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COST VOLUME
PROFIT ANALYSIS
MBA5101 GROUP C

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 GROUP MEMBERS - HOSPITALITY
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1.Makwambeni Isheunesu
2 . M a r a d z a Pa n a s h e
3.Mazarire Sellah
4.Moyo Zwoluga
5.Moyo Victor
6.Ndlovu Nothando

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OBJECTIVES
• DEFINITION
• ASSUMPTIONS
• T R A D I T I O N A L B R E A K E V E N C H A RT
• E X A M P L E I N H O S P I TA L I T Y

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 DEFINITION
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• Cost-volume-profit (CVP) analysis is a technique that examines
changes in profits in response to changes in sales volumes, costs,
and prices.
• Estimate future revenues, costs, and profits to help them plan and
monitor operations
• They use cost-volume-profit (C.V.P) analysis to identify the levels
of operating activity needed to avoid losses, achieve targeted
profits, plan future operations, and monitor organizational
performance.
• Managers also analyze operational risk as they choose an
appropriate cost structure.

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 COST VOLUME PROFIT ANALYSIS
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• is a method for analyzing how operating decisions and marketing
decisions affect profit based on an understanding of the relationship
between variable costs, fixed costs, unit selling price, and how they
change in a predictable way as the volume of activity changes(the
output level), CVP analysis has many applications:

1. Setting prices for products and services.

2. Introducing a new product or service.
3. Replacing a piece of equipment.
4. Determining the breakeven point.
5. Deciding whether to make or buy a given product or service.
6. Determining the best product mix.
7. Performing strategic what-if analyses.
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 ASSUMPTIONS
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i) The behaviour of total revenue and total cost has been reliably
determined and is linear over the relevant range.

ii)Selling price is constant.

iii)All costs can be divided into fixed and variable elements.

iv)Total fixed cost remain constant over the relevant range.

v) Total variable costs are directly proportional to volume over the

relevant range, that is, variable cost per unit remain constant.

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 ASSUMPTIONS
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i) Prices of the factor of production (inputs) are constant.

ii) Efficiency or productivity are also constant

iii)The analysis of either covers a single product and assumes that a given sales mix
will be maintained as total volume changes.

iv)Revenue and costs are being compared on a single volume base.

v) Volume is the only driver of costs.

vi)Production volume is equal to sales volume or alternatively changes in beginning

and ending inventory are equal to zero.

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BREAK
ClickEVEN POINT
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OPREATING INCOME = TOTAL REVENUE – VARIABLE COST – FIXED COST

We use the profit equation to plan for the different volumes of operation CVP
analysis can be performed using:

• Units (quantity) of product sold

• Revenue

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CONTRIBUTION MARGINtitle style
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Contribution margin per unit tells us how much revenue from each unit
sold can be applied toward fixed costs it is:
Contribution margin = sales – variable cost or Fixed cost + profit

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THE BREAK – EVEN POINT
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The break-even point is the point in the volume of activity where the
organization’s revenues and expenses are equal.
Revenue= total cost

Break even points in units = Fixed costs/ Contribution per unit

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 TRADITIONAL BREAK – EVEN CHART
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• Shows the relationship between total revenues and total costs; illustrates how
an organization’s profits are expected to change under different volumes of
activity .
• Consider the following information for X company.:

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 TRADITIONAL BREAK – EVEN CHART
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 EXAMPLE
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Chamuka bake and sale a single cake, the variable cost of

production is 0,15c and the current sales price is 0, 25c.
Fixed costs are $2 600 per month while annual profit at
current sales volume is $36 000. The volume of sales per
month is constant throughout the year

Calculate the BEP sales (units) for the firm for:

a)a month
b)a year 13 13
 EXAMPLES
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• a) BEP in sales units for a month = Fixed Costs
Contribution per unit
= $2 600
(0, 25c- 0,15c)
= 26 000 units

• b) BEP in sales units for a year = Fixed Costs

• Contribution per unit

= $31 200
(0, 25c- 0,15c)

= 312 000 units

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 EXAMPLE
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However, the firm may decide to change its price. Where this would be
the case, the standard for decision making would also change and the
current results become the minimum that can be accepted and this is
computed as follows:

Required Sales (N) = Required Contribution

Contribution per unit

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EXAMPLE
• Qstn: The sales manager from the above case (Chamuka) decided to raise the price to 0,29c per cake
but considers that a price rise will tend to loss of some sales. What is the minimum sales required for
each month to justify the price rise to 0,29c?

Monthly fixed costs = $2 600

Monthly Profit $3 000

Monthly Contribution = $5 600

Required Sales = $5 600

(0.29c – 0.15c)

= 40 000 units
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MARGIN OF SAFETY
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• It is the difference between the budgeted sales or actual sales and the
breakeven point sales. It is also the percentage to which sales can decline
before reaching BEP and this is computed as follows:

Margin of Safety (MoS) = Expected Sales – BEP sales x 100

Expected sales

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Thank You

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