Group-2-CVPRELATIONSHIPS-PRESENTATION

1、Thecost volume profit analysis, commonly referred to asCVP, is a planning process that management uses to predict the future volume of activity, costs incurred, sales made, and profits received.The separation of fixed costs from variable costs contributes to an understanding of how revenues, costs,

2、and volume interact to generate profits. With this understanding, managers can perform any number of analyses that fit into a broad category called COST-VOLUME-PROFIT.CVP is used to determine how changes in costs and volume affect a companys operating income and net income. In performing this analys

3、is, there are several assumptions made, including: Sales price per unit is constant. Variable costs per unit are constant. Total fixed costs are constant.Cost - means the expenses involved in producing or selling a product or service.Volume - which means the number of units produced in the case of a

4、 physical product, or the amount of service sold.Profit - which means the difference between the selling price of a product or service minus the cost to produce or provide it.Activity level. This is the total number of units sold in the measurement period.Price per unit. This is the average price pe

5、r unit sold, including anysales discountsandallowancesthat may reduce thegross price. The price per unit can vary substantially from period to period based on changes in the mix of products and services; these changes may be caused by old product terminations, new product introductions, product prom

6、otions, and theseasonality of sales for certain items.Variable cost per unit. This is the totallyvariable costper unit sold, which is usually just the amount ofdirect materialsand the salescommissionassociated with a unit sale. Nearly all other expenses do not vary with sales volume, and so are cons

7、ideredfixed costs.Total fixed cost. This is the total fixed cost of the business within the measurement period. This figure tends to be relatively steady from period to period, unless there is astep costtransition where management has elected to incur an entirely new cost in response to a change in

8、activity level.The basicCVP formulais the price per unit multiplied by the number of units sold, which equals the sum of total variable costs, total fixed costs and accounting profit.CVPanalysis can help companies determine their contribution margin, which is the amount remaining from sales revenue

9、after all variable expenses have been deducted. The amount that remains is first used to cover fixed costs, and whatever remains afterward is considered profit. Cost-volume-profit(CVP)analysisis used to determine how changes in costs and volume affect a companys operating income and net income. In p

10、erforming this analysis, there are several assumptions made, including: Sales price per unit is constant. Variable costs per unit are constant. Total fixed costs are constant.The break-even point refers to therevenuesneeded to cover a companys total amount of fixed and variable expenses during a spe

11、cified period of time. The revenues could be stated in dollars (or other currencies), in units, hours of services provided, etc. Breakeven point is the price level at which the market price of a security is equal to the original cost. For options trading, the breakeven point is the market price that

12、 anunderlying assetmust reach for an option buyer to avoid a loss if they exercise the option. TARGET PROFIT ANALYSIS =is aboutfinding out the estimated business activities to perform to earn a targetprofit during a certain period of time. FORMULA TARGET PROFIT IN UNITS: # UNITS= FIXED COST+ TARGET

13、PROFIT CONTRIBUTION MARGIN CONTRIBUTION MARGIN=PRICE- UNIT VARIABLE COSTHOW MUCH OUTPUT OR SALES LEVEL CAN FALL BEFORE A BUSINESS REACHES ITS BREAK EVEN POINT (BEP).FORMULA : DIFFERENCE BETWEEN ACTUAL OR EXPECTED SALES AND BREAK EVEN POINT(BEP) BLAZIN BOARD COMPANY PLANS TO SELL 10,000 SNOWBOARDS AT

14、 $400 EACH IN THE COMING YEAR.PRODUCT COST INCLUDE:1. CALCULATE THE NUMBER OF UNITS BLAZIN-BOARDS MUST SELL TO BREAK EVEN.PREPARE AN INCOME STATEMENT FOR CALCULATED UNITS.2.CALCULATE NO. OF UNITS BLAZIN MUST SELL TO ACHIEVE TARGET INCOME OF P240,0003. CALCULATE NUMBER OF MARGIN IN SAFETY IN UNITS FO

15、R THE COMING YEAR.4. CALCULATE THE BREAK EVEN SALES AND MARGIN OF SAFETY IN SALES FOR THE COMING YEAR.5. WHAT IS THE MARGIN OF SAFETY PERCENTAGE?1.BEP=TFC/(P-UVC) =P1,200,000/(P400-P240) =7500*1,200,000 =800,000(FIXED FACTORY OVER HEAD)+400,000(FIXED SELLING AND ADMINISTRATIVE EXPENSE.*240 =80(DM)+1

16、25(DL)+15(VOH)+20(COMM.EXP. 5% OF 400(PRICE)SALES(7500units P400)P3,000,000LESS:VARIABLE EXPENSES P1,800,000 (7500P240)CONTRIBUTION MARGIN P1,200,000LESS:FIXED EXPENSES P1,200,000 (800,000+400,000)OPERATING INCOMEP0 2.# UNITS= FIXED COST+ TARGET PROFIT CONTRIBUTION MARGIN =(P1,200,000+P240,000) (400

17、-240) =P1,440,000/P160 =9,000*must sold 9000 units of snowboard inorder to achieve the target income .3.MOS=ACTUAL/EXPECTED-BEP =10,000-7500 =2,500 UNITS4.BEPSALES=7500*P400 = P3,000,000 MOS SALES=(10,000*400)-3,000,000 =P1,000,0005.MOS %= 4,000,000-3,000,000 4,000,000 = 1,000,000 4,000,000 =.25*100

18、 =25%NOTE: 100 IS CONSTANT Operating leverage is concerned with the relationship between the firms sales revenue and its earnings before interest and taxes (EBIT) or operating profits. The degree of operating leverage (DOL) is the numerical measure of the firms operating leverage.Johns Software is a

19、 leading software business, which mostly incurs fixed costs for upfront development and marketing. Johns fixed costs are $780,000, which goes towards developers salaries and the cost per unit is $0.08. The company sells 300,000 units for $25 each. Given that the software industry is involved in the

20、development, marketing and sales, it includes a range of applications, from network systems and operating management tools to customized software for enterprises.Sales mix is the proportion in which two or more products are sold. For the calculation of break-even point for sales mix, following assum

21、ptions are made in addition to those already made for CVP analysis:The proportion of sales mix must be predetermined.The sales mix must not change within the relevant time period.Following information is related to sales mix of product A, B and C.ProductABCSales Price per Unit$15$21$36Variable Cost

22、per Unit$9$14$19Sales Mix Percentage20%20%60%Total Fixed Cost$40,000ProductABCSales Price per Unit$15$21$36 Variable Cost per Unit$9$14$19Contribution Margin per Unit$6$7$17Step 1: Calculate the contribution margin per unit for each product:ProductABCSales Price per Unit$15$21$36 Variable Cost per U

23、nit$9$14$19Contribution Margin per Unit$6$7$17 Sales Mix Percentage20%20%60%$1.2$1.4$10.2Sum: Weighted Average CM per Unit$12.80Step 2: Calculate the weighted-average contribution margin per unit for the sales mix using the following formula:Product A CM per Unit Product A Sales Mix Percentage+ Prod

24、uct B CM per Unit Product B Sales Mix Percentage+ Product C CM per Unit Product C Sales Mix Percentage= Weighted Average Unit Contribution MarginTotal Fixed Cost$40,000 Weighted Average CM per Unit$12.80Break-even Point in Units of Sales Mix3,125Step 3: Calculate total units of sales mix required to

25、 break-even using the formula:Break-even Point in Units of Sales Mix = Total Fixed Cost Weighted Average CM per UnitProductABCSales Mix Ratio20%20%60% Total Break-even Units3,1253,1253,125Product Units at Break-even Point6256251,875Step 4: Calculate number units of product A, B and C at break-even p

26、oint:ProductABCProduct Units at Break-even Point6256251,875 Price per Unit$15$21$36Product Sales in Dollars$9,375$13,125$67,500Sum: Break-even Point in Dollars$90,000Step 5: Calculate Break-even Point in dollars as follows:COST STRUCTUREandPROFIT STABILITY- Refers to the relative proportion of Fixed and Variable Costs in an organization.- Typically used to plan a businessand to communicate the costs of a strategy or investment.CONTRIBUTION FORMAT INCOME STATEMENTS FOR TWO BLUEBERRY FARMSAssume that each farm experiences a 10% increase in sales without any increase in fixed costs. The new i