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Cost-volume-profit (CVP) analysis is a technique used by managers to determine the relationship between sales, costs, volume, and profits. It helps identify the break-even point, which is the sales volume needed to cover total fixed costs. It also calculates the margin of safety, which is the amount sales can decrease before the company loses money. Managers use CVP to determine the effects of changes in prices, costs, and sales volume on profits. It makes assumptions that costs can be classified as fixed or variable and that selling prices and production levels remain constant. CVP analysis is made up of components like the break-even point, margin of safety, and calculations showing the impact of changes in net income.

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64 views3 pages

CVP Emba

Cost-volume-profit (CVP) analysis is a technique used by managers to determine the relationship between sales, costs, volume, and profits. It helps identify the break-even point, which is the sales volume needed to cover total fixed costs. It also calculates the margin of safety, which is the amount sales can decrease before the company loses money. Managers use CVP to determine the effects of changes in prices, costs, and sales volume on profits. It makes assumptions that costs can be classified as fixed or variable and that selling prices and production levels remain constant. CVP analysis is made up of components like the break-even point, margin of safety, and calculations showing the impact of changes in net income.

Uploaded by

Rajib
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 (CVP)

Cost-volume-profit (CVP) analysis is a way to find out how changes in


variable and fixed costs affect a firm's profit. Companies can use CVP to
see how many units they need to sell to break even (cover all costs) or reach
a certain minimum profit margin.
The cost volume profit analysis, commonly referred to as CVP, is a
planning process that management uses to predict the future volume of
activity, costs incurred, sales made, and profits received. In other words,
it’s a mathematical equation that computes how changes in costs and sales
will affect income in future periods.
Generally, CVP analysis provides answers to questions such as:
(a) What will be the effect of changes in prices, costs, and volume on
profits?
(b) What minimum sales volume need be affected to avoid losses?
(c) Which product is the most profitable one and which product or operation
of a plant should be discontinued? Etc.
Assumptions when using CVP analysis
When managers use CVP analysis to make business decisions, the following
assumptions are made:
• All costs, including manufacturing, administrative, and overhead costs, can
be accurately identified as either fixed or variable.
• The selling price per unit is constant.
• Changes in activity are the only factors that affect costs.
• All units produced are sold.

Components of CVP Analysis


There are several different components that together make up CVP
analysis. These components involve various calculations and ratios, which
will be broken down in more detail in this guide.
The main components of CVP analysis are:
1. CM ratio and variable expense ratio
2. Break-even point (in units or dollars)
3. Margin of safety
4. Changes in net income
5. Degree of operating leverage

Problem: 1
Sales price Tk. 20 per unit
Variable manufacturing cost Tk. 11 per unit
Fixed factory overhead Tk. 5,40,000 per year
Fixed selling cost Tk. 2,52,000 per year
You are required to calculate:
(a) Break-even point expressed in amount of sales in Taka
(b) Number of units that must be sold to earn a profit of Tk. 60,000
Problem: 2
The ABC company sales a single product for which the following data are
available:
Current selling price Tk. 4.90 per unit
Budgeted sales volume 2,00,000 units
Budgeted fixed costs Tk. 1.60 per unit
Budgeted variable cost Tk. 2.20 per unit
The company in contemplating an increase in the selling price of its product
to Tk.5.40 per unit
You are required to calculate:
(a) What will be the new break-even point in Taka and units
(b) Compute the new margin of safety ratio
(c) How many units will have to be sold at the new price to earn 10% increase
in total profit?
Problem: 3
a. A company makes Tk. 5,000 profit from Tk. 60,000 sales. Its fixed costs
are Tk. 15,000, what is the Break-even point?
b. A company has sales of Tk. 1,00,000, fixed costs of Tk. 20,000 and
break-even point of Tk. 80,000. What profit has it made?
c. A company has a profit of Tk. 5,000, fixed cost of Tk. 10,000 and break-
even point of Tk. 20,000. What were its sales?

Problem: 4
Matador produces a product which sells for Tk. 5. At present the company
products and sells 50,000 units per year. Unit variable manufacturing and
marketing expenses are Tk. 2.50 and Tk. 0.50 respectively. Fixed expenses
are Tk. 70,000 for factory overhead and Tk. 30,000 for marketing and
administration. The sales manager has proposed that the price be increased
to Tk, 6, To maintain the present sales volume advertising must be
increased, The company's profit objective is 10% of sales.
You are required:
a. Compute the additional expenditure the company can afford for
advertising.
b. Compute the new Break-even point in units and taka, using the Tk. 6
sales price and the additional advertising expenditure from requirement a.

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