Cost-Volume-Profit

Analysis

1
• Cost- Volume –Profit Analysis is a profit planning
technique which is generally used by the managers to
study the impact of changes in cost and volume of sales
on the profitability of the Firm.

• The analysis is based on the classification of expenses

as variable (expenses that vary in direct proportion to
sales volume) or fixed (expenses that remain
unchanged over the long term, irrespective of the sales
volume).

• Break-even analysis is the most widely used form of

CVP analysis . To understand the application of break
even analysis in business , managers need to estimate
future revenues, costs and profits .
2
The method relies on the following assumptions

•Sales price per unit is constant (i.e. each unit is sold at the
same price).

•Variable costs per unit are constant (i.e. each unit costs the
same amount).

•Total fixed costs are constant (i.e. costs such as rent,

property taxes or insurance do not vary with sales over the
long term).

•Everything produced is sold.

•Costs are only affected because activity changes.

3
Profit Equation of the Firm

Profit = Sales – Variable Costs – Fixed Costs

Profit + Fixed Cost = Sales – Variable Cost

Profit + Fixed Cost = Contribution

Fixed cost – loss = Contribution
• The contribution or contribution margin is defined
as the difference between Sales and Variable Costs.

• Contribution Margin Percentage (CM%) is computed as

follows
CM% = Contribution Margin (Rs) / Sales (Rs)
4
• Accordingly, the following is another way to express the
relationship between contribution margin, CM percentage, and
sales:
Contribution Margin (Rs) = Sales (Rs) X Contribution
Margin %
As variable costs change in direct proportion (in %) of sales, the
contribution margin also changes in direct proportion to sales,
However, the contribution margin percentage remains the same.
• The contribution Margin as % of sales is also known as P/V
Ratio or C/S ratio.
Profit-volume ratio (P/V) expresses contribution as a
percentage of sales.
• A higher P/V ratio shows higher proportion of contribution in the
given sales ,and thus with the given fixed cost, the amount of
profit is higher.
5
1. When amount is given:
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
P/V Ratio = × 100
𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
Or
Sales – Variable Cost
× 100
𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
Or
Fixed Cost + Profit
× 100
Total Sales
2. When per unit is given:
contribution per unit
P/V Ratio = × 100
𝑺𝒂𝒍𝒆𝒔 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕

3. When the information is given for two time periods:

change in profits
P/V Ratio = × 100
𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒔𝒂𝒍𝒆𝒔 6
4. When V/C ratio is given:
P/V ratio = 1- V/C ratio or 100 – V/C ratio

Note: variable cost ratio (V/C) shows variable cost as

% of sales.
Variable Cost
V/C ratio = × 100 and
𝑺𝒂𝒍𝒆𝒔

V/C ratio + P/V ratio = 1

7
The Break-even point (BEP) is the point at which
total cost and total revenue are equal. There is no net
loss or gain.

• Total profit at the break-even point is zero.

• Any level of sales above the BEP gives profit.

• At BEP contribution is equal to fixed cost.

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Break- Even Point

9
Calculation of units at BEP:

Profit = Sales – Variable Costs – Fixed Costs

Profit + Fixed Cost = Sales – Variable Cost
At BEP Profit = 0
0 + Fixed Cost = sales –variable cost
Let X be the no of units at break even point
Fixed Cost = (sales) x (X) –(variable cost) x (X)
Fixed Cost = X ( Sales – Variable Cost)
Fixed Cost
=𝑿
(𝒔𝒂𝒍𝒆𝒔 − 𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝒄𝒐𝒔𝒕)
Fixed Cost
BEP in Units =
Sales(p.u) – Variable Cost(p.u)
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 Fixed Cost
BEP (in units) =
Contribution per unit

Fixed Cost
BEP in (Rs) = ( ) x selling
Sales(p.u) – Variable Cost(p.u)
price (per unit)
Fixed Cost
=
Sales(p.u) – Variable Cost(p.u)/ selling price (p.u)

Fixed Cost
=
1−V/C ratio

Fixed Cost
=
P/V Ratio
11
 CVP Analysis
Q 1.

Q 2.

Q 3.

12
Sol 1 .

13
Sol 2.

14
Sol 3.

15
 Desired Sales for Target Profit

Fixed cost + Target Profit

Desired sales ( units) =
Contribution per unit

Fixed cost + Target Profit

Desired sales (Rs) =
P/V ratio
• In case income tax rate and profit after tax are given
then profit after tax should be converted into profit
before tax to calculate desired sales to meet target
profit

Profit after tax

Profit before tax =
1− tax rate
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Margin of Safety

• The Margin of safety refers to the excess of actual

sales over break- even sales.
Margin of safety = Actual sales – Break- even sales

• A higher margin of safety represents the strength of

the firm to face the declining sales.

Margin of safety may be calculated in units or in

rupees.

Margin of safety (units) = Actual sales(units) – Break

even sales (units) 17
• Margin of safety (Rs) = Actual sales(Rs) – Break even sales
(Rs)

=
Fixed cost + Profit
P/V ratio
- Fixed cost
P/V ratio

Profit
=
P/V ratio
Margin of safety
• Margin of safety ratio = X 100
Total sales

Profit
• MOS % = X 100
Total Contribution

• Profit = MOS ratio X P/V ratio X Actual Sales (Rs)

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 Q 4.

Q 5.

Q 6.
.

19
Sol 4.

20
Sol 5.

21
Sol 6.

22
Q 7.

23
24
25
Q 8.

Q 9.

26
Sol 8.

27
 Composite/ Combined Break even point
( Multiple Product situation)
• The Composite BEP shows the break even sales of the
company for all products taken together. It is the BEP of
the firm as whole.
• Sales mix remains constant.
• Sale mix is the proportion of different products in the
overall sales of the firm.
Aggregate fixed cost
Overall BEP(Rs) =
Composite P/V ratio

Total contribution from all products

Composite P/V ratio =
Total sales amount of all products

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 Composite BEP (in units)

Composite fixed costs

=
Average Contribution per unit for two or more products

Q 10 . Vadilal Enterprises manufactures and sells four different types of

ice creams-vanilla, chocolate, mango and orange. The sales mix in value
comprises 33-1/3%,41-2/3%,16-2/3% and 8-1/3%for vanilla, chocolate,
mango and orange respectively. The total budgeted sales at 100% are
60,000 per month. Operating costs for the four products are as follows:
A 60% of sales B 68% of sales C 80% of sales
D 40% of sales
Fixed cost is14,700 per month.
Calculate the BEP for the company as a whole. 29
Sol 10.

30
Q 11.

31
Sol 11.

32
 Cost Break Even Point ( Cost Indifference Point)

• Cost BEP Refers to that level of output at which the total cost or
total profit under the two alternatives plant is equal.

• At this level of production firm is indifferent between two

alternatives.
• The objective is to identify the alternative which is more economical
at a given level of output.

For example there are two machinery

case (1) Machine A Machine B
Fixed cost 2 lacs 3 lacs
Variable cost Rs 5 p.u. Rs. 10 p.u.
33
Machine A will be preferred.
Case (2 ) Machine A MachineB
Fixed cost 7 lacs 4 lacs
Variable cost Rs. 6 p.u. Rs. 5 p.u.
Machinery B will be opted by Firm .

Case (3) Machine A Machine B

Fixed cost 5 lacs 8 lacs
Variable cost Rs 6 p.u. Rs. 4 p.u.

Which machinery will be selected by firm ?

In this case calculate that level of output at which total
cost of both machinery will be equal. This is known as
cost indifference point where management is indifferent.
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 Cost Indifference point
Total Cost of Machinery A = Total Cost of Machinery B

Fixed Cost + (Variable cost) X (no of units) = Fixed Cost + (Variable

Cost) X (no of units )

5 lacs + 6 (no of units ) = 8 lacs + Rs 4 ( no of units)

(Rs 6 – Rs 4) x no of units = 8 lacs – 5 lacs

8 lacs – 5 lacs Difference in fixed cost

No of units = =
Rs 6 – Rs 4 Difference in varable cost per unit
At break even
= 3,00,000 / 2 = 1,50,000 units
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• If the expected demand in the market is more than the cost BEP, the plant with lowest
variable cost per unit will result in lower total cost and therefore should be preferred.
Expected units ≥ Cost BEP = select low variable cost.
2,00,000 units ≥ 1,50,000 = Select Machinery B

• If the demand is less then the cost BEP, the plant with lower fixed cost will results in
total lower cost and therefore should be preferred.
Expected units ≤ Cost BEP = select lower fixed cost
1,00,000 ≤ 1,50,000 = Select Machinery A

Difference in fixed cost

=
Difference in varable cost per unit

Difference in fixed cost

Cost Break even point ( in Rs) =
Difference in P/V ratio

36
Q 12.

Q 13.

37
Sol 12.

• At output level more than 20,000 units, the machine with

lower variable cost , i. e. A, will result into lower total
cost and therefore should be preferred.

• At output less than 20,000 units, the machine with a

lower fixed cost, i. e. B, will result into lower total cost
and therefore should be preferred.
38
Sol 13.

39
Q 14.

40
Sol 14.

41
Q15.

42
Sol 15.

Poonam, SRCC 43
44
Q16.

45
Sol 16.
At 80 % capacity = 800000 at Rs 25 per units
800000/ 25 = 32000 units
At 100% capacity level = ( 32000X 100)/ 80 = 40000 units

Total variable cost = 7.50 +6.25+ 3.75= 17.5

Contribution per unit = 25 – 17.5= Rs 7.5

Break even point = Fixed cost / contribution per unit

Out of 180000 only 120000 is variable in nature ( 32000 X 3.75)

Fixed cost is 60000 + 90000 = 150000
BEP = 150000/7.5= 20000 units , which is 50 % of the total capacity.

(2) profit = sales – variable cost – fixed cost

.08 * 25* x = 25 x – 17.5 X – 150000 46
X = 27272.7 units
3) Desired sales = fixed cost + profit / contribution per unit

which is beyond 80 % of capacity so we need to add 20000 in

fixed cost =
170000 + 95000/ 7.5 = 35333.3 units
Capacity utilization = 35333.3/40000 units

We have to work at 88.33 % of the capacity to achieve a profit

f Rs 95000

4 ) At 40 % capacity = 16000 units

Let selling price be x
at break even profit = 0
Profit = sales – variable cost – fixed cost
0 = 16000 X – 17.5 X 16000 – 150000
X = 430000/16000 = Rs 26.875 per unit.
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Q17.

Q18.

48
Sol 17.

49
Sol 18.

50
Q19.

51