Beruflich Dokumente
Kultur Dokumente
Analysis
Introduction:
The key elements in the CVP analysis are selling prices, sales
volume, variable cost per unit, total fixed costs and the sales
mix (if the firm is dealing with more than one product at a
time).
1.
2.
1.Contribution margin
analysis
100
selling price
As the selling price p.u and the variable cost p.u are assumed to
be constant, the CM p.u also remains constant. Ex: selling price is
Rs.50 and variable cost is Rs.30. So, the CM is Rs.20 p.u. Each unit
sold by the firm generates a contribution of Rs.20, which is
available to recover fixed costs and after they are covered, to
contribute to the profit of the firm.
CM Ratio= 50-30
100
=40%
50
Suppose in the above case, the firm is selling 1000 units and the
fixed cost of operations is Rs.12,000. the contribution margin and
the net profit will be:
CM=Sales*CM Ratio
= (1,000*50)*40%
=Rs.20,000
Or
VC=sales-CM
Now if sales is 100% and the CM ratio is 40%, the VC Ratio is
(100-40)=60%. So if that sales are increasing by Rs.5,000 then
the VC will also increase by 60% of Rs.5,000 i.e. Rs.3,000. The
existing VC Rs.30,000( 1,000*30) and the new VC will be
Rs.33,000 (1,100*30). So, VC Ratio is defined as :
VC Ratio =100% - CM Ratio
2.Is the
Break
even
analysis
fundamental technique of CVP Analysis. The BE point is the
Any sales level below the BE Level will therefore result in loss and
sales level above the BE Level will bring profit to the firm.
or S =
VC+F+NP
No. of units sold (U) *S.P =(no. of units sold*VC p.u) +F+NP
U*S.P
= U*VC+F+NP
= F
S.P-VC
U=
F
Contribution
p.u
illustration 1:
i.
ii.
How many units the firm must sell to earn a profit of Rs.40,000
iii.
iv.
v.
How much extra sales must be made to meet the extra fixed
cost of Rs.5,000
Margin of safety
In case of R Ltd., the BE sales level was 6,000 units. If the firm is
operating at 6,000 units only, the margin of safety is zero and
decline of even a single unit in sales volume will inflict a loss on the
firm. If the firm expects a sales level of 8,000 units, then it has a
margin of safety of 2,000 (8,000-6,000). The margin of safety can
be presented as a % of sales or as an amount as follows:
Margin of safety =S.P *( actual sales- BE sales)
= Rs.20* (8,000-6,000)
=Rs.40,000
=25%
Illustration 2: Two firms A and B Ltd. the sales and cost information
for these 2 firms are given as follows:
A Ltd.
B Ltd.
10,000
10,000
Rs. 20
Rs.20
Rs.15
Rs.10
Fixed cost
Rs.40,000
Rs.90,000
sales (units)
[the difference in margin of safety can be traced to the fact that the
cost structures of 2 firms is entirely different. B Ltd has higher fixed
cost as compared to A ltd. and the former would suffer losses more
quickly than the latter in case of decrease in sales. This highlights
that margin of safety is an indicator of degree of risk of the co.. If the
firm has high risk as indicated by low margin of safety, foll steps must
be taken to improve the position:
(1) Increasing the overall sales level; (2) reduction in fixed cost or
conversion of FC into VC; (3) reducing the BE Level by increasing
contribution].
illustration
3:
The BOD of F Ltd. , manufacturing three products A, B, and C
Rate per
hr
Re.0.50
1.00
0.50
10
3
30
2
20
5
Hours
28
5
16
Hours
16
6
8
Hours
30
10
30
A
10,00
0
50
B
5,000
68
C
6,000
90
7,000
9,000
12,00
0
1.
2.
illustration
4:
A co. presents the foll cost estimates for 3 prospective plants
X, Y and Z.
Plant X
Plant Y Plant Z
60,000
1,08,000 1,20,000
2.50
2.20
75,000
1,20,000 1,50,000
2.10
1.
2.
If sales are steady at 1,00,000 units per year and the unit
selling price is Rs.4 per unit, what will be the profits earned
with each of the plants? Assume that Plant X can be worked
double shift with an additional expense of 10% in fixed cost
and 5% in variable costs of all units.
illustration 5:
ABC Ltd. manufactures and sells four products- I, II, III, IV. The
sales mix in value comprises 331/3 %, 412/3 %, 16 2/3% and 8
1/3% resp. out of the total sales of Rs.60,000
Operating costs are 60%, 68%, 80% and 40% resp. of the
selling price.
The firm proposes to change the sales mix for the next month
to 25%, 40%, 30% and 5% resp.
Calculate:
1.
Break even point for the products on an overall basis for the
current month.
2.
Break even point for the products on an overall basis for the
next month assuming that the sales mix is changed.
illustration
6:
M Ltd. manufacturers three products P, Q,R. the unit selling
prices of these products are Rs.100, Rs.80 and Rs.50 resp. The
corresponding unit variable costs are Rs.50, Rs.40 and Rs.20.
The propositions (quantity wise) in which these products are
manufactured and sold are 20%, 30% and 50% resp. the total
fixed costs are Rs.14,80,000.
Given the above information, work out the overall break even
quantity and product wise break up of such quantity.