COST VOLUME PROFIT ANALYSIS Cost-Volume-Profit (CVP) Analysis is a tool to analyse the relationship between cost, volume of sales

and profit. Cost can be further elaborated as a combination of fixed costs (which are unchanged due to level of sales) and variable costs (which change directly to the number of unit sold). Through CVP Analysis, one may benefits from the information of how much (minimum) sales unit required to be achieved to avoid trading losses. In chapter 2, we had derived at the conclusion that: Total Costs = (Unit Variable Costs x Unit) Fixed Costs In accounting, profit means the excess amount of sales value over total costs. Hence, the calculation of profit can be demonstrated as follows: Illustration Operational results of Alif Sales Price Variable Costs per unit Fixed Costs Unit Sold Trading for the month of February 2010: : RM10.00 / unit : RM4.00 / unit : RM7,000 per month : 1,500 units

Hence; the profit from the operation can be calculated as follows: Alif Trading Trading Account for the month of February 2010 Sales (RM10.00 x 1,500 units) Less : Variable Costs (RM4.00 x 1,500 units) Fixed Costs Profit From the illustration; we notice that profit is: Profit = [Sales Price x Units] [(Unit Variable Costs x Units) + Fixed Cost] The above illustration was actually generated for reporting purposes. Its means that, what had really happened be reported in a Trading Account; showing the resulted sales, costs and profits of such activities. However, CVP Analysis is more useful for future planning, i.e. with given information of variable costs per unit, fixed costs, and selling price per unit, how much would be the least quantity of sales needed in before trading profits turns to losses?. RM 15,000 6,000 7,000 13,000 2,000

BREAK-EVEN POINT Break-even point (BEP) refers to the point of sales unit of which the total sales revenue equals to total costs (variable costs + fixed costs). At this point, the resulting profits or loss will equal to nil (RM0.00). Assumptions of CVP Analysis: 1. Total costs can be classified as either fixed or variable elements with reasonable accuracy. 2. Both total costs and total revenues graph are linear throughout the relevant range of the activity index (straight line). 3. The unit selling price, unit variable costs, and fixed costs are known, can be identified accurately and constantly (fixed) 4. Changes in the level of revenues and costs arise due to changes in the number of unit produced and sold. 5. All units produced are sold. 6. When more than one type of product is sold, the sales mix is constant. Illustration 2 Given the following information, the results of profit / (losses) can be shown in the following table: Selling Price per unit : RM12.00 Variable Costs per unit : RM6.00 Fixed Costs : RM300
Volume (Unit) 10 20 30 40 50 60 70 80 Sales Amount (RM) 120 240 360 480 600 720 840 960 Total Variable Costs (RM) 60 120 180 240 300 360 420 480 Fixed Costs (RM) 300 300 300 300 300 300 300 300 Total Costs (RM) 360 420 480 540 600 660 720 780 Profit / -loss (RM) -240 -180 -120 -60 0 60 120 180 BEP

From the CVP Analysis above, the BEP is at 50 units of sales, where at this volume the total sales revenue is RM600 [RM12.00 x 50units] as well as total costs also at RM600 [(RM6.00 x 50 units) + RM300]., hence the profit at 50 units of sales is equal to zero (RM0.00). There 1. 2. 3. are several ways BEP can be arrived: The mathematical equation approach. The graphical approach. The contribution margin approach.

1. The mathematical equation approach. Previous knowledge to be applied: (a) Profit = Sales Revenue Total Costs Profit = [selling price x unit] [(unit variable costs x unit) + Fixed costs] (b) At BEP, Profit = nil (RM0.00) Thus, by taking the information from illustration 2, and be applied in the 'Zero Profit' equation: Profit (RM0) 0 0 300 Q Q Tutorial: Determine the BEP of sales for the following three trading companies: Company A Selling Price per unit Variable costs per unit Fixed Costs Break even sales unit RM15.00 RM10.00 RM20,000 Company B RM80.00 RM30.00 RM50,000 Company C RM2.50 RM1.50 RM18,000 = [ RM12 x Q ] [ (RM6 x Q ) + RM300 ] = 12Q - 6Q - 300 = 6Q - 300 = 6Q = 300/6 = 50 units

2. The Graphical Approach Previous knowledge / skills required: (a) Drawing curves for variable costs, fixed costs, and sales revenues. The data from illustration 2: Selling Price per unit : RM12.00 Variable Costs per unit : RM6.00 Fixed Costs : RM300
RM
80 75 0 70 0 65 0 60 0 55 0 50 0 45 0 40 0 35 0 30 0 25 0 20 0 15 0 10 0 5 0 0 1 0 2 0 3 0 4 0 5 0 6 0

Sales

Total Costs

Break-even point The intersection point between the sales curve and total costs curve indicates that the sales revenues and total costs amount are at the same value, and hence resulting in zero profit Fixed Costs

7 0

8 0

9 0

10 11 120 0 0

Volum e

3. The Contribution Margin Approach