(C)
• Excess of Revenue over Variable Costs [ Sales – Variable Cost] • Default : expressed as per unit • Contribution Margin [ Aggregate ] • Any C, after BEP equals Profit (P)!
Break Even Point
In English : That Volume of Activity, expressed in (a) quantity or (b) value or (c) a % of capacity utilsation, at which, Total Revenues are equal to Total Costs.
BEP in Maths The CVP Equation
Q = units sold v = unit variable cost f = total fixed cost p = unit selling price N = operating profit
The CVP Model:
(p × Q) = f + (v × Q) + N
When N = 0
BEP in art : Profit-Volume Graph
Profits
Total Cost 0
Q = 125
Losses
25,000 50,000
Output Volume
75,000
CVP - Graph Method
[ IN ART]
378 336 294 252 210 168 126 84 42 0 0
Breakeven
$(000)
Fixed costs
1000
2000
3000
4000
5000
Units
CVP Graph for a Firm with Relatively High Fixed Costs
$1.5
Losses @ 25,000 units = – 25,000 x $10 = – $250,000 Total Revenue
Total Cost
Fixed cost/yr. $500,000 Variable cost/ unit $2 Price $12 Contribution margin $10
$.5
25,000
50,000
75,000
Output in Units
CVP Graph of a Firm with Relatively Low Fixed Costs
$1.5 Total Revenue Total Cost
$1.0
Losses @ 25,000 units = -25,000 x $3 = -$75,000
$.5 $ .l5
25,000 50,000
Fixed cost/yr. $150,000 Variable cost/ unit $9 Price $12 Contribution margin $3
75,000
Output in Units
Profit Volume Ratio
In English : The Rate at which profit will be generated after the BEP is achieved.
Profit Volume Ratio
In Maths : C / S * 100 Or Contribution / Sales * 100 Expressed as a % always.
PVR in art : Profit-Volume Graph
Profits
Total Cost 0
Q = 125
Losses
25,000 50,000
Output Volume
75,000
Margin of Safety
• In English MOS is the difference between Actual or Planned Sales and the Break Even Sales. It is expressed in (a) Quantity or (b) Value or (c) as a % of Actual or Planned Sales.
Margin of Safety
• In Maths
MOS = ACTUAL SALES - BREAK EVEN SALES [ in qty or value] In % : Actual Sales – Break Even Sales ------------------------------------------------ * 100 Actual Sales
Margin of Safety
• In art ? You figure it out!
What is the relationship between, Profit, PVR and MOS ?
If , PVR represents the rate at which profit is made after the break even point,
MOS x PVR = Profit !!! Makes sense? All contribution, on every rupee of sale after the BEP….adds to the bottom line..the operating profit!
Operating Leverage (OL)
• In English OL tells u What will be the change in profit for a given change in Revenues? For eg. If the Sales increase by 10%, by what % will the Profit go up?
[expressed in No. of times]
Operating Leverage
• In Maths
At a given Sales level or Activity Level [ known as Base Level],
Contribution / Profit
OL
• SEE EXCEL SHEET!
Assumptions and Limitations of CVP Analysis
? Linearity and the Relevant Range
?Identifying Fixed and Variable Cost for CVP Analysis
My take : Not Limitations..bcoz its application is for specific purposes.. beyond that something else becomes useful!
Understanding Sensitivity…
BEP S pu V pu F total Volume Yes I Yes D Yes D No PVR Yes D Yes I No No MOS Yes D Yes I Yes I Yes D Profit Yes D Yes I Yes I Yes D
If there is Change in S pu, will BEP change, & if yes, direct or inverse?
And so on..fill in the 16 cells. With YES or NO, if YES, D or I
Practice Qs
#1. The following data are obtained from the records of a company: First year Second year Sales Rs.80,000 Rs.90,000 Profit 10,000 14,000
Calculate the BEP.
Practice Qs
#2. From the following particulars, find out the selling price per unit if BEP is to be brought down to 9000 units. • Variable cost per unit Rs. 75/• Fixed expenses per annum Rs.2,70,000. • Current Selling price per unit Rs. 100
Practice Qa
#3. Given Fixed Cost Rs.8,000, Profit Rs.2,000 and BEP Sales Rs.40,000. Find Actual Sales.
Practice Qs
#4. From the following information, calculate the break-even point and turnover required to earn a profit of Rs.36,000. Fixed overheads Rs. 180000 Variable cost per unit Rs.2, Selling price per unit Rs.20
doc_314615445.pptx
study of the interrelationships between costs and volume and how they impact profit.
Cost-Volume-Profit (CVP) Analysis - the study of the interrelationships between costs and volume and how they impact profit.
I can’t make a good marketing decision without understanding the CVP relationships.
The Road Map
• • The CVP Equation Glossary
1. 2. 3. 4. 5. Contribution BEP PVR MOS OL
• •
Assumptions?? How realistic ?? ST view vs. LT view
The CVP Equation
Q = units sold v = unit variable cost f = total fixed cost p = unit selling price N = operating profit
The CVP Model:
(p × Q) = f + (v × Q) + N
Glossary
• • • • • • Contribution Break Even Point [BEP] Profit Volume Ratio [PVR] Margin of Safety [MOS] Profit Operating Leverage
Contribution(C)
• Excess of Revenue over Variable Costs [ Sales – Variable Cost] • Default : expressed as per unit • Contribution Margin [ Aggregate ] • Any C, after BEP equals Profit (P)!
Break Even Point
In English : That Volume of Activity, expressed in (a) quantity or (b) value or (c) a % of capacity utilsation, at which, Total Revenues are equal to Total Costs.
BEP in Maths The CVP Equation
Q = units sold v = unit variable cost f = total fixed cost p = unit selling price N = operating profit
The CVP Model:
(p × Q) = f + (v × Q) + N
When N = 0
BEP in art : Profit-Volume Graph
Profits
Total Cost 0
Q = 125
Losses
25,000 50,000
Output Volume
75,000
CVP - Graph Method
[ IN ART]
378 336 294 252 210 168 126 84 42 0 0
Breakeven
$(000)
Fixed costs
1000
2000
3000
4000
5000
Units
CVP Graph for a Firm with Relatively High Fixed Costs
$1.5
Losses @ 25,000 units = – 25,000 x $10 = – $250,000 Total Revenue
Total Cost
Fixed cost/yr. $500,000 Variable cost/ unit $2 Price $12 Contribution margin $10
$.5
25,000
50,000
75,000
Output in Units
CVP Graph of a Firm with Relatively Low Fixed Costs
$1.5 Total Revenue Total Cost
$1.0
Losses @ 25,000 units = -25,000 x $3 = -$75,000
$.5 $ .l5
25,000 50,000
Fixed cost/yr. $150,000 Variable cost/ unit $9 Price $12 Contribution margin $3
75,000
Output in Units
Profit Volume Ratio
In English : The Rate at which profit will be generated after the BEP is achieved.
Profit Volume Ratio
In Maths : C / S * 100 Or Contribution / Sales * 100 Expressed as a % always.
PVR in art : Profit-Volume Graph
Profits
Total Cost 0
Q = 125
Losses
25,000 50,000
Output Volume
75,000
Margin of Safety
• In English MOS is the difference between Actual or Planned Sales and the Break Even Sales. It is expressed in (a) Quantity or (b) Value or (c) as a % of Actual or Planned Sales.
Margin of Safety
• In Maths
MOS = ACTUAL SALES - BREAK EVEN SALES [ in qty or value] In % : Actual Sales – Break Even Sales ------------------------------------------------ * 100 Actual Sales
Margin of Safety
• In art ? You figure it out!
What is the relationship between, Profit, PVR and MOS ?
If , PVR represents the rate at which profit is made after the break even point,
MOS x PVR = Profit !!! Makes sense? All contribution, on every rupee of sale after the BEP….adds to the bottom line..the operating profit!
Operating Leverage (OL)
• In English OL tells u What will be the change in profit for a given change in Revenues? For eg. If the Sales increase by 10%, by what % will the Profit go up?
[expressed in No. of times]
Operating Leverage
• In Maths
At a given Sales level or Activity Level [ known as Base Level],
Contribution / Profit
OL
• SEE EXCEL SHEET!
Assumptions and Limitations of CVP Analysis
? Linearity and the Relevant Range
?Identifying Fixed and Variable Cost for CVP Analysis
My take : Not Limitations..bcoz its application is for specific purposes.. beyond that something else becomes useful!
Understanding Sensitivity…
BEP S pu V pu F total Volume Yes I Yes D Yes D No PVR Yes D Yes I No No MOS Yes D Yes I Yes I Yes D Profit Yes D Yes I Yes I Yes D
If there is Change in S pu, will BEP change, & if yes, direct or inverse?
And so on..fill in the 16 cells. With YES or NO, if YES, D or I
Practice Qs
#1. The following data are obtained from the records of a company: First year Second year Sales Rs.80,000 Rs.90,000 Profit 10,000 14,000
Calculate the BEP.
Practice Qs
#2. From the following particulars, find out the selling price per unit if BEP is to be brought down to 9000 units. • Variable cost per unit Rs. 75/• Fixed expenses per annum Rs.2,70,000. • Current Selling price per unit Rs. 100
Practice Qa
#3. Given Fixed Cost Rs.8,000, Profit Rs.2,000 and BEP Sales Rs.40,000. Find Actual Sales.
Practice Qs
#4. From the following information, calculate the break-even point and turnover required to earn a profit of Rs.36,000. Fixed overheads Rs. 180000 Variable cost per unit Rs.2, Selling price per unit Rs.20
doc_314615445.pptx