CH 8 – COST-VOLUME-PROFIT
Objective of CVP-analysis
Effects of different options – compared to each other in decision-making process
How many units must be sold – before I breakeven?
Effect on profit – if I reduce my selling price and sell more units?
NUMERICAL APPROACH
a) Break-even Point in Units
¿ Costs ¿ Costs
¿
Contribution per unit
or = ( SP−VC per unit)
Or: 0 = SPx – Bx – A
b) Required Volume to Achieve Target Profit
(¿ Costs+Target Profit)
=
Contribution per unit
Or Target Profit = SPx – Bx - A
Target Profit Calculation
= Variable income (units x contribution p.u.) xxx
Less: Fixed costs (xx)
= Current Profit xxx
Target Profit = Current profit + additional profit want to make
c) Profit-volume Ratio (Contribution Ratio)
Contribution per unit
= x 100
Sales price per unit
Expressed as a percentage (%)
Meaning – The contribution is 50% of the sales value
d) Break-even Point in Rand-value
, ¿Costs
=
Contribution Ratio( Profit−vol ratio)
Expressed in Rands
Meaning – We must get sales of R9000 before we start making a profit
e) Safety Margin
( Expected Salesunits−BEP units)
=
Expected Sales units
Expressed as a percentage (%)
Meaning – if more than 40% = profit -> good decision
We want the safety margin to be HIGH/ increase
SENSITIVITY ANALYSIS
Address – risk and uncertainty
Measures – how sensitive profit is to change in variable costs
Example
Proposal 1:
Offer the shop manager a bonus of R0,25 for every carton sold above breakeven point.
Proposal 2:
Spend R500 per month on advertising and decrease the selling price with 10%. Currently
no money is spent on advertising.
Proposal 1
Target profit = R2500
Additional sales volume = A
Required Volume to Achieve Target Profit
Target Profit = (BEP units x Contrib. per unit) + [Additional units x (Contrib. p.u. –
Additional expense per unit)] – Fixed Costs
R2500 = (3000U x R1.50) + (A x (R1.50 – R0.25)) – R4500
1.25A = 2500
A = 2000 Units
Thus Required Volume/Units = Break-even Units + Additional Units
Req vol = 3000U + 2000U = 5000U
Objective of CVP-analysis
Effects of different options – compared to each other in decision-making process
How many units must be sold – before I breakeven?
Effect on profit – if I reduce my selling price and sell more units?
NUMERICAL APPROACH
a) Break-even Point in Units
¿ Costs ¿ Costs
¿
Contribution per unit
or = ( SP−VC per unit)
Or: 0 = SPx – Bx – A
b) Required Volume to Achieve Target Profit
(¿ Costs+Target Profit)
=
Contribution per unit
Or Target Profit = SPx – Bx - A
Target Profit Calculation
= Variable income (units x contribution p.u.) xxx
Less: Fixed costs (xx)
= Current Profit xxx
Target Profit = Current profit + additional profit want to make
c) Profit-volume Ratio (Contribution Ratio)
Contribution per unit
= x 100
Sales price per unit
Expressed as a percentage (%)
Meaning – The contribution is 50% of the sales value
d) Break-even Point in Rand-value
, ¿Costs
=
Contribution Ratio( Profit−vol ratio)
Expressed in Rands
Meaning – We must get sales of R9000 before we start making a profit
e) Safety Margin
( Expected Salesunits−BEP units)
=
Expected Sales units
Expressed as a percentage (%)
Meaning – if more than 40% = profit -> good decision
We want the safety margin to be HIGH/ increase
SENSITIVITY ANALYSIS
Address – risk and uncertainty
Measures – how sensitive profit is to change in variable costs
Example
Proposal 1:
Offer the shop manager a bonus of R0,25 for every carton sold above breakeven point.
Proposal 2:
Spend R500 per month on advertising and decrease the selling price with 10%. Currently
no money is spent on advertising.
Proposal 1
Target profit = R2500
Additional sales volume = A
Required Volume to Achieve Target Profit
Target Profit = (BEP units x Contrib. per unit) + [Additional units x (Contrib. p.u. –
Additional expense per unit)] – Fixed Costs
R2500 = (3000U x R1.50) + (A x (R1.50 – R0.25)) – R4500
1.25A = 2500
A = 2000 Units
Thus Required Volume/Units = Break-even Units + Additional Units
Req vol = 3000U + 2000U = 5000U
