M7 Cost-Volume-Profit Analysis PDF

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Teacher: Terry Li
CVP Analysis...

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CVP Analysis What is CVP Analysis? CVP Analysis is examining the concerns of changes in profits in response to changes in sales volumes, costs and prices CVP Assumptions: □ The behaviour of costs can be neatly classified as fixed or variable □ Cost Behaviour is linear □ Fixed costs remain ‘fixed’ over the time period and / or a given range of activity □ Unit price and cost data remain constant over the time period and the relevant range □ Mixed costs can be separated into their fixed and variable portions □ Mixed cost portions when separated are linear (maintain FC / VC behaviour) within the relevant range of sales volume How does CVP Analysis assist a case: CVP data can be used to provide information for a variety of decision situations: □ Identifying the number of products or services required to be sold to meet breakeven or profit targets □ Determining the impact on profit of changes in the mix of fixed and variable costs □ Pricing Products Contribution Margin Concept: What is the Contribution Margin Concept? CVP Analysis involves the Contribution Margin Concept, the contribution margin is a critical concept and can be conceptualised in the following ways: □ Contribution margin is calculated by deducting total variable costs from total revenue

Contribution margin = □ Contribution Margin per unit can be calculated by deducting variable cost per unit from revenue per unit

CM per unit = Sales price – SP (x) – VC (x) – FC = estimated How much sales revenue to achieve a target profit (pre-tax)? How many sales units to achieve a target profit (pre-tax)?

(x) = (Target Profit (pre-tax) +

Breakeven Analysis What is Breakeven Analysis? Breakeven Analysis relates to the calculation of the necessary levels of activity required in order to breakeven in a given period. Breakeven occurs when total revenue and total costs are equal resulting in zero profits

Revenue = FC – VC How to Calculate the required Sales Units to Breakeven?

Breakeven Point (x) = Fixed Cost / Graphical Representation of CVP

Contribution Margin Ratio Why use Contribution Margin Ratio? It is particularly useful when seeking the total sales dollars required to break even or earn a desired profit, rather than a specific number of units. It can also be used in accordance with breakeven and target profit (pre-tax) to undergo CVP Analysis The contribution margin ratio can be expressed as a percentage of revenue

x%= Contribution Margin per unit x100 x%= Total Contribution Margin x100 CVP analysis using CM ratio The amount of revenue to achieve the targeted profit:

Revenue = Target Profit (pre-tax)+ FC The amount of revenue to Breakeven:

Revenue = Fixed Costs CM Ratio...