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##### Cost-Volume-Profit (CVP) Analysis

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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.