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CVP Analysis Lecture Notes PDF

This document discusses cost-volume-profit (CVP) analysis, which examines how changes in volume, sales price, fixed costs, and other factors affect costs, revenues, and profits. CVP analysis can be used for product pricing, order acceptance, profit planning, and technology usage decisions. It involves techniques like contribution margin analysis and break-even analysis under assumptions like constant prices, costs, and sales mix over the relevant range.

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Reverie Sevilla
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1K views32 pages

CVP Analysis Lecture Notes PDF

This document discusses cost-volume-profit (CVP) analysis, which examines how changes in volume, sales price, fixed costs, and other factors affect costs, revenues, and profits. CVP analysis can be used for product pricing, order acceptance, profit planning, and technology usage decisions. It involves techniques like contribution margin analysis and break-even analysis under assumptions like constant prices, costs, and sales mix over the relevant range.

Uploaded by

Reverie Sevilla
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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COST-VOLUME-PROFIT ANALYSIS

•COST-VOLUME-PROFIT (CVP) analysis is a


systematic method of examining the effects of
changes in an organization’s volume of activity
on its costs, revenue and profit .

•In other words, CVP analysis helps in analysing


the effects of change in SP or sales volume or
sales mix or fixed costs on the profits of the
firm.
USAGE OF CVP ANALYSIS IN MANAGERIAL
DECISIONS
•Product pricing.
•Accepting / rejecting sales orders.
•What product lines to promote?
•What level of output is required to achieve a
set level of net profit?
•Feasibility of profit plan.
•Technology usage.
CVP ANALYSIS : TYPICAL QUESTIONS
•How many photocopiers must ABC produce to earn a profit
of, say Rs. 800,000?

•At what sales volume will XYZ’s total revenues and total
costs be equal?

•What profit will PQR earn at an annual sales volume of, say
Rs. 30 million?

•What will happen to the profit of JKL if there is a 20%


increase in the cost of food and a 10%increase in the selling
price of meals?
TECHNIQUES OF CVP

•Profit-volume (P/V) or Contribution Margin


analysis; and

•Break-even analysis.
ASSUMPTIONS UNDERLYING CVP ANALYSIS
1. The behavior of total revenue is linear (straight line). This implies
that the price of the product or service will not change as sales
volume varies within the relative range.
2. The behavior of total expenses is linear (straight line) over the
relevant range.
3. Expenses can be categorized as fixed, variable, or semi variable.
Total fixed expenses remain unchanged as activity varies.- The
efficiency and productivity of the production process and workers
remain constant
4. In multi-product organizations, the sales mix remains constant over
the relevant range.
5. In manufacturing firms, the inventory levels at the beginning and
end of the period are the same. This implies that the number of
units produced during the period equals the number of units sold.
BREAK-EVEN ANALYSIS
1. A break-even analysis indicates at what
level cost and revenue are equal and there
is no profit and no loss.BEP:
Total costs = Total revenue
2. At BEP, Contribution = Fixed costs
3. BES (units) = FC / CMPU
4. Cash BEP(units) = Cash fixed cost Cash
contribution per unit
BREAK-EVEN ANALYSIS
1. Total contribution margin available to
contribute to cover fixed expenses after all
variable expenses
2. Unit contribution margin
3. Total contribution margin
4. Weighted contribution margin
5. Contribution-margin ratio
LIMITATIONS OF CVP ANALYSIS

1. CVP analysis suffers from a limitation that it


does not include adjustments for risk and
uncertainty.
2. Contribution itself is not a guide if there is
some key or limiting factor.
3. Decisions by sales staff and marketing
personnel may lead to low profits or loss.
AREAS OF APPLICATION IN INDUSTRY

•Banking
•Hotel
•Software
•Non-Profit-Organistions
•Newspaper Industry

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