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Cost-Volume-Profit (CVP) Analysis
Cost-Volume-Profit Analysis • 3 methods: • Basic equation method • Contribution margin method • Graphical method
Basic Equation Method • Profit = Total Sales – Variable Costs – Fixed Costs • Example 1: Syarikat Surjit Sdn Bhd is selling compact discs. Selling price for a piece of compact disc is RM4. Variable cost for a piece of compact disc is RM2.50 and its fixed costs is RM5000. Required: Calculate the profit if the company successfully sold some 8,000 units of compact discs in a particular period.
Contribution Margin Method • Profit = Total Sales – Variable Costs – Fixed Costs • Sales unit = ? • Example 2: Syarikat Ako Sdn Bhd is selling pen. Selling price for a pen is RM10. Variable cost for a pen is RM6 and its fixed costs is RM4000. Required: How much sales need to be achieved in order to have profit of RM5,000 ?
Contribution Margin Ratio Method • Contribution Margin Ratio (CM Ratio) shows the percentage of contribution margin as a proportion of sales. • CM Ratio = ? • Example: Refer to Example 2 and calculate the revenue from pen sales in order to achieve profit of RM5,000, using CM ratio method.
Graphical Sketch Method Operating income Total revenues line Breakeven point = 25 units Operating income area Variable costs Breakeven point = 25 units Total costs line Total costs line Operating loss area Operating loss area Fixed costs
Breakeven Point • Breakeven Point = a point where a firm has no profit or loss at a given sales level • Example 3: XYZ is in a business of selling plastic chair. The variable costs is RM9 and the sellling price is RM15 per unit. Fixed costs is at RM6,000. Required: Determine break-even point using the first 3 methods discussed earlier.
ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be sold to break even? a. 100,000 units b. 40,000 units c. 200,000 units d. 66,667 units Computing Break-Even Sales
Computing Break-Even Sales Use the contribution margin ratio formula to determine the amount of sales revenue ABC must have to break even. All information remains unchanged: fixed costs are $200,000; unit sales price is $5.00; and unit variable cost is $3.00. a. $200,000 b. $300,000 c. $400,000 d. $500,000
Break-even formulas may be adjusted to show the sales volume needed to earnany amount of operating income. Computing Sales Needed to Achieve Target Operating Income Fixed costs + Target income Unit sales = Contribution margin per unit Fixed costs + Target income Dollar sales = Contribution margin ratio
Computing Sales Needed to Achieve Target Operating Income ABC Co. sells product XYZ at $5.00 per unit. If fixed costs are $200,000 and variable costs are $3.00 per unit, how many units must be sold to earn operating income of $40,000? a. 100,000 units b. 120,000 units c. 80,000 units d. 200,000 units
Breakeven Point, extended: Profit Planning (targeted) • With reference to Example 3, say XYZ targeted a profit of RM3,000. Required: Using the first 3 methods discusses earlier, determine sales unit and sales revenue required to achieve such target.
Margin of Safety • One indicator of risk, the Margin of Safety (MOS) measures the distance between budgeted sales and breakeven sales: • MOS = Budgeted Sales – BE Sales • The MOS Ratio removes the firm’s size from the output, and expresses itself in the form of a percentage: • MOS Ratio = MOS ÷ Budgeted Sales
Margin of Safety • Example: Perniagaan Rahmat is selling Product X. The selling price is RM2. Its break-even point is at 1,000 units. If sales for the month of June is RM5,000, determine the margin of safety in RM, percentage and sales unit.
Learning Objective To use CVP whena company sellsmultiple products. LO8
Sales mix is the relative combination in whicha company’s different products are sold. Different products have different selling prices, costs, and contribution margins. If Speedo sells bikes and carts, howwill we deal with break-even analysis? CVP Analysis When a Company Sells Many Products
Speedo provides us with the following information: CVP Analysis When a Company Sells Many Products
The overall contribution margin ratio is: CVP Analysis When a Company Sells Many Products
Break-even in sales dollars is: CVP Analysis When a Company Sells Many Products
Effects of Sales-Mix on CVP • The formulae presented to this point have assumed a single product is produced and sold • A more realistic scenario involves multiple products sold, in different volumes, with different costs • For simplicity’s sake, only two products will be presented, but this could easily be extended to even more products
Effects of Sales-Mix on CVP • Example 6: Syarikat XYZ is selling 2 products, Product A and Product B. Relevant data for Product A and Product B are as follows: Product A Product B (RM) (RM) Selling price per unit 8 12 Variable cost per unit 6 6 Contribution margin per unit 2 6 Fixed costs RM8,800
Effects of Sales-Mix on CVP (cont’d) Required: Calculate sales unit at break-even point for Product A and Product B if: (a) Product A and Product B is sold in equal units. (b) Sales of Product A is 40% from total sales unit.
Target Net Incomeand Income Taxes Example Management would like to earn an after tax income of $35,711. The tax rate is 30%. What is the target operating income?
Target Net Incomeand Income Taxes Example How many units must be sold?
Target Net Incomeand Income Taxes Example Proof: Revenues: Variable costs: Contribution margin Fixed costs Operating income Income taxes: Net income
THE END ADVISE & REMINDER: Now, your reading time….it’s your responsibility to read relevant chapter in the main text and related chapters in the additional recommended references !
Exercise 1 Pekan Buku is in the business of selling books. Variable costs for each book is RM15 and is sold at RM20 per unit. The fixed costs is RM5,000. Required: Determine break-even point using: • Basic equation method • Contribution margin method
Exercise 2 With reference to Exercise 1, if the company is targeting a profit of RM4,000, determine sales unit and sales amount required to achieve the targeted profit using: • Basic equation method • Contribution margin method
Exercise 3 Syarikat WWW is introducing new product into the market. The break-even for the product is RM100,000 with contribution margin ratio of 40%. Assuming Syarikat WWW is making a profit of RM50,000 during that particular period, calculate the amount of sales for the period.
Exercise 4 Syarikat ABC is selling 2 products, Product X and Product Y. Relevant data for Product X and Product Y are as follows: Product X Product Y (RM) (RM) Selling price per unit 10 14 Variable cost per unit 4 8 Contribution margin per unit 6 6 Fixed costs RM12,000 Required: Calculate sales unit at break-even point for Product A and Product B if: (a) Product A and Product B is sold in equal units. (b) Sales of Product A is 60% from total sales unit.
Exercise 5 Perniagaan PQR is selling two products, Product P and Product R. Relevant data for Product X and Product Y are as follows: Product X Product Y Selling price per unit RM10 RM4 Variable cost per unit RM6 RM3 Estimated sales unit per month 30,000 20,000 Fixed costs RM44,000 Required: (a) Based on current sales mix, calculate break-even point in unit and RM. (b) If sales mix has changed to a new ratio of 4 Product Y to 1 Product X, calculate the new break-even point in unit and RM.