PART C - Cost Volume Profit (CVP) analysis PDF

Preview

Summary

Part C of performance management: Cost Volume profit (CVP) analysis summarised...

Description

5 Cost Volume Profit (CVP) analysis Topic list 1 2 3 4 5 6 7 8 9

A recap of basic CVP analysis Preparing a basic breakeven chart Breakeven analysis in a multi-product environment Breakeven point for multiple products Contribution to sales (C/S) ratio for multiple products Margin of safety for multiple products Target profits for multiple products Multi-product breakeven charts Further aspects of CVP analysis

Definition Cost volume profit (CVP)/breakeven analysis is the study of the interrelationships between costs, volume and profit at various levels of activity.

Assumptions 1) 2)

CVP analysis can apply to one product only, or to more than one product only if they are sold in a fixed sales mix (fixed proportions). Fixed costs per period are same in total, and unit variable costs are a constant amount at all levels of output and sales. 3) Sales prices are constant at all levels of activity. 4) Production volume = sales volume.

5 Cost Volume Profit (CVP) analysis

3 Breakeven analysis in a multi-product environment To perform breakeven analysis for a multi-product organisation, either a constant sales mix must be assumed, or all products must have the same C/S ratio.

3.1 A major assumption To perform breakeven analysis in a multi-product organisation, a constant product sales mix must be assumed. In other words, we have to assume that whenever x units of product A are sold, y units of product B and z units of product C are also sold. By assuming a constant sales mix for the products, we can calculate a weighted average contribution per unit sold.

4 Breakeven point for multiple products The breakeven point for a standard sales mix of products is calculated by dividing the total fixed costs by the weighted average contribution per unit, or by the weighted average C/S ratio.

5 Cost Volume Profit (CVP) analysis 5 Contribution to sales (C/S) ratio for multiple products The breakeven point in terms of sales revenue can be calculated by dividing the fixed costs (= required contribution) by the weighted average C/S ratio. The breakeven point in terms of sales revenue = fixed costs/average C/S ratio.

6 Margin of safety for multiple products The margin of safety for a multi-product organisation is equal to the budgeted sales in the standard mix less the breakeven sales in the standard mix. It should be expressed as a percentage of the budgeted sales.

7 Target profits for multiple products The sales mix required to achieve a target profit is the sales mix that will earn a contribution equal to the fixed costs plus the target profit.

8 Multi-product breakeven charts Breakeven charts for multiple products can be drawn if a constant product sales mix is assumed. The P/V chart can show information about each product individually....