CostVolumeProfit Analysis CVP Scenario Selling price trip Variable

Cost-Volume-Profit Analysis

CVP Scenario Selling price (trip ) Variable cost (fuel) CONTRIBUTION (S. P-V. C) Monthly fixed expenses: Rent Driver’s Salary Car Maintenance Total fixed expenses per month Per Unit £ 250 200 £ 50 Percentage of Sales 100% 80 20% £ 2, 500 3, 500 1, 000 £ 6, 500 Cost-volume-profit (CVP) analysis is the study of the effects of output volume on revenue (sales), expenses (costs), and net income (net profit).

Break-Even Point The break-even point is the level of sales at which revenue equals expenses and net income is zero. Sales - Variable expenses - Fixed expenses Zero net income (break-even point)

CVP analysis: non-graphical computations 1. Fixed costs per annum Unit selling price Unit variable cost Relevant range £ 60 000 £ 20 £ 10 4 000 - 12 000 units 2. Profit volume (P/V) ratio = Contribution Sales revenue x 100 3. Break-even point (in units) = Fixed costs Contribution per unit = (20 -10)/20 x 100 = 50% = 60, 000/10 = 6000 units 4. Break-even point (in sales value i. e. £ or £ ) = Fixed costs P/V ratio OR = BEP in units x S. P p. u = 60, 000/50% = £ 120, 000 = 6000 * 20 = £ 120, 000

4. If unit fixed costs and revenues are not given, the break-even point (expressed in sales values) can be calculated as follows: Total fixed costs Total contribution x Total sales 5. Units to be sold to obtain a desired profit (£ 30, 000 profit): Fixed costs + desired profit =( 60, 000+ 30, 000) /£ 10 = 9000 units Contribution per unit 6. Sales to obtain a desired profit (£ 30 000 profit): Fixed costs + desired profit =( 60, 000+ 30, 000) 50%= £ 180, 000 P/V ratio

CVP analysis assumptions 1. All other variables remain constant e. g. sales mix, production efficiency, price levels, production methods. 2. Complexity-related fixed costs do not change. If the range of items produced increases but volume remains unchanged, then it is assumed fixed costs will not alter. 3. Profits are calculated on a variable costing basis. 4. Unit variable cost and selling price are constant per unit of output. 5. The analysis applies over the relevant range only. 6. Costs can be accurately divided into their fixed and variable elements. 7. Single product or constant sales mix.

Margin of Safety How much can sales drop before we incur a loss? Margin of safety = Expected Sales – Break even sales Percentage margin of safety = Expected sales - Break-even sales Expected sales Operating profit = p/v ratio x(Exp. Sales-Breakeven sales)

Cost-Volume-Profit Graph